Investors in Australian and EMEA transportation infrastructure assets should be able to relax for a while as the latest Fitch Ratings’ reports showed the outlook for the asset class in both regions remains stable.
Decent levels of traffic, driven by better economic prospects, was the contributing factor in the assessment of the Australian and EMEA transportation infrastructure sector going forward, according to the ratings agency.
For Australia, Fitch cited Sydney Airport’s 2.5 percent on-year growth in traffic in May (albeit a lower growth rate compared with May 2013) as an example of why it expects the country to see a steady performance from its transportation infrastructure sector for the second half of this year.
It also expects strong overall traffic growth in its rated Australia road portfolio to continue through the second half following the completion of expansion works.
These roads also benefit from supportive pricing arrangements thanks to their importance for the economy. Combined with improved traffic, the assets have strong cash flow coverage, Fitch said in the report.
In EMEA, a similar reason – improvement in traffic performance – resulted in the “stable” grading, although “the improvement remains insufficient, and the economy is not robust enough, to warrant any positive rating action,” said Nicolas Painvin, head of the transportation infrastructure team for EMEA at the agency’s global infrastructure group.
Fitch said it expects the stabilisation trend in large European toll road networks to continue for the rest of the year, while air traffic may also expand steadily for the rest of 2014.
In the meantime, both regions are subject to some risks in the medium term, according to Fitch.
Australian transportation issuers have unusually high exposure to medium-term (three to five-year) domestic bullet bank debt compared with global peers. A bullet bond is considered riskier than an amortizing bond because it gives the issuer a large repayment obligation on a single date rather than a series of smaller repayment obligations spread over several dates.
And that could leave them “vulnerable to refinancing risk in the event of a significant downturn in the Australian economy or banking sector,” Fitch said.
Meanwhile, the EMEA region faces two headwinds going forward: high fuel prices and low inflation.
Fitch expects oil prices to remain at around $100 a barrel until 2015, with the effect on road, air and sea traffic significant and hampering a clear rebound.
An extended period of low inflation, although not included in Fitch’s rating cases, would likely have “a disproportionately adverse impact on revenues compared with related operating cost savings,” it said.