TfL gets debt ratings upgrade, but need for long-term government support highlighted

Transport for London’s finances have been given a vote of confidence after one of the debt ratings agencies upgraded the quality of TfL debt.

When TfL borrows money by issuing debt, it is given a quality score by the ratings agencies, and that affects how much TfL has to pay in interest payments. The better the quality score, the lower the cost of servicing the debt.

The ratings agencies periodically report on company debts. Now Standard & Poor’s (S&P) has lifted TfL’s debt score after forecasting that TfL will “gradually improve its financial performance due to strong demand for its service.”

Justifying the ratings upgrade, S&P cited the full opening of the Elizabeth line and additional services, the continued economic recovery, and population growth in TfL’s service area as underpinning solid demand for TfL’s services.

They do warn of the uncertainty about working from home’s long-term impacts  on TfL’s fare revenues and the lack of certainty about how TfL will be able to fund future transport upgrades without clear government support.

Long-term funding deals would be needed to cover the upfront costs of replacing the UK’s oldest passenger trains still in service on the Bakerloo line, as well as the potential housing-supported expansions of the DLR and Bakerloo line.

The lack of clarity about the government’s intentions is a significant issue because the uncertainty about what TfL could do in the future raises the cost of delivering upgrades, as suppliers crave certainty about their order books. Additionally, the uncertainty acts as a brake on future debt ratings upgrades, which means TfL could be paying more to service its debt than it needs to. The uncertainty adds costs that could be removed if the government clearly outlined its long-term plans. Confirming plans doesn’t mean writing a cheque today, just committing to do so in the future.

On the upside, the assumption that the government would never let TfL go bust due to the serious effect that it would have on the UK’s economy provides some uplift in its debt rating, which helps reduce some of TfL’s borrowing costs.

Looking to the future, due to ongoing investments and the opening of the Silvertown tunnel, S&P forecasts that TfL’s debt will increase by about 15% in the next three years to about £17.5 billion. Debt is then expected to stabilise and eventually decline as the extra revenues help pay down the cost of building the Elizabeth line.

Rachel McLean, Chief Finance Officer at Transport for London said: “We are pleased that S&P has upgraded both our long-term and short-term credit ratings. This decision is testament to the hard work taking place across our organisation to rebuild our ridership, ensure we are operationally financially sustainable and deliver a safe and reliable transport network that serves London and the wider UK, night and day.

“Whilst we are now able to cover our day-to-day costs, with any surplus going directly into infrastructure improvements, we cannot fund major capital projects entirely from our own resources, just like other transport authorities. That’s why we are keen to work with transport authorities across the country to secure multi-year funding settlements from the Government, like those that are already in place for National Highways and Network Rail.

“With a long-term funding deal, TfL would be able to deliver a programme of sustainable investment, aligning our national supply chains around long-term programmes and offering better outcomes for a lower cost. This will both support jobs and growth outside of London, and protect London’s position as a leading global city and economic powerhouse for the benefit of the whole UK.”

S&P raised its long-term issuer credit rating (ICR) to ‘AA-‘ from ‘A+’ and short-term ICR to ‘A-1+’ from ‘A-1’ on TfL. The outlook is stable.