The Outlook is Stable: Fitch Ratings Supports Transurban’s ‘A-‘ Remarks

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Fitch Ratings has affirmed Transurban Group’s Long-term Issuer Default Rating (IDR) at ‘A-‘ with a Stable Outlook. The outlook affirmation reflects the positive implications of an investment grade rating for the company’s bonds and unaffected access to bond markets.

Transurban’s affirmation reflects traffic recovery throughout most road assets, mostly inflation-linked toll pricing in Australia and Canada, but uncapped on its two US routes, and continuous network capital spending. Transurban’s debt is covenanted and secured and is subject to refinancing risk, mitigated by a track record of capital market access. Under our modified rating case, we expect net debt/adjusted EBITDA to fall somewhat to 3.5x by FY27 from a maximum of 3.8x in FY23, a level we consider appropriate with the ‘A-‘ rating.

KEY RATING DRIVERS

Proven Traffic Base: Volume Risk – Stronger

Transurban’s factor rating has been altered to ‘Stronger’ from ‘Midrange’ by Fitch. This comes after the release of its Transportation Infrastructure Rating Criteria. Transurban received a ‘Stronger’ rating in the following categories: reference market, strategic relevance, diversity, and demand volatility. It received a ‘Midrange’ rating for competition and comparable cost to end users.

Mostly Inflation-Linked: Revenue Risk – Price

Concessions granted by Transurban usually allow for CPI-based toll hikes, providing safety in the current high inflationary climate. The roadways in the United States use uncapped dynamic toll rates. However, there appears to be minimal price elasticity at the moment. In the long term, we expect traffic growth to worsen congestion and slow traffic, lowering the value of toll roads compared to other modes of transportation. This may make maximum toll hikes challenging without negatively impacting travel flow. Transurban has accomplished this through road extension, but the concept may have reached its limit as traffic corridors are utilised.

Continuous Expansion: Infrastructure Development and Renewal

Road operation and management are standard, low-risk tasks carried out by skilled contractors with defined capital plans. Although Transurban has completed numerous significant expansion projects and new roadways, Melbourne’s West Gate Tunnel project has had cost overruns and delays. Transurban has recently agreed to a new completion date of late 2025 with the Victorian government and contractors and increased contributions from all parties. Transurban’s skilled management team and structure continue to limit the danger of its increased expansion rate in recent years.

Market Access Reduces Refinance Risk: Senior Debt Structure

The corporate debt portfolio of Transurban is entirely composed of bullet maturities.

The organisation has a track record of refinancing debt well ahead of maturity and has access to a varied lender base spanning banks and capital markets.

Transurban’s capacity to extend the weighted-average concession term of its toll roads aids in deferring amortisation. It also keeps a high level of interest-rate hedging on its debt portfolio, comfortably exceeding the senior interest-coverage ratio requirement of 2.00x for new debt issuance and 1.25x for lockup and default.

The Financial Summary states, “Most Transurban’s operating toll roads have asset-level debt that is non-recourse to Transurban and contribute dividend cash flow to the corporate entity. We, therefore, use a net debt/adjusted EBITDA leverage metric to evaluate Transurban. Debt includes all corporate-level recourse debt, while adjusted EBITDA includes EBITDA contributed by toll roads in Melbourne and other corporate sources, along with dividend flow from project-financed ringfenced toll roads. There have been few instances of assets being locked up due to robust headroom under debt covenants for most subsidiaries.”

Transurban’s primary peers are APRR and Abertis Infraestructuras, both of which have high ratings. “Transurban’s 534 km of roads is short compared with that of peers, but its 21 assets are diversified across five major cities and three countries. Its domestic assets have been more resilient than peers during the pandemic, owing to strategic intra-city locations that enabled efficient movement within local markets rather than long-distance intercity transit.”

Transurban offers a ‘Mid Range’ attribute for infrastructure development and renewal.

Fitch forecasted leverage is comparable to peers, with a high profile in the short future.

A fall in net debt/adjusted EBITDA below 3.5x for an extended period is one factor that could contribute to positive rating action. The company’s base scenario results in net debt/adjusted EBITDA of 3.7x in FY23, decreasing to 3.1x by FY27, while the rating case imposes more conservative traffic-growth assumptions, resulting in net debt/adjusted EBITDA of 3.8x in FY23, declining to 3.5x in FY27.

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