TfL’s long-term financial outlook looks better after the debt ratings agency, Fitch upgraded TfL’s debt, although it is retaining a negative outlook due to the wider UK’s economic situation. Debt ratings matter as they affect how much it costs for TfL to service its existing debt, and borrow more money in the future.

TfL had just under £13 billion of debt at the end of March 2022, which is mostly raised through selling bonds, a type of debt that can be roughly described as an interest-only loan. When the debt needs to be paid off, TfL will usually roll over the debt, by issuing fresh debt to pay off the old one.

So a debt rating matters as TfL, along with most companies and governments, will be rolling over debt and borrowing more quite regularly. The worse the debt rating, the more interest that TfL will need to pay to borrow money.

If TfL pays more interest on its debt, that’s less money to invest in the transport network.

The debt ratings agency, Fitch has issued one of its periodic reviews of TfL’s debt, and upgraded it, citing an improvement in Fitch’s assessment of TfL’s financial profile, the strong link with the UK government, and the implications if TfL were to default on its debts.

The UK government has always expressed its support for TfL’s long-term commitments, although it has not subsidised TfL’s investment plan since April 2017. Since then, the investment plan has included the Elizabeth Line, the modernisation of tube services and stations and the transformation of the road network. From April 2017, the investment grant from the UK government was replaced with business rates grant from the GLA.

During the pandemic, TfL received extraordinary grants from the UK government to maintain operations and financial stability. Under the latest funding settlement in August 2022, this will continue until at least March 2024. However, the support provided by the government during the pandemic was not immediate and led to some financial deterioration. It was also initially provided partially as a loan.

Despite that, Fitch still considers TfL’s financial situation at the moment to be strong.

That’s underpinned by the huge shock to the country if TfL was pushed into a position of being unable to pay back its debts. Apart from the shut-down of London’s public transport, a default would cause investors to rethink their exposure to all UK government backed debt — meaning local authorities across the UK would be affected.

As Fitch notes, the “disruption would lead to significant political or economic repercussions.”

Away from debt, and looking TfL’s income, Fitch says that TfL’s revenue defensibility is driven by a strong demand assessment. TfL has limited pricing power, but the rating agency considers the overall assessment to be strong, given its position as the key provider of public transport in the capital.

Fitch also expects TfL to improve pre-pandemic EBITDA levels as the increased revenue from the Elizabeth line is collected.

That’s why Fitch upgraded TfL’s debt ratings, which will enable a modest improvement in how TfL funds its long-term debts.


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