Fitch Assigns Final Ratings to ITR Concession Company LLC's Senior Indebtedness

CHICAGO--()--Fitch Ratings has assigned 'BBB' final ratings to ITR Concession Company LLC's (ITRCC) senior secured debt structure:

--$1.05 billion notes series A-C;

--$700 million private placement notes;

--$776 million acquisition term loan facility; and

--$329 million capex facility.

The Rating Outlook on all debt instruments is Stable.

The senior notes have been issued to partially refinance ITRCC's acquisition term loan facility and fully refinance its acquisition bridge loan facility. The loan facilities, combined with the private placement notes and equity, were used to wholly acquire the remaining concession term interest of the Indiana Toll Road (ITR) concession and lease agreement (CLA).

The rating reflects a stable, monopolistic asset that serves as a vital route for both commercial and passenger traffic. Traffic has shown resilience despite toll increases and economic shocks while the tolling framework affords for considerable rate-making flexibility. The relatively stable, mature operating profile and long concession term allow for relatively high leverage compared with investment grade peers and, when coupled with debt covenants, partially mitigate potential refinance or economic stress risk. The 2.22% total revenue growth rate breakeven, reflecting Fitch's conservative refinancing assumptions, demonstrates resilience to low traffic and revenue growth scenarios.

KEY RATING DRIVERS

Critical Midwest Corridor - Volume Risk: Stronger

ITR serves as the primary route for commercial freight traffic, connecting Chicago, IL with the East Coast, forming an integral part of the country's interstate highway network. It faces no material direct competition and is contractually protected against improvements or upgrades to nearby alternatives. The road has a long, demonstrated record of traffic and revenue growth with moderate volatility.

Moderate Rate-Making Flexibility - Price Risk: Midrange

The concession agreement provides a relatively generous toll increase framework and flexibility in how increases may be applied on various sections of the road. While currently low relative to peers, Fitch expects ITRCC to take advantage of the tolling flexibility and rates to grow relative to peers over time. Recent performance has indicated moderate elasticity to increases.

Adequate Condition, Debt-Funded Plan - Infrastructure Development & Renewal: Midrange

ITR's condition is adequate for its age and comparable to similar highways within the Midwest. ITRCC's lifecycle cost approach is reasonable at $2.77 billion (in 2014 dollars), funded by additional debt; however, future capital outlays may be larger given the condition of the asset.

Bullet Structure, Adequate Covenants - Debt Structure: Midrange

Moderate refinance risk exists with the bullet maturities. Six-month reserve and covenant package are considered adequate. A restriction on additional debt, if it would result in leverage exceeding 12.5x, provides significant comfort.

Elevated Leverage, Ample Coverage - Financial Metrics

Initial leverage is high at 13x. Fitch's rating case refinancing risk analysis yields an average coverage of 1.6x, reflecting refinancing of initial bullet maturities with a theoretical amortizing structure assuming a stressed interest rate, and indicating that refinancing risk is not a constraint on a 'BBB' category rating.

Peer Group

ITR's traffic and volume characteristics are generally in line with Pennsylvania Turnpike Commission (PTC, 'A+/A-'/Outlook Stable) and Ohio Turnpike and Infrastructure Commission (OTIC, 'AA/A+'/Outlook Stable). Other global peers include Autoroute Paris-Rhin-Rhone (APRR, 'BBB+'/Outlook Stable) and Atlantia SpA (Atlantia, 'A-'/Outlook Stable) both of which are privately owned concessionaires employing bullet-bond debt structures.

RATING SENSITIVITIES

Negative - Traffic Underperformance: Annual commercial traffic growth lower than 1% for a prolonged period that leads to lower revenue growth than reflected in Fitch's rating case;

Negative - High Price Elasticity: Higher-than-anticipated elasticity to toll increases could pressure the concessionaire's ability to increase future tolls;

Negative - High Capex: A significant level of deferred maintenance, or capex higher than anticipated over a sustained basis, could lead to lower-than-expected EBITDA;

Negative/Positive - High Leverage: Inability to manage net debt/EBITDA down to a stabilized level of 12x or lower over the first four to five years could put the current rating under pressure, while a demonstrated stabilization of leverage below 8x could lead to an upgrade.

