Rating Action Overview

• Australia-based toll road company WestConnex (WCX) has completed two financing transactions resulting in a nominal increase in project debt of up to A$55 million: (1) A$1.355 billion bank debt facility comprising a A$1.055 billion two-year bridge facility and a A$300 million five-year term facility; (2) refinancing of a A$600 million WCX M4-M5 Link senior project debt at WCX.
• The bridge facility is to provide liquidity for a A$1 billion December 2023 bank debt maturity and can only be drawn to repay existing WCX debt and to fund transaction costs and reserves. The term facility will be used to repay WCX M4-M5 Link senior project debt.
• Traffic continues to grow at steady rates post COVID. We have revised our base-case assumption of future traffic for WCX M4, WCX M5, and M5 South West to 95% of sponsor forecast, from 90%, resulting in improved debt service coverage ratios (DSCRs). WCX M4-M5 Link was recently opened to traffic, ahead of our assumed opening date.
• The outlook for WCX is stable, reflecting assumed future traffic growth across all roads and our expectation that the minimum DSCR will remain above 1.75x over the life of the project, absent a material increase in debt.

Project Description And Key Credit Factors

WCX is a tolled Sydney metropolitan motorway comprising six roads under three separate concessions that are physically joined. The six roads are: New M4, M5 East, M8, M4-M5 Link, Rozelle Interchange, and M5 South West (M5 South West is currently 100% owned by Transurban and will transfer to WCX once the current concession expires in December 2026). All concessions expire at the same time in 2060.

WCX operates as a closed tolling road network. Tolls are based on the distance travelled and a maximum toll trip cap will apply for vehicles using multiple sections of the road network. Tolls escalate at the greater of Consumer Price Index (CPI) or 4% a year prior to Dec. 31, 2040, and the greater of CPI or 0% post Dec. 31, 2040, until the end of the concession in 2060.

Strengths

Long concessions with a strong regulatory regime.  WCX benefits from concessions with the NSW government that do not expire until 2060. The NSW toll road market is mature, with a supportive regulatory regime from state government agency, Transport for New South Wales, and a long history of private sector involvement.

Strong toll price-setting provisions.  The concession agreements contain price-setting provisions for increasing tolls at the greater of 4% a year or CPI until 2040 and the greater of CPI or 0% thereafter, providing stable revenue growth over the term of the financing.

Benefit from exposure to Sydney metropolitan area demographics and urban road congestion.  The catchment areas for WCX are highly populated regions of Sydney. Alternative free roads are congested and the likelihood for additional alternate routes being built is remote.

High EBITDA margin.  WCX expects to operate with EBITDA margin between 80%-85% after the next five years.

Risks

Exposure to traffic volume risk.  Future traffic levels or growth rates lower than our expectation could weaken DSCRs, especially during the debt amortization period.

Interest rate impact.  WCX's policy is to hedge a minimum of 80% of interest rate exposure. Unhedged debt could result in lower DSCRs, depending on the movement of interest rates.

Refinancing risk. Debt is presently bullet maturity debt, albeit with staggered maturity dates that limit multiple refinancing transactions being required at the same time. The project will face refinancing and interest rate risk at multiple points throughout its life.

Potential for additional indebtedness to affect rating.  Under the debt document terms, WCX can issue additional debt in the ordinary course of business (including to fund distributions to equity holders), subject to the maintenance of a credit rating of 'BBB' or above, or if no public rating is in place, a minimum DSCR test (backward and forward looking) of 1.8x for purposes other than distributions.

Traffic Update

Traffic growth has continued on all sections of WCX since the end of COVID. In January 2023, construction of the WCX M4-M5 Link was completed and that section of WCX opened to traffic.

For WCX M4, WCX M5 and M5 South West, we have adjusted our forecast to 95% of sponsor forecasts, from 90%, reflecting actual traffic results, which have been greater than our base-case assumptions over the past 12 months. The revised traffic assumptions for WCX M4 and WCX M5 have resulted in an increase in the minimum DSCR of about 0.10x.

We had previously assumed a 12-month delay in the opening of WCX M4-M5 Link and so have now adjusted our analysis to reflect cash flow from traffic on the WCX M4-M5 Link from the March 2023 quarter. We continue to adopt a forecast of 70% of sponsor WCX forecasts for WCX M4-M5 Link, given it will incorporate a larger element of new or induced traffic than WCX M4 and WCX M5, which are extensions of long-term existing toll roads.

