After improving the rating outlook on Royal Women’s Hospital early this week, Moody’s has also upgraded the rating outlook on Praeco from negative to stable, which is positive for Praeco nominal and indexed annuity bondholders
Moody's has improved the outlook on Praeco’s senior secured credit rating from negative to stable, and at the same time has affirmed the investment grade Baa2 rating.
The outlook upgrade has been driven by the rating agency’s view that the refinancing risk on the nominal bonds in 2020 is manageable. The owner of Praeco, Australian infrastructure fund IFM Investors (IFM), is highly incentivised to inject additional capital to support the full refinancing of the nominal bonds in 2020. Moody’s estimates the equity capital injection needed to support the refinancing is materially below the future value of dividends which IFM could earn if they allow the project to continue until the end of the project term. In principle, Moody’s has applied a similar rationale in its reasons for improving the rating outlook on both Royal Women’s Hospital and Praeco, given both projects carries similar refinancing risks.
Previously, Moody’s has indicated that it would continue to downgrade the Praeco credit rating until such time as the project owners provide a plan for the refinancing, so the affirmation that the rating outlook is now stable represents a change from previous statements. It suggests they do not plan to downgrade the credit rating further in the near term. The rating agency has stated however that a downgrade would be likely if IFM indicates it is unlikely to support Praeco in achieving the refinancing.
The news is positive for both the nominal and indexed annuity bondholders, as it reaffirms the FIIG Research view that the project owners will support the refinancing of the nominal bonds in 2020.
However, Moody’s has stated that it does not believe that credit margins will improve enough to allow refinancing of the nominal bonds without additional equity support. So, the current rating is reliant on the project owners supporting the refinancing of the project. Please note at this stage IFM has not made a public statement around its intention to support the Praeco refinancing and so at this stage the credit opinion is based on the expectation they will provide equity support to the refinancing given the incentives in place to do so.
The improvement in rating outlook reaffirms FIIG Research’s view that the nominal bonds are likely to be refinanced at the 2020 call date given the incentives for IFM to keep the project running and earn dividends from the asset until the end of the project term. While the current senior secured rating on Praeco is currently Baa2 with a stable outlook, the rating could be upgraded once there is certainty around the refinancing.
The Praeco nominal and indexed annuity bonds are currently offered at indicative yields of 5.25% and 2.25% (real) respectively and represent good value given the improved rating outlook. The indexed annuity bond fully amortises by 2020 and as such is not exposed to refinancing risk. Please note the yield on the nominal bond is to the 2020 call date on the expectation the bonds will be called. Supply is currently available in both lines but may move quickly given the rating action.
IFM Investors
The owner of Praeco, IFM Investors (IFM) is a pioneer and leader in infrastructure investing on behalf of institutional investors globally, with a 20 year track record of success. It currently holds A$25 billion in infrastructure equity assets under management diversified across every infrastructure subsector. IFM holds interests in 30 infrastructure companies across Australia, North America and Europe; with more than 40 board seats.
IFM invests in core infrastructure assets - investments with strong market positions, high barriers to entry, limited demand elasticity and long ‘lives’. In many cases, target assets will also have a link to inflation, through revenues, costs, debt structures or company valuations.
Please contact your FIIG representative for further information on the Praeco bonds.