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

The expected ratings reflect the envisaged capital structure, including a proposed ten-year senior secured bullet bond issue of up to EUR500m and proposed amortising senior secured private placements totalling EUR250m

The final ratings are contingent upon the receipt of final documents conforming to information already received. Failure to issue the instruments would result in the withdrawal of the expected IDR and senior secured debt ratings.

AT is a leading private passenger train and locomotives lessors in continental Europe, with a presence in 13 countries and deriving close to 60% of leasing revenues from Germany. Its revenues are split almost equally between passenger trains and locomotives.

The expected 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 - IDRs, SENIOR SECURED DEBT
AT has a proven business model and operates in fairly stable European markets with significant barriers to entry. Long-term operating lease contracts, coupled with sound utilisation rates (consistently above 90% in 2010-2014), 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, viewed by Fitch as fairly predictable, is concentrated in Germany (86% of revenues in 8M14), while the less predictable locomotive business is more widely spread geographically. AT has a fairly young fleet with an average age of 6.2 years, and which consists 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 and with investment-grade credit 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 projection shows annualised starting 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 the proposed debt instruments and limited capex requirements. Rating pressure related to high leverage is partially mitigated by a sound forecast debt service coverage ratio (DSCR) of 1.89x for 2015.

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 proposed ten year senior bond has a bullet repayment, but refinancing risk is mitigated by a cash-sweep mechanism and a margin step-up. The proposed EUR375m senior bank loans (EUR50m bullet, EUR325 amortising) mature in 2020-2022, while the remaining senior debt, including the private placement debt, is amortising.

Fitch has also accounted for the proposed subordinated EUR125m junior debt in its analysis. While refinancing risk related to the latter 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. Fitch notes though that a default on the junior note does not trigger a default on senior debt instruments and that under such a scenario there is limited room for manoeuvre of the junior note holders 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 of 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, SENIOR SECURED DEBT RATINGS
Fitch expects that debt (including EUR125m of junior debt)/EBITDA will be below 7.5x on a sustained basis by end-2018. Failure to steadily reduce leverage to this level or to maintain the DSCR ratio above 1.7x would put pressure on the ratings. 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 ratio above 2x may allow for rating upside, but near-term rating upside is limited in view of AT's high leverage.

A full presale report on AT and on senior secured debt issued by Alpha Trains Finance S.A. will shortly be available at www.fitchratings.com.