Aurizon

• AZJAU 28’s and AZJAU 30’s offer very good relative value.
• This acquisition makes Aurizon more bulk, less coal.
• Opens investors with transitional carbon-based mandates, who start to see Aurizon’s strategy as coming to fruition.
• For investors worried about coal, maybe a switch out of Pacific National into Aurizon works, as Aurizon is making quicker headway on the carbon-transition front.

Great opportunity for Aurizon and fits well with their strategy for growing the bulk freight business and diversifying out of coal. Upon completion, bulk will contribute 40% of proforma revenue. One Rail Australia (ORA) will open Aurizon up to commodities such as copper, grain, magnetite, phosphate, and rare earths. Aurizon will also be looking at the potential for a future hybrid issuance to diversify funding sources and is expected to achieve a 50% equity credit.

Aurizon Operation’s net leverage will increase to 3.1x following the transaction. Aurizon Network’s leverage is unchanged. At a group level, the proforma net leverage increases from 2.4x to 3.4x.

In our view, there may be a reduction in the ESG discount following this transaction, thus AZJAU bonds should perform. Currently, the AZJAU bond curve is pricing at a wide discount to the BBB corporate curve. We see this differential being squeezed over the next year, especially as investors with transitional carbon-based mandates see Aurizon’s strategy come to fruition.

Source: Aurizon Investor Presentation

• Aurizon will acquire ORA for AUD2.35bn from Macquarie Asset Management.
• ORA comprises bulk rail haulage and general freight assets in South Australia and the Northern Territory; the 2,200km Tarcoola-to-Darwin railway line; and a haulage business in NSW and QLD. Aurizon will divest ORA’s NSW and QLD business (ECR) through a demerger or trade sale — whichever creates the best value for Aurizon shareholders.
• ORA bulk comprises zero coal haulage. ECR has coal haulage, but that business is being divested.
• Aurizon will retain and integrate ORA bulk and general freight into the Aurizon business. This includes the Tarcoola-to-Darwin rail infrastructure; South Australian regional infrastructure; five rail yards; 68 active locomotives; over 1000 active wagons; and approximately 400 employees.
• This will be subject to ACCC approval and regulatory conditions.
• Will be fully funded by Aurizon’s existing debt facilities and underwritten by newly committed debt facilities, with AUD1.93bn debt for Aurizon Operations and AUD500m secured debt for ECR.
• Engagement with rating agencies, a commitment remains to an Aurizon Operations BBB+/Baa1 credit rating.
• EBITDA of AUD220m (Bulk ~AUD80m, ECR ~AUD140m).
• Completion of ORA acquisition by Jan-Apr 2022. Divestment of ECR targeted for CY2022.

AZJAU 28’s and AZJAU 30’s offer very good value versus the BBB corporate curve. Remember, these bonds are rated BBB+/Baa1 and ultimately will benefit from growth in the bulk business, which will dilute the coal business over time. We expect a reduction in the ESG discount following this transaction and thus these bonds should perform.

Source: Bloomberg