Unseen debts may derail UK bus and rail bidding plans

24th Nov 2016 13:13

(ShareCast News) - Some big changes may be coming to the way companies bid for big UK rail and bus franchises, HSBC has predicted.The bank, which downgraded Firstgroup to a 'reduce' rating but kept a 'buy' on both Go-Ahead Group and National Express, has taken a deep dive into the bus and rail operators' balance sheets to see what it might mean for the industry.What it found was there is less financial headroom than it might otherwise appear, which could restrict the ability of the UK-listed travel companies to bid for capital-intensive rail contracts.HSBC, which also kept Stagecoach on a 'hold' rating, noted that standard net debt/EBITDA multiples used by analysts and investors only go so far towards showing the real financial headroom of the companies, as rail franchises all now contain high levels of off-balance sheet risk capital that operators must pledge to the government, which the ratings agencies can count as debt.So while operators are comfortably financed right now, they might not be able to afford many more large guarantees in future."This could mean a change to the structure of the industry. It could give well-financed foreign-owned groups an advantage in future competitions. Or, more likely we think, it could mean bids become more conservative, and that risk is spread through joint ventures," analyst Joe Thomas wrote.These last two scenarios would ultimately be positive for investors, HSBC said.Recent trading updates have indicated current trading is difficult in the UK, sometimes better abroad, and while the changes to the structure of the rail industry are looming they are not immediate.Firstgroup and Stagecoach's UK bus businesses continue to struggle, Thomas noted, with the latter in particular looking vulnerable to downgrades.Firstgroup's target price was cut to 95p from 105p; Go-Ahead, despite its travails with Govia and Southern Rail, was hiked to 2,470p from 2,001p; National Express kept 400p; and trimmed to 225 from 235p.