Fitch Rates Concesionaria Mexiquense's (Conmex) Senior Debt 'BBB'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has assigned 'BBB' ratings to Concesionaria Mexiquense, S.A. de C.V.'s (Conmex) debt issuances as follows:

--MX$8,250 million notes due 2035;

--MX$10,541 million notional amount zero-coupon notes due 2046;

--MX$6,465 million Goldman Sachs loan due 2027.

The Rating Outlook for all issuances is Stable.

The notes were issued on Dec. 17, 2013 in accordance with Rule 144A of the Securities Act in the U.S. and pursuant to Regulation S outside the U.S. All the debt is senior pari passu.

The final rating assignment incorporates the fact that, as of today, the issuer has already engaged in two interest-rate swaps that cover an aggregate of 55% of the bank loan, on target to meet its obligation to cover at least 75% of such debt within the six months following the transaction's financial closing.

KEY RATING DRIVERS

COMMUTING BELTWAY STRATEGICALLY LOCATED: The road is located in the metropolitan area of Mexico City and interconnects some of the most densely populated areas and several key commercial and industrial centers, providing a shorter-distance travel alternative for local residents. It also connects five out of seven of the main exits of the city. About 70% of traffic and revenue comes from commuters, which have proven to be a strong and less volatile traffic base.

EXTRAORDINARY TOLL INCREASES ALLOWED: The concession allows for annual toll increases according to inflation, or more often, in case Mexico's Consumer Price Index (CPI) surpasses 5% before year end. However, in 2012 the title was amended to include extraordinary 4% - 6% real toll increases from 2013 to 2021. According to the independent consultant, elasticity in the road is moderate. As of today, toll adjustments have been timely so as to keep toll values in real terms over time.

STRONG DEBT STRUCTURE: Debt is diversified in three tranches under different conditions. The structure includes a stronger distribution test at 1.50x for 2014 - 2015 and 2.00x afterwards; however, if the debt service coverage ratio (DSCR) is between 1.75x and 2.00x, distribution is capped at MX$400 million. Fixed interest rates eliminate rate volatility risk in MXN-denominated debt, while inflation-linked units (UDI)-denominated debt entails some inflation risk that is largely mitigated by the yearly toll increase at CPI level.

ROBUST DEBT SERVICE: There is ample space for volume and price movement. Fitch's base case projected DSCR is 1.58x minimum and 3.55x average, while the loan life coverage ratio (LLCR) is 3.33x.

RELATIVELY NEW ASSET IN GOOD CONDITION: The toll road has been fully operational for approximately three years. A long-term renewal plan that is revised annually in order to assess the asset's latest needs is in place as well as a reserve account to cover six months of maintenance expense.

RATING SENSITIVITIES

A positive rating action could be triggered if traffic performance is substantially better than Fitch's rating case over a sustained period of time.

The main factors that individually, or collectively, could trigger a negative rating action include:

--Severe and prolonged deterioration in traffic volumes;

--Tariff increases significantly below expected level;

--LLCR under 2.50x for total debt;

--Recurring two-digit increase in operation expense that would negatively affect cash flow, or not having enough flexibility to reduce costs in case that is needed.

SECURITY

The collateral in favor of the creditors is the trust estate, which is mainly made up of: i) all the rights related to the toll roads (except for future collection rights related to Phase IV) and for the exploitation of ancillary services; ii) the rights over indemnities received upon the concession; and iii) the Conmex shares.

TRANSACTION SUMMARY

Conmex issued MX$8,250 million notes at a 5.95% fixed interest rate and MX$10,541 million notional amount zero-coupon notes, both denominated in Mexican UDIs. Also, a MX$6,465 million bank loan was granted by Goldman Sachs Bank at a variable rate of TIIE plus a spread of 210 basis points (bps) for 2014 - 2017 and 350 bps for 2018 onwards.

The three financing instruments were offered at a discount from their principal amount at maturity and will generate proceeds of around MX$13,524 million to Conmex.

Conmex has so far engaged in two interest-rate swaps with Goldman Sachs Bank at 6.92% and 6.82% that cover 35% and 20% of the bank debt, respectively. According to the indenture, the issuer is obliged to cover at least 75% of such debt within the six months following the financial closing. Less than six months have elapsed, leading to current compliance of this obligation.

Although Fitch initially assumed in its calculations the issuer would enter into a hedge for 100% of the loan amount, the agency is of the opinion that the weight of this credit relative to the total financing as well as its much shorter term alleviate its concerns in respect to the materiality of the remaining interest rate risk present in the transaction.

