MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Red de Carreteras de Occidente, S.A.B. de C.V.'s (RCO) MXN7.5 billion senior secured notes to 'BBB' from 'BBB-'. The Rating Outlook is Stable.
Debt is backed by the toll collection rights of four highways (collectively referred as FARAC I), and by the cash distributions made by Concesionaria Irapuato La Piedad, S.A. de C.V. (CONIPSA) and Concesionaria de Vias de Irapuato Queretaro, S.A. de C.V. (COVIQSA).
The upgrade of RCO's notes reflects the project's resilient cash flow performance, coupled with its considerably lower exposure to refinancing risk when compared to when it was initially rated. Moreover, RCO expects to place the last tranche of its refinancing plan within the next weeks. Upon closing, the company will no longer be subject to refinancing risk, with all its debt issuances expected to be fully amortized upon legal maturity. The rating is also supported by the assets' strength and diversification, its strategic location, connecting several major cities in the central part of the country, and by its solid expected coverage ratios illustrated by a loan life coverage ratio (LLCR) of 1.71x under Fitch's base case.
KEY RATING DRIVERS
Revenue Risk: Volume - Stronger
Diversified and Strategically Located Assets: The company's pool of toll roads is located in one of Mexico's most dynamic regions, which accounts for around 15% of national GDP. They are part of the diversified system of trunk routes that serve major industrial centers and cities, and that connect the two largest cities in Mexico. Historical performance since the early 1990s has been positive and has been resilient to economic downturns, experiencing modest declines during the recent deep crises.
Revenue Risk: Price - Midrange
Timely Toll Rate Increases: Toll rates can be increased annually with inflation, while additional increases can be approved whenever Mexico's Consumer Price Index (CPI) exceeds 5% in a given year. This feature is crucial, especially since a portion of the rated debt is linked to inflation. Tolls have historically been adjusted in a timely manner.
Infrastructure Development & Renewal - Midrange
Well-Maintained Infrastructure: The 470 miles of the six asphalt roads are in good physical condition having been upgraded under the terms of the concession agreement. From 2008 to 2013, RCO invested close to MXN2.9 billion in capital expenditures. Pursuant to the agreement, the company has to invest in additional mandatory roadway and network improvements. The remaining investment has already been funded in a separate trust. There is a five-month reserve fund for major maintenance.
Debt Structure - Midrange
Standard Debt Structure: The 2014 issuance ends RCO's refinancing plan started in 2012. The debt structure is in line with industry standards, as it includes a 12-month debt service reserve fund (DSRF), and tests to distribute excess cash if minimum coverage levels are not reached, among others.
Metrics
Financial Resilience under Stress Conditions: Even under harsh scenarios, the debt service coverage profile is robust and growing. Fitch's base case resulted in a minimum debt service coverage ratio (DSCR) of 1.30x that averages 1.58x from 2015 to 2028, and LLCR of 1.71x. Fitch's rating case resulted in a minimum DSCR of 1.06x that averages 1.38x from 2015 to 2028, and LLCR of 1.49x.
Peers
RCO's debt is comparable to that of Concesionaria Mexiquense, S.A. de C.V. (Conmex), rated 'BBB-' with a Stable Outlook by Fitch. The different rating derives from Conmex's shorter operating history and lack of diversification as it is a single asset, which results in a midrange attribute for volume risk, while RCO's assessment is stronger. Both transactions have midrange attributes for price and infrastructure development and renewal. Conmex has a stronger debt structure than RCO; however, both maintain a similar Debt/EBITDA ratio at 8.96x vs. 9.31x for Conmex and RCO, respectively.
RATING SENSITIVITIES
A positive rating action is unlikely in the short time given the notes' recent upgrade. In the medium term a positive rating action could take place if traffic and revenue grow significantly and consistently over Fitch' base case.
