The debt ratings agency, Moody’s has lowered TfL’s debt ratings, with Moody’s citing weaker economic growth and higher inflation which is hindering the recovery of passenger growth. The implication is that as ratings are used by banks and lenders to judge how likely a firm is to repay its debt, lower ratings usually leads to higher costs as lenders charge more to companies at a higher risk of not being able to pay back their loans.

TfL’s debt stood at £13,070 million at the end of 2021.

The downgrade moves TfL’s debt from Moody’s definition of low risk of default (A3) to moderate risk of default (Baa1).

Moody’s said that the downgrade was due to its opinion that TfL’s operating performance will be weaker than expected due to new hurdles, namely weaker economic growth and higher inflation, hindering the recovery of passenger growth.

The downgrade also reflects the ongoing uncertainty around TfL’s long-term funding framework, especially for capital funding. While Moody’s expects additional government support to be forthcoming, it is unlikely to fully cover TfL’s capital funding needs and is likely to be accompanied by onerous conditions.

TfL is still in discussions with the Department for Transport over a funding settlement that’s been ongoing ever since the pandemic wiped out most of TfL’s income. The current funding settlement expires on 24th June 2022.

Under the current funding settlement, TfL must identify £400 million of cost savings or additional revenue in fiscal 2023. Although the opening of the Elizabeth line in a couple of weeks time, along with the expanded Ultra Low Emission Zone (ULEZ) will raise around £500 – £750 million per year from fiscal 2023, that still leaves a gap of around £1 billion for the year. Moody’s is warning that TfL may require an additional operating subsidy to balance its budget for fiscal 2024 given the more challenging operating environment.

TfL is unusually dependent on fares revenue for its income compared to most other major city public transport networks, where the society benefits are generally considered worthy of central government funding.

Although passenger numbers have grown significantly since pandemic lows with the most recent data reporting ridership across TfL of 72% of pre-pandemic numbers. Moody’s doesn’t expect ridership to exceed 80% by fiscal 2024. Moody’s estimate for passenger income for fiscal 2023 is £4.3 billion, down £400 million from last year’s forecast of £4.7 billion.

High inflation also poses downside risks to this forecast if it increases the sensitivity of passenger demand to TfL’s prices. The link with inflation could see a substantial fares rise next year, as the calculation is based on inflation in July, and that’s predicted to be anywhere between 7% to 9% this coming July – leading to a possible 10% hike in fares next year.

That could see TfL’s ridership fall as people cut back on discretionary spending, which is bad for TfL, but also likely to have knock-on effects on London’s wider cultural venues as they may see a decline in people willing to travel into the West End.

And that in turn puts even more pressure on TfL to cut costs or raise fares to service its debt.

A Transport for London (TfL) spokesperson said: “Moody’s decision to amend our long-term rating by one notch, as well as upgrade our outlook to ‘stable’ reflects a number of factors, including concerns that operating performance will be weaker than expected due to weaker economic growth and higher inflation, as well as the ongoing uncertainty around TfL’s long-term funding framework, especially for capital funding.”

“We continue to rebuild ridership on all our services – with the Tube now seeing more than two thirds of ridership on weekdays compared to pre-pandemic levels and buses consistently being 75-80 per cent of pre-pandemic levels. With the forthcoming opening of the Elizabeth line, the completion of the Bank station capacity upgrade and delivery of more UK-built zero-emission buses across the city, public transport will continue to make a vital contribution to the economic recovery of London and the wider country. To ensure this recovery is successful, it is crucial that a longer-term settlement with Government is confirmed. Our discussions with Government on this continue.”

Updated 9:47am to add TfL spokesperson quote.