Standard & Poor's downgraded two of the London Underground Limited's (LUL) public-private partnership securitizations, taking their ratings to just above junk. The drop in underlying ratings will not directly affect bondholders, although it does serve as a reminder that Metronet Rail has not yet dealt with the delays in its improvement programs, a problem that has plagued these deals for some time now.
The long-term debt rating on both the Metronet Rail BCV's and Metronet Rail SSL's senior secured bank loan were downgraded to BBB-' from BBB'. The deals' respective long-term underlying debt ratings on their index-linked bonds, and fixed-rate bonds, due 2032, were lowered to BBB-' from BBB'. The outlook is stable. Ambac Assurance and Financial Security Assurance provided the wrap for Metronet Rail BCV Finance and Metronet Rail SSL Finance.
The company continues to encounter difficulties in executing its capital-works program on time and within budget; and meeting the ongoing challenges presented by its stations' enhancement program. By March 31, 2006, only 11 of the 18 expected stations had been delivered into service following refurbishment. Many of these stations were delivered late, and at greater cost than originally anticipated.
Metronet SSL's financial performance and forecasts are considerably weaker than projected under the original base case. For example, the base case anticipated a minimum annual debt service cover ratio (ADSCR) of 1.50x (in 2017), but the March 2006 base case forecasts a 1.17x minimum ADSCR (in 2013). This decline denotes various factors, including delays to Metronet SSL's capital-expenditure program; a reduction in revenues received and station enhancement abatements.
But S&P analysts said that from a credit perspective, Metronet could still remedy its position. A large part of Metronet's future revenues depend on the delivery of specified line upgrades scheduled for completion between 2010 and 2016. "The stations enhancement program remains a key credit risk, and an area of dispute with LUL," S&P said. "Metronet has adopted a credible plan to address this issue, by seeking agreement on a general scope of works with LUL, contracting out about 40% of works away from Trans4m Ltd. (the civil engineering and stations contractor), and using third parties for key roles such as design. Nevertheless, the plan has not been implemented and tangible improvements have yet to be achieved."
S&P noted that Metronet had identified several hundred million pounds of cost savings through measures such as changing existing procurement arrangements, and "significant expenditure" incurred beyond its base case that Metronet believed it could recover from
the London Underground (ASR, 7/18/05). A full recovery of this expenditure will depend on whether the London Underground views these claims as "economic and efficient" and not as the result of inefficiencies at Metronet.
Moody's Investors Service has affirmed the Baa3' senior secured unguaranteed debt ratings of Metronet deals but has changed the rating outlook on the debt ratings that were not guaranteed to negative from stable. Moody's said that it will likely change its outlook back if Metronet demonstrates a proven record of delivering its projected cost reduction and operational efficiencies program. A
rating upgrade is not considered likely until SSL demonstrates a sustained period of operating within its current projected parameters and it stabilizes and starts to reverse the delays in the stations' upgrade program.
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