TfL’s credit rating was lowered in October 2020 and again in June 2021. What impact does this have on TfL’s expected borrowing costs and how does this affect the budget’s risk profile?

The June 2021 credit rating downgrade by Moody's was due in part to their assessment of the financial support provided by the Government and the absence of a longer-term funding arrangement. Although over 90 per cent of Transport for London’s (TfL) debt is at fixed interest rates (including a fixed margin), which limits the immediate impact of any specific event on TfL’s borrowing costs, TfL is exposed to changes in borrowing costs as its fixed rate debt matures and is refinanced, and for the portion of borrowing that is not fixed.

The cost of TfL’s variable rate borrowing has marginally increased since its short-term credit rating was downgraded by Moody’s in June 2021. This is being seen in the short-term commercial paper market that TfL uses for its working capital requirements and is in part due to an increased margin required by investors following the rating downgrade, and also due to underlying increases in interest rates across the market. Currently, TfL’s main source of funds for refinancing maturing debt is the Public Works Loan Board (PWLB). The rate charged by the PWLB does not vary depending on TfL’s credit rating or perceived credit quality and is therefore not impacted by the credit rating downgrade.

TfL routinely updates borrowing cost assumptions as part of the budgeting and forecasting process. TfL’s revised budget published in July 2021 included an increase of around £5m due to the Moody’s downgrade.