International PPL shores up Covid-hit Diabolo Rail Link

International Public Partnerships has made an additional investment of €10m (£9.08m) and a contingent commitment of a further €14m to the 100% indirectly-owned special purpose company that owns the Northern Diabolo Rail Link project, it announced on Wednesday.

The FTSE 250 company described Diabolo as a rail infrastructure investment which was integrating Brussels Airport with Belgium's national rail network.

It said the additional €10m would support the project's liquidity position, ensure its debt covenants would still be met, and protect the value of the company's investment.

International PPL had flagged the need for such a commitment previously.

“As previously advised, Covid-19 has resulted in the number of passengers using the project being significantly lower over the course of 2020 compared to previous years, and the reinstatement of a national lockdown in Belgium at the end of October has further impacted passenger numbers,” the company’s board said in its statement.

“Whilst Diabolo does not operate train services, and part of its revenues are paid on an availability basis, the larger part of its revenues, while paid by the public authorities and not directly by passengers, are nonetheless linked to the numbers of passengers that use either the rail link itself or the wider Belgian rail network.”

It said the project's operational performance remained “excellent”, but without remedial action by the company, the continued lower-than-projected passenger numbers would be expected to result in a liquidity shortfall and a breach of certain formula-based debt covenants in early 2021.

International PPL said it had been aware of such a possibility for several months, and had been proactively engaged in discussions with the project's lenders and the Belgian state railway since the onset of Covid-19.

Agreement had now been reached to provide the additional funding to mitigate those issues.

“The extent to which funding additional to the €10m investment is required will depend upon the timing of the recovery in passenger numbers.

“There is naturally a high degree of uncertainty inherent in future passenger projections so, with an intention of prudence, the company has allowed up to €24m in total to be made available should the project require it.

“To the extent that the full €24m is not required, unutilised commitments will be cancelled.”

Despite the Covid-19-related issues, International PPL said the investment remained “strategically important” and retained a number of attractive investment characteristics, including historic strong performance with high levels of passenger use, a remaining concession term of over 26 years, and a high degree of inflation linkage.

The company's valuation of the project was reduced as at 30 June in recognition of the likely impact of reduced passenger numbers.

Further negative adjustments were not currently exp[ected to exceed the amounts of additional capital now being committed, but that position would remain under review, the board said.

“The long term valuation and cash flow impact on the company is not straightforward to project as, besides the fact that ongoing discussions continue with the project stakeholders with respect to mitigation, in the longer-term, the project benefits from a contractual mechanism which permits an adjustment to the future passenger fee should passenger numbers and returns fall below a certain threshold.

“This mechanism operated successfully earlier in the life of the project but, subsequently, the higher-than-forecast passenger use during the period 2013 to 2019 resulted in returns above the threshold at which this mechanism could be invoked.”

The firm said the lower passenger numbers due to Covid-19 had not yet rendered that mechanism available.

“However, this mechanism remains an important downside protection for the remaining term of the concession.”

At 0841 GMT, shares in International Public Partnerships were up 0.17% at 165.08p.