No-Deal Brexit disruption 'manageable' for UK transport infrastructure

UK transport infrastructure debt issuers are generally well placed to weather short-term disruption in traffic and trade flows in the event of a "no-deal" Brexit, according to a leading rating agency.

In a report for its clients Fitch Ratings said its rated issuers, including Heathrow Airport, can cope with disruption thanks to their robust liquidity positions and financial flexibility. “The longer-term impact is more uncertain but weaker macroeconomic factors could reduce traffic, and hurt revenue, EBITDA and financial metrics,” the agency noted.

Fitch currently rates Heathrow Finance plc, Gatwick Funding Limited, Heathrow Funding Limited, Manchester Airport Group Funding plc, City Greenwich Lewisham Rail Link plc, High Speed Rail Finance (1) PLC, THPA Finance Limited, Getlink S.E., ABP Finance Plc and Channel Link Enterprises Finance Plc

“We believe that [Fitch-rated] UK transport infrastructure issuers could manage short-term disruptions from a no-deal Brexit scenario, the risks of which have been reduced, but not eliminated, by the multiple deadline postponements.” 

Any revenue and cash flow impact from a short-term shock in 2019 would be mitigated by the issuers' liquidity, their scope to reduce or defer shareholder distributions, operating costs and capex, and headroom in our rating case forecasts, Fitch added. 

Some issuers have made explicit contingency provisions or provided lower EBITDA guidance for a no-deal Brexit. Fitch believes that UK ports and airports would be most at risk in a no-deal scenario. Declines in traffic and increased costs would put pressure on cash flows, and any capital market disruption and reduced liquidity would increase refinancing costs.

“All the issuers in our portfolio have sufficient liquidity to meet their 2019 debt-service requirements.”

Longer-term weaker economic growth, reduced immigration, falling consumer confidence, higher inflation and further sterling depreciation could lead to lower traffic and revenue, tightening EBITDA and weakening financial metrics. 

Fitch Ratings: "Corporate-Like" Issuers

“Inflation-linked pricing would mitigate the impact on the revenue of ABP, Heathrow, Gatwick and THPA. However, the first three also have inflation-linked debt, limiting any positive effects. ABP, Gatwick and MAG benefit from long-term contracts with revenue downside protection, which would offset some volume falls.” 

Fitch consider issuers that have significant flexibility to defer capex projects, or reduce operating costs in the case of material revenue disruption, to be better positioned. For example, MAG has significant capex in its business plan that it can defer in the event of reduced volume growth.

“Most issuers report some flexibility on operating costs, although we believe this could not continue indefinitely. Shareholder distributions could also be reduced on a longer-term basis to offset the financial impact of a downturn. ABP, Gatwick and Heathrow are among the issuers with significant balance-sheet flexibility given their dividend forecasts,” the agency noted.

Fitch Ratings: "Project Finance-Like" Issuers

CGLR, CLEF and THPA have protective, project finance-like debt structures including fully amortising debt, which mitigates refinancing risk. Fixed-rate debt also protects them from rising rates. Issuers with bullet-debt structures, such as Heathrow, Gatwick, MAG and ABP, tend to be large, well-known and regular issuers, which limits refinancing risk, although it will not “shield them” from rising interest rates, Fitch said. 

High-yield issuers, such as Getlink and Heathrow Finance (HoldCo of Heathrow Funding), could face higher refinancing risks in an economic downturn, the agency concluded.