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Fears over TfL’s finances sparks Moody’s credit ratings review

London underground

Concerns over the long-term finances of Transport for London (TfL) could see its credit rating downgraded by Moody’s.

The credit rating agency announced it was launching the review for a downgrade yesterday (Tuesday, June 2), with TfL significantly impacted by low passenger numbers as a result of coronavirus.

Moody’s is particularly concerned that TfL has the highest fare revenues as a percentage of operating expenditures (64%) in its global mass transit portfolio, which makes it particularly exposed to reductions in passenger demand.

In April, with lockdown measures in place in the UK, passenger numbers on the London Underground were down 95% on a year-on-year basis, and 85% on the bus network.

Although passenger numbers are increasing slowly as some parts of the economy re-open, a return to normal utilisation is “highly unlikely” in the next few months, says Moody's.

It is a concern that’s reflected in the most recent Transport Focus study, which showed business travellers and commuters are continuing to steer clear of public transport as the lockdown is lifted, preferring to drive rather than travel by bus or train.

Two out of five respondents (39%) said they would not use public transport for any reason until they felt completely safe.

Moody’s expects passenger numbers and fare revenues up to the year ending March 2021 to be 60% below budget.

Even if the pandemic eases later this year and the economy gradually recovers, willingness and capacity to travel, and with them TfL's revenues, are likely to be impaired for some time, it said.

Zoe Jankel, Moody's lead analyst for TfL, explained: "The review for downgrade reflects the significant negative pressure on TfL's passenger revenues and broader credit metrics resulting from the coronavirus pandemic that will test the company's capacity to adjust to a potentially prolonged period of depressed ridership, and the UK Government's willingness and capacity to provide financial support."

The review period will allow Moody's to assess the scope and effectiveness of the measures that TfL may be able to take to mitigate the impact of a prolonged reduction in demand for its services given a high fixed-cost base; and the size, nature and timeliness of further financial support from the central Government.

The coronavirus outbreak is creating a severe and extensive credit shock across many sectors, with TfL “highly exposed to the economic and social impacts”, says Moody’s.

TfL secured a £1.6 billion eleventh hour bailout from the Government last month, after warning it could have to cut services.

As part of the deal, the Government said it would carry out an immediate and broad-ranging review of the organisation’s future financial position and structure, including the potential for efficiencies.

Two special representatives will also represent the Government on TfL’s board, its finance committee and its programmes and investment committee, in order to ensure best value for money for the taxpayer.

Furthermore, TfL has agreed to increase fares next year on all modes by inflation plus 1%.

The deal, a grant of £1.095bn and a loan of £505 million, runs until October 2020.

Moody's says it will reduce TfL's large funding gap in in the short term, but will not fully compensate the revenue shortfall beyond the next few months. 

In addition, while remaining within its pre-agreed borrowing limits, Moody's expects TfL's financial debt levels to increase to £13bn by the end of this financial year and total debt to £15.8bn. 

Before the outbreak this would have represented 196% of operating revenue, said Moody's. Significantly lower revenue will exacerbate the increase in TfL's debt burden.

Through the immediate shock, as lower revenues are absorbed by Government support and higher debt, Moody's expects that TfL will maintain good cash buffers. TfL retains its liquidity buffer, which is set at 60 days of operating expenditure and equates to around £1.2bn, said Moody's.

Beyond the near term, the coronavirus outbreak poses significant long-term challenges for TfL's business model. 

Large staffing and maintenance requirements across its services make significant further cuts to operating expenditure in response to lower revenue difficult to implement. 

While 7,000 of TfL's 28,000 employees were furloughed in April, the savings, at around £16m per four-week period, represent less than 3% of TfL's average operating costs. 

Although TfL has demonstrated its capacity to reduce costs in recent years, said Moody's, if demand for its services remains lower for a number of years, it will be challenging to generate further savings through a restructure to services.

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