OREANDA-NEWS. Fitch Affirms Eversholt Investment Limited at 'BBB+'; Outlook Stable Fitch Ratings has affirmed UK-based Eversholt Investment Limited's (EIL) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. Fitch has also affirmed the senior secured rating of the bonds issued by Eversholt Funding Plc (EFP) at 'A-'. The bonds are guaranteed by EIL, ERFL Holdings, and EIL's subsidiary companies, together known as Eversholt Rail Group (ERG).

The IDR is primarily supported by EIL's strong business profile as one of the three major passenger rolling stock companies (ROSCOs) in the UK, which provides long-term contract-based cash flow visibility. The higher 'A-' rating of EFP's secured notes reflects the benefits of the security and covenant package of its financing.

KEY RATING DRIVERS

Increased Capex Neutral to Ratings

EIL's recent agreements to procure new rolling stock for the Northern and TransPennine franchises for a total of GBP610m in addition to the GBP361m for Great Western will lead to significant increase in debt-funded capex over 2016-2019. Fitch includes in its calculation of NPV (net present value of capital rentals) expected rental revenue from the new rolling stock to be procured. This balances out the impact on net debt/NPV metric that Fitch uses as one of the guidelines for EIL's rating.

Credit Metrics within Guidelines

We expect funds from operations (FFO) adjusted net leverage to increase to over 6.0x in 2016 from 4.9x in 2015 and remain at 6.4x on average during 2016-2020, driven by increased capex. FFO fixed charge cover is forecast to remain at 2.5x-3.5x. We expect net debt/NPV to remain within our negative rating guidance of 85% over the 2015-2019 period, based on our assumption of weighted average cost of capital (WACC) of 9.5%. In the event of further material acquisitions of new rolling stock, Fitch expects EIL to moderate dividend payments and reduce repayments of the subordinated shareholder loan to preserve its credit metrics.

Ownership Change Neutral to Ratings

ERG was acquired by Cheung Kong Infrastructure Holdings Limited and Cheung Kong (Holdings) Limited (collectively CKI) in early 2015 for an enterprise value of about GBP2.5bn. The change in shareholder was at Eversholt Investment Group (Luxembourg) Sarl, which was previously owned by 3i, Morgan Stanley Infrastructure Partners and STAR Capital Partners.

There has been no impact on EIL's existing capital structure following the change in ownership. Fitch expects the new shareholder to remain supportive of EIL's business and credit profiles.

Strong Business Profile

EIL benefits from solid fundamental demand trends, significant barriers to entry, high contract retention and fleet utilisation rates (100% for its passenger rolling stock), sound counterparty credit quality - albeit with some counterparty concentration - and indirect regulatory support.

EIL's predominantly electric asset portfolio is beneficial due to the longer term trend of UK rail network electrification. However, Network Rail's revised electrification programme has increased demand for self-powered (mostly diesel) and bi-mode rolling stock as reflected in EIL's new build wins for Great Western and Northern franchises. We expect continued strong passenger and freight demand in the UK to support over 50% growth in passenger rolling stock over the next 30 years.

Low Risk to Renewals

The risk of non-renewal or inability to transfer fleet to other franchises in the short - to medium-term is considered low given limited spare rolling stock capacity in the UK and the company's strong track record of 100% utilisation of its fairly young passenger rolling stock. The risk of non-renewal is low also due to EIL's high proportion of electrified stock and our expectation that the proportion of electric vehicles in the UK will rise to 80% in 2019 and potentially to as much as 90% by 2043, from 70% currently. However, Fitch's rolling stock rental forecasts include more conservative assumptions in respect of the phasing-out of fleet, exposure to increased electrification for the diesel fleet and re-leasing post franchise renewal.

Refranchising Programme Impact

EIL has been able to negotiate increased rentals under some of the existing leases in the recently contracted franchises, to reflect market-based pricing and increased capex requirements. The franchises that have been re-contracted or extended in 2015 include Northern, TransPennine, Great Western and East Midlands while East Anglia and South Western franchises are being re-tendered. EIL is in discussions, where relevant, with the bidders, the DfT and Transport for London, with regard to all of the new franchises.

Notes' Security and Covenant Package

The higher 'A-' rating of EFP's secured notes recognises the benefits of the security and covenant package of its financing. Forward-looking covenants with lock-up levels act as an early warning signal, but may not precede a negative rating action. The bonds' amortisation feature is also viewed as positive in that the gradual debt repayment schedule mirrors a depreciating asset base.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for EIL include:

- Current operating leases to run till franchise expiry.

- Renewal assumed at stressed levels and is dependent on the remaining life of the vehicles, risk of electrification and any other risk of obsolescence.

- No new builds have been assumed unless already contracted.

- Cost forecasts in line with management's expectations.

- Dividend forecasts are broadly in line with management's expectations and historical trends.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

- Adjusted net debt/NPV below 75%

- FFO-adjusted net debt below 5.5x on a sustained basis

- FFO fixed charge cover greater than 3.5x

Negative: Future developments that could lead to negative rating action include:

- Adjusted net debt/NPV in excess of 85%

- FFO-adjusted net leverage greater than 6.5x

- FFO fixed charge cover of less than 2.5x

- Consistently negative free cash flows after capex and dividends, especially in the context of increased equity returns rather than contracted business growth

LIQUIDITY

As of end-2015, EIL had bank balances of GBP45.8m (excluding restricted cash of GBP26.9m) and GBP580m available in undrawn revolving credit facilities. EIL has no short-term debt and maturities are considered well-spread with drawings on credit facilities due in 2020 and bonds maturing post 2020. We expect the company to generate negative free cash flow over 2016-2019 due to high capex, which will result in external funding.