OREANDA-NEWS.  Fitch Ratings has upgraded City Greenwich Lewisham Rail Link plc's (CGLR) GBP74m (initial amount GBP165m) senior secured bonds due October 2020 to 'BBB-' from 'BB+'. The Outlook is Stable.

The upgrade reflects CGLR's improvement in cash flows and coverage ratios in recent years, driven by continued patronage growth and positive RPI, in addition to the mechanical effect of declining debt service over time. The upgrade also reflects Fitch's view that the project is resilient to shocks and sustained declines in patronage over the short- to medium-term.

The Stable Outlook is driven by the expected solid financial performance under the Fitch base case, reflecting stable passenger volumes and ongoing effective cost control over the next two years.

KEY RATING DRIVERS
Revenue/Volume Risk - Midrange
The primary drivers for patronage have historically been employment and development projects in and around Canary Wharf and the City of London. However, as jobs growth has slowed, Fitch expects that underlying traffic growth will moderate. We believe that further proposed developments at Canary Wharf are likely to have a fairly small impact on traffic volumes given that such buildings are mainly residential and, in many cases, are not expected to reach completion until nearer the end of the concession. Similarly, we view the development of Crossrail as likely to have a minimal impact given that completion is planned towards the end of the concession.

After a sharp decline in 2008 of 4.5% - due to disruptions caused by the three-car project and job losses in the City of London and Canary Wharf - patronage has since been growing healthily at a CAGR of 4.9% between 2009 and 2014. Following growth of 8.9% in 2014 (due to sporadic events such as tube strikes and planned Thameslink works at London Bridge), Fitch expects growth to continue at a modest pace, at a CAGR of 0.9% between 2015 and 2020 under its base case (with -0.3% projected under the Fitch rating case).

Revenue/Price Risk - Midrange
The indexation mechanism used to calculate the usage fee received from the Docklands Light Railway (DLR) ensures that the project's revenue is effectively linked to RPI. As such, high RPI-inflation over past years has supported the project's cash flows. Recent abating inflation pressures should, however, not materially impact the transaction. Under Fitch's rating case, an RPI of 0% would only reduce Fitch's projected adjusted average debt service coverage ratio (ADSCRs) by 0.07x on average.

Infrastructure Development/Renewal Risk - Midrange
Fitch currently does not consider heavy maintenance costs to be a main risk factor for the project. CGLR's operational obligations are deemed fairly straightforward and therefore predictable.

Debt Structure - Midrange
Some of the transaction's structural features are fairly weak with only a six-month interest-only debt service reserve account and no maintenance reserve account. The cash lock-up ratio threshold - set at a minimum annual ADSCR (excluding cash balances) of 1.2x - is also fairly low, particularly in light of the corporate taxes recently paid by CGLR, which are excluded from the covenant calculation.

For the 6 month period ended June 2015, the Fitch-adjusted ADSCR was lower than the ADSCR covenant by 0.19x. Despite these weaker features, the transaction strongly benefits from fully amortising debt with a gradual reduction in debt service from 2016 until the maturity of the bonds (to GBP10m from around GBP20m per annum).

Credit Metrics
The ADSCR covenant (ex-cash) for the six-month period ended June 2015 stood at 1.52x (up from 1.47x a year ago), above Fitch's base case. However, Fitch's adjusted ADSCR is lower at 1.34x. Fitch expects the ratio under its base case to remain at around 1.3x until December 2016. Beyond 2016, Fitch expects coverage to significantly improve and to remain neatly above 1.3x. The assumptions under the current Fitch base case result in projected minimum and average adjusted ADSCR of 1.29x and 1.78x respectively.

Fitch's rating case - which assumes more conservative patronage growth and no interest income from positive cash balances - results in a forecast average Fitch-adjusted ADSCR of 1.69x (between 2014 and 2020). The minimum ADSCR under the rating case is 1.26x and is expected to be reached in the six months ending December 2016.

Fitch ran several sensitivities, including a break-even analysis in reduction in patronage. A 15% reduction in patronage resulted in a minimum Fitch-adjusted DSCR of 1x for the six-months ending December 2016. A combined downside scenario including flat patronage, RPI at 0% and a 40% increase in heavy maintenance expenditure resulted in an average Fitch-adjusted ADSCR of 1.6x. Furthermore, sensitivity analysis was also performed under high and low inflation scenarios, under which RPI was increased and reduced by 1.5% in each year respectively. The results showed that the project is resilient, with coverage viewed as robust under the sensitivities, consistent with the project's ratings and Positive Outlook.

RATING SENSITIVITIES
Positive: A significant improvement in the projected Fitch-adjusted ADSCR metrics as a result of improving operating performance (eg, driven by patronage growth) or due to the mechanical effect of the declining debt service over time could lead to positive rating action.

Negative: If Fitch's projected metrics under the rating case decline, for example, as a result of patronage being below current assumptions, a prolonged period of low or negative inflation, or a substantial increase in operating and heavy maintenance costs, the ratings could be negatively impacted.

SUMMARY OF CREDIT
CGLR holds a 24-and-half-year concession until March 2021, under a government private finance initiative, to build and maintain a portion of the DLR network (Lewisham Extension), serving the Greenwich and Canary Wharf areas.