Transport for London 'AA-/A-1+' Ratings Affirmed; Off Watch; Outlook Negative

  • The U.K. government, the Greater London Authority (GLA) and Transport for London (TfL) have agreed a financial package to cover additional capital costs related to the delayed opening of the central section of the Elizabeth line.
  • We expect TfL to absorb the impact of lost fare revenues related to the delay through its saving program and nonfare income, but reach an operating surplus in fiscal 2023, one year later than expected.
  • We are affirming our 'AA-/A-1+' long- and short-term ratings on TfL and removing them from CreditWatch negative.
  • The outlook is negative, reflecting TfL's stretched financial profile at a time of heightened risk because of economic uncertainty and delivery of large capital projects.
MADRID (S&P Global Ratings) Dec. 20, 2018--S&P Global Ratings today affirmed 
its 'AA-/A-1+' issuer credit ratings on U.K.-based transport operator 
Transport for London (TfL). We removed the ratings from CreditWatch negative 
where we placed them on Sept. 5, 2018. The outlook is negative. 

At the same time, we affirmed and removed from CreditWatch our 'AA-' issue 
rating on TfL's senior unsecured debt.

The U.K. government and the Mayor of London have announced a financial package 
to cover additional costs related to the delayed opening of the central 
section of the Elizabeth line. The construction project, Crossrail, is 
currently Europe's largest infrastructure program. 

Previously, we assumed extraordinary support would come mainly from the 
Department for Transport (DfT), channeled through the Greater London Authority 
(GLA; AA/Negative/A-1+). Now we believe that as part of the devolution process 
to London, the GLA will have to directly contribute substantially more to the 
Crossrail project than we anticipated. The GLA will provide a grant of up to 
£1.4 billion to TfL to complete the remaining construction work on stations 
and tunnels and safety testing. GLA's contribution is to be financed by £1.3 
billion of additional borrowing from DfT as well as a £100 million cash 
contribution (see "GLA Has Capacity To Absorb Additional Debt For Crossrail; 
TfL Still On CreditWatch Negative," published Dec. 13, 2018, on 

As the final costs of the Crossrail project are yet to be confirmed, a 
contingency arrangement has also been agreed between TfL and the DfT. We 
understand the department will loan TfL up to £750 million if further 
financing is required for the project. The financing package supersedes the 
£350 million interim financing offered by the DfT in October 2018. Total cost 
overruns are estimated to represent 11%-14% above the estimated cost of £14.8 
billion announced in the UK government's 2010 Spending Review.

This agreement supports our view of a very high likelihood that TfL would 
receive extraordinary support, if needed. We base our opinion on:
  • A very important role: we believe that TfL plays a very important role as a near monopoly providing essential transportation services in the U.K.'s capital region.
  • A very strong link between TfL and the GLA. The Mayor of London plays a critical role in setting TfL's strategy and objectives and passes on retained business rates from the GLA that represent a significant part of TfL's revenues. The Mayor and the central government, via the DfT, set the incremental borrowing limits for TfL. The central government also provides ready access to reliable liquidity sources via the Public Works Loan Board (PWLB).
We factor the very high likelihood of support into our rating with a two-notch 
uplift to the stand-alone credit profile (SACP), which we maintain at 'a'. 
TfL's SACP is driven by its very strong enterprise profile and its adequate 
financial profile.

In our opinion, TfL's very strong enterprise profile is underpinned by the 
very low risk associated with the global mass transit industry. Also, TfL 
benefits from London's still extremely strong and diversified economic 
fundamentals. The population is growing rapidly, and local per-capita income 
(gross value added) is significantly higher than the national average. Nearly 
5.8 million people now work in the capital, up from 5.1 million in 2012--a 
five-year historical growth rate of about 13.7%. 

However, a subdued economy has slowed down ridership and reduced fare 
revenues. Ridership fell by 1% to slightly below 4 billion journeys in fiscal 
2018 (ended March 31, 2018), driven by a decline in passenger journeys on the 
London Underground (for the first time since 2008), and on the bus network. 
TfL estimates a slight decrease in ridership until fiscal year-end 2020. It 
expects underground journeys to return to growth over our forecast horizon, 
but bus demand willstill be in decline. The Elizabeth line, which will 
increase rail capacity in central London by 10%, will support ridership growth 
when it opens. 

Bus services account for the largest passenger volume--exceeding 2.2 billion 
journeys in fiscal 2018. However, since 2015, bus ridership has declined 
yearly, in part due to traffic delays and road congestion, although conditions 
have eased recently due to improved traffic management and signal timings, 
together with a lower volume of roadworks . TfL expects further decline due to 
the uncertainty relating to the U.K.'s exit from the EU and the continuing 
squeeze on incomes, despite its efforts to  make the bus network more 
attractive. We understand that TfL plans to reshape the bus network by 
reducing the number of routes where demand has fallen and where there are more 
sustainable alternatives available (central London), and by increasing the 
number of routes in parts of London where additional bus services will have 
the biggest impact.

