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Aurizon

Aurizon to Buy One Rail Australia

Selling Points

  • 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.

IAM Credit View

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.

Chart 1. Aurizon Business Model Transformation

Source: Aurizon Investor Presentation

Key Terms

  • 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.

Relative Value

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.

Chart 2. Relative Value Versus BBB Corporate Curve

Source: Bloomberg

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