Research Update:
Norway-Based Norges Statsbaner 'A+'
Rating On CreditWatch Negative On
Details Of Rail Reform Implementation
Primary Credit Analyst:
Beata Sperling-Tyler, London (44) 20-7176-3687; [email protected]
Secondary Contact:
Romana Matouskova, London +44 (0)20 7176 3946; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
CreditWatch
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
Norway-Based Norges Statsbaner 'A+' Rating On
CreditWatch Negative On Details Of Rail Reform
Implementation
Overview
• Norwegian railway operator Norges Statsbaner AS (NSB) has announced that
the implementation of the government's railway reform will involve
spinning off its real estate company ROM Eiendom AS and maintenance
company Mantena AS. Their new owner will be the Ministry of Transport and
Communication. The rolling stock used by NSB and most of NSB's debt will
be transferred to Materiellselskapet AS, a newly created rolling stock
company.
• We believe that NSB will continue to benefit from a high likelihood of
extraordinary government support in the event of financial distress.
However, we also expect its credit quality to deteriorate as a result of
exposure to less-profitable and more-volatile businesses while its
leverage will remain at similar levels.
• We are therefore placing the 'A+/A-1' long- and short-term corporate
credit ratings on NSB on CreditWatch with negative implications.
• The CreditWatch placement signifies that we are likely to lower the
rating on NSB by one to three notches when the demerger completes. We
expect to resolve the CreditWatch by April 2017.
Rating Action
On Oct. 25, 2016, S&P Global Ratings placed its 'A+/A-1' long- and short-term
corporate credit ratings on Norwegian railway operator Norges Statsbaner AS
(NSB) on CreditWatch with negative implications.
Rationale
The CreditWatch placement follows the company's disclosure that it will spin
off its real estate company ROM Eiendom AS and maintenance company Mantena AS.
Both companies will be transferred to the Ministry of Transport and
Communications, which will own Mantena directly and ROM Eiendom indirectly
through Bane NOR SF. The rolling stock used by NSB and most of NSB's debt will
be transferred to Materiellselskapet AS, a newly created rolling stock
company, which from April 2017 will also be spun off and owned by the Ministry
of Transport and Communication.
We expect that NSB's credit quality will deteriorate after the demerger as a
result of its exposure to less-profitable and more-volatile businesses while
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Research Update: Norway-Based Norges Statsbaner 'A+' Rating On CreditWatch Negative On Details Of Rail
Reform Implementation
leverage remains at similar levels.
Having spun off its most profitable real estate business and transferred the
rolling stock to Materiellselskapet, NSB will become an asset-light train and
bus operator, in our view. Although it will still operate passenger trains in
at least six of Norway's eight geographical service areas, the share of
earnings from transportation infrastructure operations will decrease, and we
expect about 40% of the company's EBITDA to originate from the more-volatile
and less-profitable bus, freight, and tourism business.
When the first two tenders are announced in February 2017 for the provision of
rail services from December 2018 on the two geographical service areas that
will be subject to competition, we believe NSB will be well-positioned to
compete for them and could remain a monopoly operator in at least the
short-to-medium term. However, we expect the profitability of passenger rail
services will decrease. Although the price for the rolling stock leased from
Materiellselskapet AS will be fixed, the train operators will have to compete
on the quality of service, thus potentially incurring higher costs. Also,
because new operators will be entering the market, NSB will receive fewer
government subsidies in the form of the public purchase agreements. Still, we
expect to continue to view NSB's business risk profile as satisfactory. Our
assessment is also supported by its role as an operator of last resort,
meaning it would be expected to take over from another operator that was in
default or otherwise underperforming under the tendered contracts.
We expect NSB's leverage will remain at similar levels after the reform is
completed. This is because NSB will incur high lease payments for the hire of
the rolling stock, having spun off that business, while its earnings
generation will be somewhat lower as a result of losing about 30% of its
EBITDA from the demerger. This will be partially compensated for by NSB
transferring out to Materiellselkapet AS the vast majority of its debt issued
under its Euro Medium-Term Note program, with the exception of the 1,966
million Norwegian krone maturity due in 2017. NSB has already repaid its
commercial paper maturing in 2016.
The reform represents a shift in NSB's profile to the operation of rolling
stock rather than both ownership and operation, which in our view will lead to
a higher share of more-volatile and more-cyclical cash flows. For companies
that generate one-third or more of their cash flows from such more-volatile
sources, we would expect stronger financial metrics, in particular higher cash
flow coverage ratios, for the same assessment of credit quality. We would
expect a company to generate a ratio of funds from operations (FFO) to debt of
between 20% and 30% for us to assess its financial risk profile as
significant.
