OREANDA-NEWS. Fitch Ratings has affirmed Transurban Finance Company Pty Limited's (Transurban) senior secured bank debt and capital markets facilities at 'A-'. The Outlook is Stable.

Transurban's senior secured debt 'A-' rating is supported by the demonstrated resilience of its road portfolio and the importance of its roads to local transportation networks in Sydney, Melbourne, and Brisbane . Transurban has benefitted from the relative stability of the Australian economy with continuing strong toll revenue growth, which was 10.7% in FY15 on a proportional, like-for-like basis.

In New South Wales its network of the M1 Eastern Distributor (Fitch: A-/Stable), Hills M2, M5 South-West Motorway, Westlink M7 (Fitch: BBB+/Stable), and two tunnels make up the bulk of Sydney's orbital road network. In Melbourne, the CityLink road, which contributed more than 40% of Transurban's FY15 underlying proportional EBITDA, serves as an important connection between the city and the primary Melbourne airport and also to the south-eastern suburbs. The acquisition of Queensland Motorways in July 2014 has made Transurban the market leader in Brisbane as well.

KEY RATING DRIVERS
Volume Risk - Midrange: Traffic growth on Transurban's Australian roads varied between 0.5% and 11.4% in FY15. On a regional basis Sydney had the strongest performance with traffic up 7.7% for the year, benefitting from completion of expansion works on the M5 and Hills M2 motorways. The Melbourne and Brisbane networks had slower but steady growth of 3.0% and 2.7%, respectively. While Australian economic expansion has cooled following the end of the resources boom, GDP growth continues steadily between 2% and 3%, helping to drive traffic increases. Fitch expects traffic growth in the low to mid-single digits going forward.

The US portfolio has been less successful to-date. In 2012, Transurban wrote off its investment in the Pocahontas 895 toll road in Virginia following poor performance. Traffic ramp-up on the 495 Express Lanes near Washington DC, which opened in November 2012, was much slower than expected, requiring Transurban to make a substantial capital injection in FY14 in order to make the project viable. The third project, the 95 Express Lanes, was completed in December 2014; traffic has met management expectations to date. The US portfolio currently makes up less than 3% of Transurban's proportional EBITDA.

Price Risk - Midrange: Transurban's concession agreements allow it to increase tolls at a rate equivalent to CPI, and in some cases at a higher rate if CPI is below a certain level. There appears to be little price elasticity to date. However, the traffic growth will eventually create higher congestion and slower traffic, decreasing the value of using the roads versus competing transportation, which will make it more difficult to implement the maximum toll increases without incurring traffic declines. Transurban has so far effectively managed this through road expansion, although that strategy will eventually reach a limit as traffic corridors are fully utilised.

Infrastructure Development/Renewal - Midrange: Road O&M is conventional, low-risk work undertaken by experienced contractors. Detailed capital plans with reasonable budgets are prepared. Transurban successfully undertook larger projects , both in the US and Australia, usually under fixed price and time contracts. The 495 Express Lanes and the 95 Express Lanes in the US were both completed on budget and ahead of schedule by Fluor Lanes LLC. Agreements for expansion projects have provided for a level of cost recovery through higher tolls or extended concession periods. While Transurban has increased its rate of expansion in recent years through both acquisition and greenfield construction, Fitch is comfortable that the company has the appropriate management team and structure in place to manage the tasks and adequately mitigate the risks.

Debt Structure - Midrange: Transurban's corporate debt portfolio consists entirely of bullet maturities. This introduces an additional level of risk as compared to similarly-rated peers internationally which have amortising debt structures. However Transurban has a proven track record of refinancing its debt well in advance of maturity and expanding its lender base across banks and capital markets. In FY15, Transurban extended the average maturity of its corporate debt from 3.9 years to 5.0 years while substantially lowering the average cost. In November 2015, the company completed its first issue in the US 144A market with a 10-year USD550m note. The lengthy concession periods for Transurban's roads help defer amortisation for the time being. Transurban maintains a high level of interest rate hedging on its debt portfolio and comfortably exceeds the Senior Interest Coverage Ratio (SICR) covenant of 2.0x for new debt issuance and 1.25x for lockup/default.

Debt Service: All but one of Transurban's operating assets have non-recourse debt at the project or intermediate holding company level. As a result, Transurban's corporate debt is structurally subordinated and relies in part on dividend cash flows from those projects for debt service, making its SICR more sensitive to revenue fluctuations on those roads. CityLink, a mature toll road 100% owned by Transurban, has no project-level debt and provides stability to corporate debt service metrics. The acquisition of Queensland Motorways may introduce some variability to cash flows given the high level of project debt and Transurban's new greenfield and expansion projects will increase its corporate debt load. However the peak leverage of 5.0x debt/CFADS, projected in 2018 in the Fitch Rating Case, is appropriate for lower 'A' rated toll road assets.

RATING SENSITIVITIES
Any problems completing the refinancing of the approximately AUD1bn in debt maturing over the next 18 months (such as a major disruption in the financial markets) could negatively affect Transurban's ratings. Ratings are also subject to Transurban's ability to maintain Debt/CFADS generally in line with Fitch's Rating Case. An increase of gearing above 5.5x for an extended period would put pressure on Transurban's rating. Fitch will evaluate the impact of the proposed AUD5.5 billion Western Distributor project once the funding plan is confirmed.

Transurban's acquisitions over the past two years have substantially increased the level of non-recourse project finance debt, which finances the group's core operations in Australia. The overall debt / EBITDA ratio taking into account Transurban's proportionate share of asset level debt (including non-recourse) and EBITDA is over 9x, far higher than the recourse leverage ratio. Transurban has no legal obligation to support debt service for project financed assets, but this may be tested in the event that an asset underperforms - an unlikely scenario in the near term given solid asset level performance. In the event that Transurban extended support to a non-recourse project beyond near term liquidity, this may result in a downgrade of Transurban's rating.

Finally, any material adverse events in relation to the major upcoming construction projects, for example cost overruns or major traffic disruption, could result in a ratings downgrade.

SUMMARY OF CREDIT
Transurban develops, owns, and operates toll road networks in Australia and the US. It is listed on the Australian Securities Exchange.