Posted on: 17/06/2009 

National Express Group PLC (NEX.LN) Wednesday said it had agreed with banks to extend the terms of its banking covenants, which will provide the bus and rail group with more financial flexibility on its debt.

The transport operator, which has suffered from lower growth in passenger revenue, said that it had agreed with its banking group, subject to receipt of signed documents, to retain current covenant terms at a maximum four times adjusted net debt to earnings before interest, tax, depreciation and amortization, or EBITDA, at June 30, which would provide the company with more headroom for the next six months.

At the same time, National Express said it has gained approval to change the calculation of net debt for covenant purposes. It will now use average foreign currency rates, rather than spot, which would reduce foreign-exchange-rate volatility, it said.

The company still expected to meet its key covenant of adjusted net debt to EBITDA not exceeding 3.5 times at June 30, following cash generation in the first half of the year.

National Express May 22 said it had sold its London bus operations to NS Dutch Railways for GBP32 million, the proceeds of which would help pay down debt. It has already cut dividend payments to ease the pressure of its debt, which stood at GBP1.18 billion at Dec. 31.

Douglas McNeill, analyst at Blue Oar Securities, said the developments would be helpful, but Gerald Khoo, analyst at Arbuthnot, said the covenant test for December, 2009, appeared unchanged, and added this (very temporary) relaxation of banking covenants solves nothing in the long-term.

Khoo said the group still had to refinance EUR540 million due September, 2010, and GBP800 million in June, 2011, which will lead to a step-up in interest costs in the current credit environment.

It also has to find a way to stem losses in the U.K. rail division in order to provide sufficient certainty to launch a rights issue to create clear headroom relative to its covenants, Khoo added.

The InterCity East Coast rail franchise has proved to be a headache for National Express, as it was for its previous operator GNER, whose parent company Sea Containers eventuallywent bankrupt. National Express bid for the franchise during the boom years, promising to pay the government some GBP1.4 billion on a net present value basis over the life of the franchise, which runs until 2015.

While National Express has been in regular talks with the Department for Transport, the government department has been adamant it will not renegotiate the terms of franchises. That could leave National Express with little option but to exit the franchise if its financial outlook gets worse. Instead, it could be paid a fixed sum by the government to manage the line, until a new operator can be found.

McNeill added the company needed to continue prioritizing on cash generation, but discouraged selling assets.

It is not a good time to sell assets, he said, adding the company instead should clamp down on capital expenditure.

At 0811 GMT, National Express shares traded up 3 pence, or 1%, at 304 pence, while the FTSE 250 index traded down 0.7%.
Company Web site: www.nationalexpressgroup.com