Fitch: Australian Transportation Sector to Remain Stable through 2015

Fitch Ratings says in a newly-published report that its Outlook for Australian transportation infrastructure is stable, supported primarily by continued traffic growth. However, exposure to medium-term bullet debt could leave issuers vulnerable to refinancing risk in the event of a significant downturn in the Australian economy or banking sector.

Underlying traffic levels have remained generally robust in 2015, continuing the trend of recent years. Fitch expects strong overall traffic growth in its rated Australian road portfolio to continue through the second half of 2015, as recently completed expansion works boost patronage. Major Australian airports saw subdued domestic passenger growth of 1.0% for the year to March 2015, but a stronger international increase of 5.6%.

The performance of the road assets in Fitch's Australian portfolio are underpinned by their important economic roles: the Eastern Distributor, Hills M2, M5 and Westlink M7 roads along with the Cross City Tunnel and the Lane Cove Tunnel form the bulk of Sydney's orbital road network; the Queensland Motorways network provides the equivalent function in Brisbane; and the Citylink road in Melbourne is an important connection into the city's central business district. Robust traffic performance, combined with supportive pricing arrangements, has provided these companies with strong cash flow coverage.

Nonetheless, Australian transportation issuers have unusually high exposure to medium-term (three to five-year) domestic bullet bank debt compared with global peers. While cash flows should be able to support potentially higher debt costs in the future, the need for regular refinancing of these long life assets is a weakness, relative to global peers and exposes these companies to the liquidity of the Australian banking sector. 

Furthermore, the transport sector is sensitive to fluctuations in Australian GDP growth, and its banking sector is heavily reliant on external debt funding. Should either of these factors deteriorate substantially, Australian transportation issuers could be exposed to reduced traffic levels or to difficulties refinancing maturing debt. 

The report, 2015 Mid-Year Outlook: Australian Transportation, is available on www.fitchratings.com or by clicking on the link above.