Fitch Rates Portsmouth Gateway Group's Sr. PABS & Sub. TIFIA Loan 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to approximately $227 million of senior Treasurer of State (Ohio) private activity bonds (PABs), series 2015 issued on behalf of the Portsmouth Gateway Group, LLC (PGG) for the Portsmouth Bypass Project (the project).

Fitch has also assigned a 'BBB' rating to an approximately $208 million subordinate Transportation Infrastructure Finance and Innovation Act (TIFIA) loan for the project. The Rating Outlook for both instruments is Stable.

Final pricing for the PABs provided an all-in interest cost of approximately 5%. The interest cost is the same as the rate assumed when Fitch announced its Expects to Rate for the project. The rural interest rate on the TIFIA loan is 1.27%, which is slightly lower than the rate assumed for the Expects to Rate.

Projected coverage is consistent with Fitch's case at the time of the Expects to Rate rating with minimum and average coverage of 1.22x. In addition, LLCR breakeven analysis indicates that the financial structure can withstand a 248% increase in lifecycle costs, 290% increase on O&M cost, 130% increase in O&M and overhead costs (SPV, insurance, financing related costs), or an 81% increase to all costs including O&M, lifecycle and overhead. These results are all in-line with Fitch's analysis at the time of the Expects to Rate rating.

The ratings reflect the experience of the managing partner of the design build joint venture (DBJV), Dragados USA (parent company Dragados, S.A., the construction arm of ACS Group) and adequate construction security package, which do not constrain the rating during the construction phase of the project. The ratings further reflect the project sponsor's experience operating similar projects worldwide as well as the relatively low complexity of operation, maintenance, and lifecycle requirements along with the strong revenue counterparty in the Ohio Department of Transportation (ODOT). In addition, the ratings reflect the project's ability to withstand reasonable financial stresses during the operating phase.

KEY RATING DRIVERS

Experienced DBJV with Sufficient Security Package - Completion Risk: Midrange

The project will be constructed via a DBJV whose members (Dragados USA, Beaver Excavating, and John R. Jurgensen) are experienced contractors. Design build requirements under the PPA are passed down to the DBJV. Completion risk in the 44-month design and construction schedule is mitigated by an adequate completion security package that includes the joint and several nature of the DBJV and by the parent company guarantee from Dragados S.A. to Dragados USA, a 6% letter of credit, both payment and performance bonds of 100% of the DB price, a 16% liquidated damages cap of the DB price, a 40% limitation of liabilities, and contingent retainage. The lender's technical adviser's (LTA) replacement analysis shows that in the unlikely event that all contractors simultaneously default the security package would be sufficient to bring in a replacement contractor to complete the project.

Availability and Periodic Payments Supported by Strong Counterparty - Revenue Risk Stronger

Payments during construction and operation of the project stem from milestone payments and availability payments from a strong counterparty, ODOT. The availability payment is split with 80% of the payment fixed to an annual escalator of 1% while the remaining 20% is linked to the consumer price index (CPI). The payment mechanism is broadly in line with peers, and the LTA has suggested that cure periods for non-compliance events are sufficiently long to ensure minimal payment deductions are incurred by the project.

Operations Self-Performed - Operation Risk: Stronger

Project operations are expected to be self-performed by Portsmouth Gateway Group. The sponsors have extensive experience in performing O&M obligations on comparable projects around the world. In addition, the scope of operations is relatively low complexity relative to peers with ODOT retaining responsibility for winter maintenance and the road is un-tolled.

Adequate Life Cycle Plan - Infrastructure & Renewal Risk: Midrange

The LTA has opined on the adequacy of the developer's approach and budget for lifecycle costs. The developer will perform regular condition and performance monitoring inspections in a systematic manner that allows it to better understand the remaining life of its assets. Funding of a four-year major maintenance reserve and two-year handback reserve account provide adequate protections and are incorporated into the financial model.

Typical High Leverage Offset by Conservative Structure - Debt Structure: Midrange

As for virtually all availability-based projects, leverage is initially high (18x range Net Debt/CFADS in the first operational year). The debt structure is fixed rate with no refinance risk. There is a 6 month tail on the PABs and approximately three-year tail on the TIFIA loan. The covenant package is consistent with similarly rated transactions with debt service reserve funds equal to six months of debt service, and an equity lockup trigger of 1.15x.

Solid Coverage Ratios - Financial Metrics

The sponsor base case, which was adopted as the Fitch case, demonstrates minimum and average coverage of 1.22x. This case contains contingencies of 3% to O&M and 5% to lifecycle costs as well as another 2.5% allowance made in the O&M budget for unavailability and noncompliance risk which Fitch felt, after analysis and dialogue with the LTA, is sufficient to mitigate a likely downside scenario. Sensitivity and breakeven analysis suggests that the project should be able to withstand a considerable level of stress with respect to each of O&M (290%), O&M and overhead (130%), lifecycle (248%), and all costs (81%).

Peer Group

Fitch-rated availability payment comparables include I-69 Development Partners LLP (BBB/Stable) and WVB East End Partners ('BBB'/Outlook Stable). Both include similar average debt service coverage ratio profiles, cost break-evens, and construction security packages, providing adequate protection in the case of a contractor default.

RATING SENSITIVITIES

Negative:

--Credit deterioration of project counter-parties leading to weaker risk mitigation within the project;

--Construction delays beyond scheduled substantial completion and anticipated final acceptance dates;

--Significant payment deductions during construction and operations that reduce coverage levels well below current projections.

Positive:

--Successful completion and sustained operating performance above expectations

For a complete review of Fitch's analysis of the project, please refer to 'Fitch Rates Portsmouth Gateway Group Sr. PABS & Sub. TIFIA Loan 'BBB(EXP)'; Outlook Stable', dated March 18, 2015 and Fitch's presale report 'Portsmouth Gateway Group', dated March 23, 2015.

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

Applicable Criteria and Related Research:

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

--'Rating Criteria for Availability Based Projects' (June 18, 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 Availability-Based Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982548

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Director
+1-312-368-3171
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Director
+1-312-368-3171
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com