Research Update: U.K.-Based High Speed Rail Finance 1 'A' Issue Rating Affirmed; Outlook Stable Primary Credit Analyst: Rachel C Goult, Paris 0033 (0) 966 965933; rachel.goult@standardandpoors.com Secondary Contact: Emanuele Tamburrano, London (44) 20-7176-3825; emanuele.tamburrano@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 16, 2015 1
Research Update: U.K.-Based High Speed Rail Finance 1 'A' Issue Rating Affirmed; Outlook Stable Overview U.K.-based High Speed Rail Finance 1 Plc continues to successfully operate and maintain the High Speed 1 infrastructure, with no safety or environmental issues. Continued train path growth and the cost savings achieved through the April 2015 refinancing will likely offset any financial impact of the recent periodic cost review and Global System for Mobile Communications Railway capital expenditures, resulting in a solid annual debt service cover ratio of above 2.0x in the financial year ending March 30, 2016. We are therefore affirming our 'A' long-term issue rating on the project. The stable outlook reflects our view that the project will continue to deliver a strong operational performance and benefit from a supportive and stable regulatory regime. Rating Action On Dec. 16, 2015, Standard & Poor's Ratings Services affirmed its 'A' long-term issue rating on U.K.-based rail project High Speed Rail Finance 1 PLC (ProjectCo or HS1). The outlook remains stable. Rationale Summary The affirmation follows our review of the recent performance of ProjectCo and reflects the continued positive growth in train paths operated by the domestic and international train operators, London & South Eastern Railway Ltd. (LSER) and Eurostar. We have revised our view of the project's competitive position to strong from satisfactory to reflect HS1's role as the sole high-speed rail connection between London and the channel tunnel and the absence of competition from alternative train routes or transport modes, particularly in terms of transportation time between Paris and London. However, due to the protection afforded to the project by the domestic underpinning agreement, we assess the project's market risk exposure to be very low. Consequently, our revised view of ProjectCo's competitive position does not affect the ratings. We expect the train path growth and cost savings that HS1 achieved through its April 2015 refinancing to offset any financial impact of the recent periodic "operations, maintenance and renewals charge" (OMRC) review and Global System for Mobile Communications Railway capital expenditures, resulting in a solid WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 16, 2015 2
annual debt service cover ratio (DSCR) of above 2.0x in the financial year ending March 30, 2016. Our current base case includes zero growth in international traffic in the next two years, reflecting Eurostar's deployment of larger trains to handle passenger number growth. Thereafter, we anticipate modest 1% annual growth on the Paris-London route through 2024, with zero growth thereafter. We also factor in new international train services (as yet, unidentified) to begin in 2025, to grow total international train paths by about 1.5% from 2025 to the end of the concession. We have kept domestic and freight train services at levels comparable with current year performance for the remainder of the concession. Unregulated revenues, which are generated primarily from retail activities in HS1's flagship St. Pancras International station, represent less than 10% of total revenues and we forecast modest 1.25% medium-term growth. Standard & Poor's consumer price index assumptions are in line with global economic forecasts, with inflation in the U.K. at 0.1% for 2015, 1.2% for 2016, 1.7% for 2017, and 2% thereafter. Under this base-case scenario, Standard & Poor's minimum and average annual DSCRs for ProjectCo, are 1.46x and 1.79x, respectively. Operations Phase HS1 continues to demonstrate strong operational performance, with no safety or environmental issues. HS1 continues to perform strongly against its performance indicators, such as "train delays in excess of five minutes or trains cancelled due to HS1 infrastructure attributable incidents," which, at 0.77% in September 2015, is substantially below the specified performance threshold of 13% annually and 15% quarterly. The moving annual average delay per train rose above historical performance in September 2015, to 7.3 seconds, due to trespassing incidents, but there was only a negligible impact on the project's financial performance. Train-Paths The domestic train operator, LSER, was awarded a new franchise agreement in September 2014 to run passenger rail services until at least June 2018. At the same time, the U.K. government's underpinning agreement was enacted, which ensures that a train operator schedules a defined minimum number of trains per year to service its clients. LSER's current timetable is about 2,200 trains per year above the 53,248 trains per year underpin level. Eurostar has started its phased introduction of 17 new larger trains from December 2015, which we expect will absorb international passenger volume growth and slow train volume growth in the short term. Modifiers HS1's very low market risk exposure is due to the project's strong protection from the U.K. government's underpinning agreement that guarantees a high-level of domestic revenues and limits the project's exposure to international train revenues only. The scope for a significant decline in international services WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 16, 2015 3
is, in our view, limited by customer expectations for frequent service and a reliable timetable. Consequently, HS1 performs strongly under our downside case, leading us to factor in a one-notch positive adjustment to our final rating. Liquidity In our view, ProjectCo's liquidity is neutral. This is because it has a debt service reserve facility equal to the next 12 months of scheduled principal and interest payments. In addition, for the maintenance of the assets and replacement capital expenditures, HS1 maintains escrow accounts, into which it places the renewals component of the OMRC and of the station use charge. The cost pass-through nature of these charges largely mitigates lifecycle risk. We forecast the combined balance on these escrow accounts at about 70 million in the financial year ending March 30, 2016, with a rise to approximately 110 million at the end of the next control period in March 2020. Outlook The stable outlook reflects our view that ProjectCo will continue to deliver strong operational performance and benefit from a supportive and stable regulatory regime. The outlook also factors in the project's strong competitive position as operator of the sole high-speed train route connecting the U.K. to continental Europe, as well as our view that the minimum average DSCR of at least 1.4x under our base case is sustainable. Downside scenario We could take a negative rating action if the project's financial profile were to weaken, for example as a result of operational underperformance or reduced demand for international train paths, causing the minimum average DSCR to fall below 1.4x. We could also lower the rating if we consider that the project's resilience to our downside scenario has declined. We could also lower the rating if HS1 becomes exposed to additional counterparty risk as a result of the ratings on swap counterparties being downgraded or if the project incurs additional exchange rate risk due to the issuance of a further tranche of foreign currency-denominated debt with a lower-rated swap counterparty. The account bank counterparty must be rated at least 'BBB' in order not to constrain our current 'A' rating on the project. Upside scenario An upgrade of ProjectCo is unlikely over the medium term, in our view, without a further significant improvement in our base-case minimum average DSCR. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 16, 2015 4
Ratings Score Snapshot Operations Phase SACP (Senior Debt) Performance Risk: 3 Market Exposure: Very low Competitive Position: Strong Operations Phase Business Assessment: 4 Preliminary SACP: a- Downside Impact on Prelim SACP: aa (+1 notch) Liquidity: Neutral Comparative Analysis Assessment: None Operations Phase SACP: a Modifiers (Senior Debt) Parent Linkage: Delinked Structural Protection: Neutral Senior Debt Issue Rating: A Related Criteria And Research Related Criteria Project Finance Framework Methodology, Sept. 16, 2014 Key Credit Factors For Road, Bridge, And Tunnel Project Financings, Sept. 16, 2014 Project Finance Transaction Structure Methodology, Sept. 16, 2014 Project Finance Operations Methodology, Sept. 16, 2014 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011 Ratings List Ratings Affirmed High Speed Rail Finance 1 PLC Senior Secured A/Stable Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 16, 2015 5
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