Empresa de Transporte de Pasajeros Metro Outlook Revised To Negative Amid COVID-19 Pandemic, 'A+' Ratings Affirmed

  • We believe the liquidity position of Chile-based transportation company, Empresa de Transporte de Pasajeros Metro S.A. (the Metro), could be strained in the next 12 months because of a 40% tumble in the passenger level, due to travel restrictions and reduced overall mobility related to the coronavirus pandemic.
  • On March 27, 2020, S&P Global Ratings revised its outlook on Metro to negative from stable. We also affirmed our 'A+' issuer credit and issue-level ratings on the Metro of Santiago.
  • The negative outlook reflects the likelihood of a downgrade in 2020 if we revise our view of the company's liquidity to less than adequate. This will occur if the Metro's sources over uses of cash ratio drops below 1.2x which, in turn, will could stem from on the lower passenger volume, the pace of recovery, the company's level of investments during the year as well as the fiscal contributions from the government.
SAO PAULO (S&P Global Ratings) March 27, 2020—S&P Global Ratings took rating 
actions described above. Although we continue to expect that the Metro's cash 
flows plus the already committed fiscal contributions from the government will 
be sufficient to meet its operating and financial needs, we now envision a 
potentially tighter liquidity cushion.  

As in most other mass transit assets around the world, we observed in the past 
weeks a sharp decrease in passenger levels attributable to the growing 
outbreak of the coronavirus. According to the Metro, between March 13 and 
March 18, the volume of passengers decreased 50% versus the same week of 2019. 
In this context, and a likely further drop in passenger level in the very 
short term due to the recently announced restrictions of movement in Chile, we 
revised our base-case scenario for the Metro. Our updated forecast includes a 
total annual reduction in passengers handled of around 40% in 2020. Given this 
forecast we expect EBITDA of around CLP50 billion, down from our previous 
expectations of CLP120 billion. The company will use that cash, together with 
existing cash balances of CLP183 billion as of Sept. 30, 2019, and fiscal 
committed contributions CLP 431 billion already included in the government's 
annual budget, to service debt of around CLP131 billion and perform 
investments in a range of CLP300 billion - CLP330 billion. Although the cash 
flow level still underscores some cushion during the year, we see downside 
risks amid high uncertainty related to the pandemic particularly its severity 
and duration. Moreover, the company might end up with lower-than-usual cash 
balances by the end of 2020, pressuring liquidity in 2021. In this sense, the 
company continuously monitor its debt maturities in the short term. 

Finally, the Metro is subject to certain event-of-default covenants, including 
maintaining EBITDA interest coverage higher than 1x. We expect a limited 
cushion, although we don't envision issues to obtain the waiver if needed, 
because the company has a good standing in markets thanks to the government's 
ownership- we consider the potential breach as a signal of deteriorating 
liquidity. 

The Metro took a hit from the violent protests and riots that took place in 
Santiago throughout October and December 2019. The Metro's 78 stations out of 
the total of 136 were severely damaged, while trains and signaling systems 
were also attacked. As of the end of 2019, the Metro already had 111 stations 
operating normally, and we were initially expecting the reopening of the 
remaining damaged stations throughout this year. Nevertheless, the execution 
of those initial plans would depend on the severity and extent of the virus 
outbreak. In addition, the company might use part of the funds initially 
committed for repairs to fund its operating and financial needs in 2020, given 
the likely lower cash flows, which could cause delays in the reopening of 
stations.  

The government has already committed, through higher-than-usual fiscal 
contributions, around CLP430 billion (of which CLP260 billion will be used for 
the repairs of the damaged infrastructure). Those inflows will occur in 2020, 
although currently there are no details regarding the timeframe in which these 
contributions will be disbursed. So far, around CLP16 billion were disbursed. 

The support that the government provided last year backs our view of the 
extremely high likelihood that the company will benefit from timely and 
sufficient extraordinary support from its owner, the Chilean government in the 
event of financial distress. We base this assessment on our analysis of the 
Metro's critical role as the largest provider of public transportation in 
Santiago and its very strong link to the government. The Metro of Santiago is 
in charge of managing and expanding the subway network in Chile's capital 
(home to about 40% of the nation's population) in strict accordance with the 
government's plans. It also reflects the government's permanent involvement in 
the Metro's supervision, management, and strategic decisions, as well as the 
government's consistent track record of support to the company through annual 
statutory financial contributions. If we envision continuing higher support 
from the government--for instance, in the form of a capitalization or greater 
fiscal contributions--we might consider a stronger likelihood of support. 

With an annual EBITDA approaching CLP50- CLP60 billion in 2020 under our base 
case scenario, but historically at CLP110 billion - CLP120 billion, and debt 
consistently around CLP2,000 billion, we continue to expect a highly leveraged 
balance sheet. Nevertheless, we still view the Metro's capital structure as 
viable thanks to the annual financial support it receives from the government, 
which the company uses to fund capital expenditures, and to a lesser extent, 
service debt. 

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