TRANSACTION SUMMARY

ITRCC has issued the senior notes in order to refinance $494 million of its $1.27 billion acquisition term loan facility and fully refinance its $551 million acquisition bridge loan facility. The loan facilities, combined with the private placement notes and $3.33 billion of equity, were used to wholly acquire the remaining concession term interest of the CLA for $5.73 billion.

Structural features are relatively standard and are consistent with other projects within Fitch's portfolio at this rating level. The six-month reserve fund is considered adequate and the bank facility cash sweep partially mitigates refinancing risk. Furthermore, covenants included to protect creditors, such as the 1.30x lock-up test and 1.30x additional bonds test, which includes rating reaffirmation and leverage limits, are considered reasonably restrictive and provide some benefit to the debt structure. Of particular note is the covenant within the private placement note purchase agreement restricting additional debt (excluding capital expenditure facility draws and the refinancing of such draws) if it would result in net debt/EBITDA exceeding 12.5x - in Fitch's view, this provides significant comfort with ITRCC's future leverage profile due to the 40 year tenor of the private placement notes as all pari passu debt must accede to the intercreditor agreement.

In order to assess refinancing risk and the affordability of such debt in its cases, Fitch assumes bullet maturities included in the rated structure are refinanced as 25-year amortizing notes with level debt service, incorporating an interest rate of 8%, reflective of stressed market conditions at the time of refinancing in order to assess the project's ability to repay its obligations well inside the concession term. Over a 40 year projection period, Fitch's rating case assumed 4% annual toll revenue growth (reflecting around 2.5% nominal GDP growth per capita and around 0.5% traffic growth). Fitch's long-term CPI assumption is 2% with a cost inflation assumption of CPI + 1% applied to the sponsor's opex and capex profiles. The projected average theoretical refinancing coverage ratio over this period is 1.6x, while LLCR is calculated to be approximately 2.0x. Net debt/EBITDA in the first full operating year is 13.5x before evolving down closer to 11x within the first five years. Furthermore, in order for the project to maintain at least 1.0x coverage after depleting all available reserves, ITRCC would only require a 2.22% total revenue growth rate - a scenario probably more conservative than one involving no traffic growth and allowed-for toll increases at the floor level of 2% over the entire project life - demonstrating the resilience of the debt structure.

In Fitch's view, initial leverage is high, and the assigned rating reflects the expectation of deleveraging over the next 3 - 5 years to within 12x net debt/EBITDA, consistent with Fitch's criteria. Should the operating environment or management decisions result in such deleveraging not taking place, the assigned rating could come under some pressure.

Originally opened to traffic in 1956, ITR is a 157-mile highway that runs east-west across northern Indiana, forming an integral part of the U.S. interstate highway network, connecting the Chicago Skyway in the west to the Ohio Turnpike in the east. It serves as the critical road transportation link connecting population and industrial centers in the Midwest with the major East Coast population and production centers as well as ports. ITR consists of two major segments: the 24-mile barrier system at the extreme western end of the road and the 133-mile ticket system that runs through the rural eastern portion. The western segment adjoining the Chicago Skyway and Illinois state line operates using a barrier toll collection system and predominantly carries commuter traffic, while the eastern segment adjoining the Ohio Turnpike predominantly serves long-distance commercial traffic.

SECURITY

The obligations of the borrower in respect to the senior loans, the interest-rate hedges, additional senior indebtedness, permitted refinancings and all other senior debt permitted to be secured will rank and be secured on a pari passu basis with each other and will be secured by a perfected first-priority lien in and over the collateral permitted by the concession agreement, including a perfected first-priority lien on the holding company's membership interest in the borrower. Each senior lender and each hedge provider will have full recourse to the borrower and to all of its assets for the liabilities of the borrower. The collateral includes the borrower's interest in the leasehold mortgage pledged to the collateral agent.

For further information please refer to Fitch's new issue report.

Note: Fitch Ratings has withdrawn the 'BBB(EXP)' rating on ITRCC's series D note as the bond was not sold.

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

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

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

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 20 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988442

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988442

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bernhard Fischer, +1-212-908-9167
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bernhard Fischer, +1-212-908-9167
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com