Moody's: Australian infrastructure sector broadly resilient to softening macro-environment

Moody's Investors Service says that most of the Australian infrastructure issuers it rates are more resilient to the softening macro-environment than general corporate issuers, supporting its stable outlook for the sector, but that downside risks are increasing for commodity-exposed issuers. 

"The Australian infrastructure issuers that we rate typically have strong market or contractual positions, and their credit profiles are further supported by the essential nature of their businesses to users and the wider economy," says Spencer Ng, a Moody's Vice President and Senior Analyst. 

"However, a subset of issuers with a high exposure to the commodities sector will come under pressure from weakening industry fundamentals," says Ng. 

Ng was speaking on the release of Moody's 2016 outlook presentation for Australian infrastructure companies, "Infrastructure - Australia: 2016 Outlooks - Stable with Downside Risk Increasing in Commodity-Exposed Sectors". 

Moody's expects the soft macro-economic environment in Australia (Aaa stable) will persist into 2016. Specifically, unemployment is expected to remain at 6%-7%, and GDP growth at 1.5%-2.5% in 2016. 

Looking ahead, Moody's expects economic activity to pick up again in 2017, driven by a transition from mining-led growth to broad-based growth. 

At the same time, flat commodity prices over the next few years will likely result in continued cuts to investment by the resource sector, says Moody's. 

By sector, Moody's expects the regulatory framework for networks to remain transparent and predictable, providing issuers with a window to implement countermeasures -- if required -- to offset falling returns. 

The stable operating environment for the networks is further underpinned by their monopoly market positions and expected low cash-flow volatility during the regulatory period. 

And for airports, Moody's expects further weakness in the domestic passenger market --before a gradual recovery in 2017 -- will offset moderate growth in international passenger traffic, tariff increases and growth in revenue from non-aeronautical activities. 

Consequently, airports with a higher exposure to international markets will likely outperform, due also to the generally higher tariffs levied on international passengers. 

Toll road operators, meanwhile, benefit from the essential role of the roads as urban commuter routes as well as from strong traffic growth, both of which are increasing their resilience to macro-economic volatility, says Moody's. 

Conditions for coal logistics companies, however, remain challenging, as slowing demand from China is leading to lower profitability and increased risk of counterparty failure, although somewhat mitigated by favorable pay-or-take contracts. 

Finally, Moody's notes that refinancing risk is manageable for most of the infrastructure corporates it rates in Australia. The corporates overall exhibit good liquidity profiles, with stable cash flows and a proactive approach to refinancing debt well ahead of maturity dates. 

Of the infrastructure companies Moody's rates, 96% carry stable or positive outlooks, and only 4% negative outlooks.