OREANDA-NEWS. Fitch Ratings has affirmed Alpha Trains Finance SA's senior secured bond and private placements ratings at 'BBB' and Alpha Trains Holdco II's (AT) Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook on the Long-term IDR is Stable.

The capital structure includes a 10-year senior secured bullet bond issue of EUR350m, amortising senior secured private placements totalling EUR250m, and EUR525m of senior bank loans. This is likely to be supplemented by up to a further EUR240m of debt upon finalisation of a new fleet acquisition, which is expected around the end of March 2016.

AT is a leading private passenger train and locomotives lessor in continental Europe, with a presence in 13 countries and two-thirds of leasing revenues derived from Germany. Its revenues are split between passenger trains (54%) and locomotives (46%). Fitch anticipates that the share of more stable revenue from the passenger segment will increase to 63% after the pending acquisition.

The senior secured bond and private placement ratings reflect the underlying risk profile of AT and other group entities (together Alpha Trains Group (AT Group); guarantors of the notes). Structural enhancements of the instruments allow for a single-notch uplift from the Long-term IDR and include ring-fencing protections, covenants, and a strong security package.

KEY RATING DRIVERS
IDR AND SENIOR DEBT
AT has a proven business model and operates in fairly stable European markets with significant barriers to entry. Long-term operating lease contracts and sound utilisation rates (since end of 2010 the overall level has stabilised above 90% and moved towards an average of 96% during 2015) allow for predictable cash flow generation and strong operating margins.

AT is a leading rolling stock operating company (ROSCO) in continental Europe. The passenger train segment, which Fitch views as fairly predictable, is mainly concentrated in Germany, while the less predictable locomotive business is more widely spread across Europe. AT has a fairly young fleet with an average age of 7.3 years at end of 2015, and consisting of both electric and diesel assets. Most locomotives allow for multi-country usage.

AT benefits from a diversified lease book and from a large number of its counterparties being state-owned with investment-grade profiles, limiting credit risk. The average remaining tenor of the contracts is around five years, with contract maturities typically longer in the passenger segment (over eight years of average remaining tenor, versus two to three years in locomotives).

Fitch's rating case projects end-2016 leverage, measured as net debt (including EUR125 of junior debt)/EBITDA, of more than 8x, which is high for the ratings, partially reflecting its fairly young fleet. However, the ratings are based on the assumption that leverage will steadily trend downward. This is supported by cash flow generation, the amortising features of a portion of its outstanding debt instruments and limited capex requirements. The pending acquisition is expected to delay the deleveraging timetable, but the impact of this on the creditworthiness is offset by the benefits of a larger passenger fleet component and new long-term lease contracts. Rating pressure related to high leverage is also partially mitigated by an adequate forecast debt service coverage ratio (DSCR) of 1.73x for 2016.

AT's liquidity buffer is robust, underpinned by our expectation of stable operating cash flow generation and limited capex. Liquidity is also supported by a EUR130m liquidity facility (covering over 12 months of debt service), a EUR50m capex facility, a EUR20m maintenance reserve facility and a EUR25m revolving credit facility.

The EUR350m 10-year senior bond has a bullet repayment, but refinancing risk is mitigated by a cash-sweep mechanism and a margin step-up. The EUR525m senior bank loans (EUR200m bullet, EUR325 amortising) mature in 2020-2021, while the remaining senior debt, including the private placement debt, is amortising.

Fitch has also accounted for the subordinated EUR125m junior debt in its analysis. While its refinancing risk is limited as it is issued outside the ring-fenced perimeter, a default on it could trigger a change in AT's ownership. Seven-year junior note proceeds are on-lent into the perimeter through a 16-year loan. However, Fitch notes that a default on the junior notes does not trigger a default on senior debt instruments and that under such a scenario there is limited room for manoeuvre for the junior noteholders as they will continue to be bound by the terms of the senior debt instruments.

The one-notch uplift of Alpha Trains Finance SA's senior secured notes recognises, among other factors, the benefits of the ring-fencing mechanism as well as the comprehensive security and covenant package that has been put in place. The security package for the senior debt instruments provides security over substantially all assets of the ring-fenced perimeter. Debt/net present value and DSCR covenants with lock-up levels provide early warning signals.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Fitch expects that debt (including EUR125m of junior debt)/EBITDA will be below 7.5x on a sustained basis by end-2019. An increase in leverage or a significant delay in the deleveraging timetable, for example due to incremental indebtedness or earnings stress would put pressure on the ratings, as well as failure to maintain the DSCR above 1.7x. Prolonged pressure on asset utilisation or lease rates resulting in a material worsening of AT's cash flow generation may also result in a downgrade.

A DSCR above 2x could have a positive rating impact, but near-term upside is limited, in view of AT's high leverage.