Our revised base-case forecasts for each road, expressed as a percentage of sponsor forecast, are shown in the table below.

Table 1

Chart 2

Rating Action Rationale

The rating continues to reflect the underlying operational and financial stability of the project. In particular, traffic continues to grow steadily, following the long-term trend of traffic on toll roads in Sydney. The minimum DSCR of 1.88x under our base case, with a resilient downside, supports the rating.

Total debt has only nominally increased, and liquidity and near-term refinancing risk have been addressed.  The A$1.055 billion bridge facility provides liquidity for the December 2023 maturity of the A$1 billion bank loan. The bridge facility can only be drawn to repay existing WCX debt and to fund transaction costs and reserves. The refinancing of the WCX M4-M5 Link project debt at WCX further simplifies the structure with all senior debt now at the WCX group level. The small amount of additional indebtedness (up to A$55 million) incurred as part of the recent bank debt facility has a negligible effect on our minimum DSCR.

Table 2

The project remains exposed to movements in interest rates.  WCX has hedged about 80% of near-term debt. The hedging profile drops over time, creating exposure to movements in interest rates. Although DSCRs have been negatively affected by the rise in interest rates over the past six months, the hedging position has mitigated some of the impact.

Traffic performance underpins the operating risk assessment. WCX revenue is dependent upon levels of traffic usage. Traffic on Sydney toll roads has grown steadily over many years as evident from data on the western ends of the M4 and M5 corridors since the 1990s. Toll-road traffic in Sydney has historically been stable and reflected underlying GDP unless hampered by capacity constraints. Toll elasticity has been very low even as tolls have increased at 4% a year (i.e., greater than historic inflation) on a number of Sydney toll roads. More recently, revenue has benefitted from tolls increasing at higher annualized inflation rates of about 7%, with minimal observed impact on traffic.

Structural protection analysis modifies the preliminary stand-alone credit profile (SACP). Additional indebtedness covenants in the project documentation permit the project to raise additional debt to a rating level of 'BBB'. Because of this, we apply a one-notch negative adjustment to the project's preliminary SACP of 'a'.

Holistic analysis also modifies the preliminary SACP. We use holistic analysis to adjust the preliminary SACP down by one notch, primarily to reflect the difference between the preliminary SACP and the allowable 'BBB' rating set out in the project's additional indebtedness covenants.

Outlook

The outlook for WCX is stable. Our expectation is that the minimum DSCR will remain above 1.75x over the life of the project, absent a material increase in debt. We believe debt issuance, including refinancing of existing bank facilities, will be at levels and interest rates that support the 'BBB+' rating level.

Downside scenario

We consider the resiliency assessment to be the most relevant constraining factor for the current rating. Accordingly, we could lower the rating on WCX if the minimum DSCR under our base case falls considerably below 1.75x, with a corresponding impact on our resiliency assessment and a minimum downside DSCR of 1.10x. This could happen due to any of the following reasons:

• An increase in debt levels above our base case;
• A material increase in interest rates above our current assumptions affecting the unhedged portion of debt; or
• A material drop in traffic levels.

Upside scenario

We consider it unlikely that we would raise the rating, given our expectation that WCX will manage the capital structure to a 'BBB+' rating level, and the existence of a covenant permitting additional leverage as long as the rating is at least 'BBB' following any further borrowings.

Rating Score Snapshot

Operations phase SACP (senior debt)

• Asset class operating stability: 3
• Operations phase business assessment: 3
• Preliminary operations phase SACP: 'a'
• Downside resiliency assessment and impact: no impact
• Median DSCR impact: no impact
• Debt structure impact: no impact
• Liquidity impact: no impact
• Refinancing impact: no impact
• Future value modifier impact: no impact
• Holistic analysis impact: -1 notch
• Structural protection impact: -1 notch
• Counterparty assessment impact: no impact
• Operations phase SACP: 'bbb+'

Parent linkage and external influences (senior debt)

• Parent linkage: Delinked
• Project SACP: 'bbb+'
• Senior debt issue rating: 'BBB+'

Related Criteria

• Criteria | Infrastructure | General: Sector-Specific Project Finance Rating Methodology , Dec. 14, 2022
• Criteria | Infrastructure | General: General Project Finance Rating Methodology , Dec. 14, 2022
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings , Oct. 10, 2021
• Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions , March 8, 2019
• General Criteria: Country Risk Assessment Methodology And Assumptions , Nov. 19, 2013
• General Criteria: Principles Of Credit Ratings , Feb. 16, 2011

Ratings List