A negative rating action could arise upon the occurrence of one or more of the following events:
--Meaningfully higher actual interest rates on refinanced debt than currently projected by the Sponsors;
--Traffic growth expectations of below 2% over a prolonged period;
--Operating and major maintenance expenditures growing 10% above inflation for a prolonged period;
--Significantly higher capital costs in connection with mandatory roadway and network improvements;
--Weaker overall financial flexibility resulting in an LLCR profile below 1.60x under Fitch's base case.
CREDIT UPDATE
Fitch rates RCO's local and international notes. Fitch does not rate the loan contracted with Banobras in October 2013, nor the credit contracted with Banco Inbursa, S.A. (Inbursa) in August 2014. However, both loans are considered in Fitch's financial projections as they are part of the same class of pari passu senior debt as the rated instruments.
In 2013 and 2014, RCO performed some expansion works. In order to maintain the economic equilibrium of the concession, the company was granted a toll increase effective in January 2014. Although it is possible this increase may have a negative impact on traffic due to elasticity, Fitch expects a positive net result on the project's cash flow.
Since 2007, ICA Infraestructura, S.A. de C.V. (ICAI), a subsidiary of Empresas ICA, S.A.B. de C.V., had provided the operation and maintenance services to the roads. However, in September 2014, the services contract with ICAI was terminated by RCO, and the latter started performing such activities. In Fitch's view, operational risk is largely mitigated by the experience and active management demonstrated by the concessionaire, as well as the fact that operation and maintenance of roads is relatively simple compared to other types of infrastructure projects.
In 2013 and 2014, the company has improved its revenue through the management of ancillary businesses, which consist of the acquisition and operation of different franchises alongside the road, and also the lease of right-of-way to several tenants, particularly convenience stores and gas stations. These revenues were not initially considered by Fitch in its financial projections, so they represent additional resources that strengthen available cash flow.
At the end of 2013, weighted average annual daily traffic (WAADT) of FARAC I was 10,207 vehicles, reflecting a 1.4% growth compared to 2012, while toll road revenue reached MXN4 billion, which represents a 6.1% increase compared to 2012. During the first nine months of 2014, AADT shows an increase of 1.8% compared to the same period of 2013, while revenue has increased 13% compared to the same months of 2013, thanks to the extraordinary tariff increase which started in January 2014.
Fitch's base case assumed a traffic compounded annual growth rate (CAGR) of 2.6% from 2015 to 2035. Additionally, operating expenses were increased yearly at inflation plus 5%, while major maintenance was increased at inflation plus 5% above its respective program. Tariff lag was assumed at 5% with respect to Mexico's CPI for each year. Inflation was fixed at 4%.
The stress case assumed traffic CAGR of 1.8% from 2015 to 2035, tariff lag at 5% with respect to CPI, and 7.5% real increase to operating expenses and major maintenance.
Base case results were that the natural coverage ratio --not considering reserves or the partial guarantee-- is 1.30x minimum and 1.58x average; under the stress case, the results are 1.06x minimum and 1.38x average. To avoid distortions arising from the high levels expected in the latter years of the projection, the average coverage was calculated from 2015 to 2028. The LLCR base case yields 1.71x and stress case results of 1.49x.
As of the last rating review in May 2014, base LLCR was higher at 2.00x. The reason for the reduction is that the new bond to be issued is expected to be for a shorter term than originally considered in our projections.
This rating assumes the 2014 notes' final terms, such as nominal amount, interest rate and amortization schedule, will be consistent with those provided by the issuer. Such notes are expected to be placed within the next few weeks.
In 2007, RCO was awarded a 30-year federal concession over a four-toll-road package known as 'Farac I'. All of the roads have been in operation since the early 1990s and are located in West Central Mexico, connecting Guadalajara and Mexico City, two of the largest metropolitan areas in the country.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Rating Criteria for Infrastructure and Project Finance - July 12, 2012.
--Rating Criteria for Toll Roads, Bridges and Tunnels - August 20, 2014.
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=758708
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=919616
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