Finally, the demerger of the real estate business will in our view also reduce
NSB's financial flexibility. This is because, after the reform, the company
will lose the ability to sell and monetize underutilized real estate and use
the proceeds to pay down debt.
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Research Update: Norway-Based Norges Statsbaner 'A+' Rating On CreditWatch Negative On Details Of Rail
Reform Implementation
We believe Norges Statsbaner AS will continue to benefit from a high
likelihood of extraordinary government support in the event of financial
distress.
We base this assessment on our view of NSB's:
• Important role for the Norwegian government as the dominant nationwide
transport provider. In our view, NSB fulfils key economic, social, and
political objectives and benefits from a long track record as the sole
public transport operator; and
• Very strong link with Norway, based on the state's 100% ownership of the
company, the government's role in appointing NSB's board members and
providing considerable ongoing financial support, and our expectation
that NSB will not be privatized over the medium term.
A combination of the company's weaker stand-alone credit profile (SACP) with
our expectation of a high likelihood of extraordinary government support in
the event of financial distress, will likely result in us lowering the
long-term corporate credit rating by up to three notches, and lowering the
short-term rating by one notch.
Liquidity
The short-term corporate credit rating is 'A-1'. We assess NSB's liquidity
position as adequate, reflecting our view that sources of liquidity exceed
uses of liquidity by more than 1.2x, it has well-established relationships
with banks, and it has a strong standing in the credit markets.
CreditWatch
The CreditWatch placement reflects our view that once the spin-off is
implemented around April 2017, we could lower the long-term rating on NSB by
up to three notches if we expect the company's credit metrics to be
commensurate with a significant financial risk profile assessment, in
particular FFO to debt of between 20% and 30%. In our view, this is likely if
NSB's earnings would drop as a result of the demerger of the subsidiaries,
while the company faces significant lease payments to Materiallselskapet AS
for the usage of the rolling stock. As NSB will now be exposed to
less-profitable and more-volatile types of revenue, we would expect higher
coverage ratios for the same SACP.
We could also lower the rating if we were to assess that the likelihood of
extraordinary government support had further weakened. This could happen if,
for example, the government disposed of a substantial stake of NSB.
We consider an affirmation of the ratings on NSB to be unlikely if the
demerger of its subsidiaries goes ahead as planned.
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Research Update: Norway-Based Norges Statsbaner 'A+' Rating On CreditWatch Negative On Details Of Rail
Reform Implementation
Ratings Score Snapshot
Corporate Credit Rating: A+/Watch Neg/A-1
Business risk: Satisfactory
• Country risk: Very low
• Industry risk: Intermediate
• Competitive position: Satisfactory
Financial risk: Intermediate
• Cash flow/Leverage: Intermediate
Anchor: bbb
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Positive (+1 notch)
• Financial Policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile: bbb+
• Group credit profile: bbb+
• Likelihood of government support: High (+3 notches from SACP)
Related Criteria And Research
Related Criteria
• Rating Government-Related Entities: Methodology And Assumptions, March
25, 2015
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Dec. 16, 2014
• Key Credit Factors For The Transportation Cyclical Industry, Feb. 12, 2014
• Key Credit Factors For The Transportation Infrastructure Industry, Nov.
19, 2013
• Corporate Methodology, Nov. 19, 2013
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Group Rating Methodology, Nov. 19, 2013
• Methodology: Industry Risk, Nov. 19, 2013
• Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
• Methodology: Management And Governance Credit Factors For Corporate
Entities And Insurers, Nov. 13, 2012
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
• 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
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Research Update: Norway-Based Norges Statsbaner 'A+' Rating On CreditWatch Negative On Details Of Rail
Reform Implementation
Related Research
• Norwegian Railway Operator Norges Statsbaner ASA Downgraded To 'A+' On
Rail Reform Implementation; Outlook Negative, Feb. 11, 2016
Ratings List
CreditWatch Action
Norges Statsbaner AS
Corporate Credit Rating
Senior Unsecured
To
From
A+/Watch Neg/A-1
A+/Watch Neg
A+/Negative/A-1
A+
Additional Contact:
Industrial Ratings Europe; [email protected]
Certain terms used in this report, particularly certain adjectives used to
express our view on rating relevant factors, have specific meanings ascribed
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