Conmex is compelled to deduct withholding taxes and to pay them to the Mexican tax authorities from payments of interest on the notes made to holders who are not residents of Mexico. The issuer has to pay to such holders all additional amounts that may be necessary so that every debt service payment after netting the withholding deduction is not less than the amount provided by the notes. This extra cost has been considered in Fitch's projections.

Debt is amortized following predefined schedules commencing in 2018. Although the loan starts amortizing before the notes do and it is paid on a monthly basis compared to the biannual payments of the notes, the trust accounts are administrated in such a way that the liquidity available for the note holders is not negatively affected at any time.

Cash distributions are allowed only if the DSCR is at or over 1.50x (2014 - 2015) or 2.00x (2016 - 2046) for 12 months backward- and forward-looking. Partial MX$400 million distributions can be made if the DSCR is between 1.75x and 2.00x. If this covenant is not met, excess cash will go to a trap account and could eventually be used to prepay debt, if certain conditions are met. In Fitch's opinion, the distribution triggers as well as the mechanism to release cash are strong.

The purpose of the rated debt was to refinance the original construction loan. The structure benefits from a six-month Capex reserve account and a 12-month debt service reserve account. All resources are managed through a separate trust that isolates project cash flows from other parties' risks.

Upon the concession agreement, the returns to Conmex are limited to the recovery of its equity investment in the project plus a real rate of return of 10%. Based on the project investment review in October 2012, an amendment to the concession was signed to acknowledge the additional investments incurred by Conmex during construction. Among others, a concession extension until 2051 was agreed to, as well as an extra 4.0% - 6.0% toll increase from 2013 to 2021. Fitch believes the concession operates within a stable legal framework that has been positively developed in Mexico for the last two decades.

According to the Independent Engineer (IE) who prepared a traffic and revenue (T&R) report regarding the toll road, average elasticity for cars and trucks is -0.23 and -0.60, respectively.

Since traffic has gradually grown as the different segments have opened, history is to some extent limited and hard to compare. In 2012, traffic grew 26.3% as ramp-up of Phases II and III continued; as of the third quarter of 2013, growth was 2.1%. Nominal revenue variation was 33.0% and 14.2% for both dates. The road is mainly used by commuters, so more than 70% of T&R comes from automobiles.

Among other considerations, Fitch's base case assumed 4.0% fixed inflation, O&M expenses and Capex at issuer's budget which increased by inflation plus 5.0% real for every year, toll escalations at 95% of projected inflation plus the real-terms increases granted in the concession's 2012 amendment agreement, and traffic at a compounded annual growth rate (CAGR) of 2.5%. The traffic scenario was based on the IE's growth rates at 85%. Under this scenario, DSCR is 1.58x minimum, 3.55x on average, and LLCR is 3.33x.

Fitch's rating case assumed O&M expenses and Capex at issuer's budget increased by inflation plus 10.0% real for every year, and traffic CAGR of 2.0%. The traffic scenario was based on the IE's growth rates at 70%. Under this scenario, DSCR is 1.53x minimum, 3.12x on average, and LLCR is 3.03x.

Several additional stress tests were also run, finding that even if traffic remains at current levels (0.0% growth) and toll rates are updated only by yearly inflation, total debt can still be paid, though using reserve funds in 2029 - 2033.

Project indebtedness is consistent with the assigned ratings and comparable with similar projects rated by Fitch, as it provides ample margin for responding to changes in traffic growth rates.

The toll road represents part of a loop running around Mexico City's metropolitan area. It connects 18 municipalities that are areas of major population density and six important toll-ways. The concession comprises 155 kilometers (km.) of which 110 km. have been built and are in full operation since 2011. The remaining 45 km. are not likely to be constructed in the short- to medium-term. The concession was granted to Conmex, an indirect subsidiary of the Spanish construction and concession conglomerate Grupo OHL, by the State of Mexico in February 2003.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure & Project Finance' (July 11, 2012);

--'Rating Criteria for Toll Roads, Bridges and Tunnels' (October 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824092

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Contacts

Fitch Ratings
Primary Analyst
Astra Castillo, +52(81)8399-9100
Director
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity
Monterrey, N.L. 64920
or
Secondary Analyst
Alberto Santos, +1-212-908-0714
Senior Director
or
Committee Chairperson
Glaucia Calp, +57(1)326-9999
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Astra Castillo, +52(81)8399-9100
Director
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity
Monterrey, N.L. 64920
or
Secondary Analyst
Alberto Santos, +1-212-908-0714
Senior Director
or
Committee Chairperson
Glaucia Calp, +57(1)326-9999
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com