TfL's near-monopoly status supports our view of the company's very strong 
market position. Oyster card (TfL's travel card) can be used to travel on most 
of the transport services in and around London. We do not view suburban rail 
services (which are not controlled by TfL) to be direct competitors as they 
bring people from surrounding areas closer to TfL's system and act as a 

We have reassessed our view of TfL's management and governance to fair from 
satisfactory previously, due to the management of Crossrail. While delays and 
cost overruns are to be expected on a decade-long, £14.8 billion project, we 
note that TfL was not able to identify earlier governance and management 
difficulties at Crossrail Ltd., its subsidiary in charge of delivering the 
Elizabeth line. The delay was announced only three months ahead of the planned 
inauguration date. The Elizabeth line is key for TfL to eliminate its 
operating deficit. We view positively, though, that TfL and DfT, the joint 
sponsors of the Crossrail project have replaced the leadership team at 
Crossrail Ltd., appointing a new Chair and Deputy Chair of the board, and a 
new CEO and CFO. Also, sponsors have strengthened their representation on 
Crossrail Ltd.'s board, with three TfL and two DfT non-executive directors now 
on the board.

We will continue to monitor management's ability to adapt and respond to the 
pressures on TfL's financial profile. We view positively TfL's high levels of 
transparency. Public stakeholders are able to access detailed financial and 
operational information that is updated on a regular basis, which TfL releases 
as per the Local Government Transparency Code.

We understand that TfL will have to absorb the net impact of lost fare revenue 
caused by the delayed opening of the Elizabeth line, which is estimated at 
£600 million to fiscal year-end 2023. This adds to the loss of the general 
grant from government from fiscal 2019, the fare freeze that will remain in 
place until 2020, and a subdued economy, which is affecting passenger numbers. 
Consequently, we expect TfL's EBITDA (adjusted for operating lease costs) 
generation to decline significantly, from about £700 million in fiscal 2017 to 
about £200 million in fiscal 2020. In our base case, we exclude the portion of 
business rates that replace the investment grant (£976 million in fiscal 2019) 
to calculate TfL's EBITDA. Due to the delay of the Elizabeth line, TfL now 
expects to achieve an operating surplus (after capital renewals and financing 
costs) in fiscal 2023, one year later than expected in its previous business 

On the capital side, TfL's business plan forecasts about £2 billion of capex 
annually (excluding Crossrail), out of which £1.4 billion is for new capital 
investment and £600 million for capital renewals. TfL relies on steady and 
sustained investment from the government to support major capital projects.

At the same time, TfL has strengthened its debt service capacity to about 1.5x 
on average over our forecast horizon through fiscal 2020 from slightly above 
1x in fiscal 2017. This is due to TfL receiving a higher portion of retained 
business rates that, if required, can be used for debt service, replacing 
investment grants (we add the £976 million of business rates replacing the 
investment grant in our calculation of debt-service coverage). However, 
business rates can potentially be more volatile, and politically influenced. 

In our opinion, TfL's debt burden remains very high and is likely to increase 
as the company invests in its large capital program including the Elizabeth 
line, tube modernization, and capacity upgrades to support demand. Therefore, 
we expect total debt (including finance leases and operating leases, the 
latter of which we capitalize) to reach £13.3 billion, or 1.5x total revenues 
by fiscal 2019; increasing further to 1.7x by fiscal 2021. A significant 
proportion of capital spending is on large-scale projects that have strategic 
importance--both to London and the national economy--thereby limiting TfL's 
ability to delay or cancel these projects once they are committed. While 
incremental borrowing limits are settled with the central government and the 
GLA during spending reviews, the use of short-term commercial paper and 
planned sale and leaseback of Elizabeth line trains could add volatility to 
its otherwise predictable debt profile. 

We see continued pressure on TfL's financial flexibility to raise farebox 
revenues, resulting from the commitment to keep TfL-controlled fares frozen 
until December 2020. Nevertheless, TfL over-delivered on savings in fiscal 
2017 and fiscal 2018, and is £250 million ahead of its deficit target for 
fiscal 2019. So far, TfL's saving program has focused on vertical, divisional 
organization changes. Over the coming years, it will focus on end-to-end 
process and structural integration across the organization, a more horizontal 
view to find synergies. In addition, we believe TfL has the flexibility to 
raise capital income from its substantial estate, including commercial and 
retail real estate in central London. Taken together, TfL continues to 
demonstrate strong financial flexibility, resulting in a farebox recovery 
ratio among the highest of the mass transit systems we rate globally, although 
this is based more on its ability to cut costs rather than to increase 

The negative outlook reflects our view that TfL's financial profile is 
stretched, leading to declining cash balances, at a time of heightened risk as 
a result of economic uncertainty and delivery of large capital projects. 

We could lower the rating if we anticipated a considerable weakening in TfL's 
growth prospects, potentially as a result of a more pronounced economic 
slowdown than we currently expect or changes in consumer patterns, or if 
ridership growth from capacity increases was below our base case. Additional 
cost overruns and debt on the Crossrail project or failure to achieve the 
savings already planned could have an adverse impact on TfL's liquidity, and 
add to the downward pressure on ratings over the next two years.

We could revise the outlook to stable over the next two years if TfL performed 
in line with our base-case expectations. 
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