CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following bonds issued by the Kentucky Economic Development Finance Authority on behalf of the KentuckyWired Infrastructure Company, Inc. (KWIC) for the Next Generation Kentucky Information Highway project (the project):
--Approximately $232 million senior tax-exempt revenue bonds series 2015A;
--$58 million senior taxable revenue bonds series 2015B-1 & 2015B-2.
The Rating Outlook is Stable.
Fitch has also assigned a rating of 'A' to the Commonwealth of Kentucky's (the Commonwealth) counterparty obligations. The Rating Outlook is Stable.
Final pricing for the tax-exempt bonds were an interest rate of 4.6358% and the taxable bonds were a blended rate of 4.6575%. Projected coverage is consistent with Fitch's case at the time the expected rating was assigned with minimum and average coverage of 1.25x. In addition, LLCR breakeven analysis indicates that the financial structure can withstand a 42% increase in O&M costs and a 15.8% deduction in availability payments. These results are all in-line with Fitch's analysis at the time the expected rating was assigned.
The rating reflects an adequate completion security package from two experienced contractors completing a relatively low-risk project under a design-build (DB) contract with joint and several guarantees. The rating further incorporates the project's expected stable revenue profile due to modest performance requirements and a fully-indexed revenue component for operations and maintenance (O&M) costs under the availability-based contract with a highly-rated commitment from the Commonwealth. The rating also reflects the project's ability to withstand prolonged financial stresses during the operating phase due to the market-based re-pricing of the O&M contract every 10 years.
KEY RATING DRIVERS
Completion Risk: Midrange
Experienced DB Contractor with Sufficient Security Package: The project is expected to be constructed via a DB contact whose members Black & Veatch and Ledcor (collectively, the DB contractor) are experienced contractors. DB requirements under the Project Agreement (PA) are fully passed down to the DB contractor. Completion risk in the 35-month design and construction schedule is mitigated by joint and several parent company guarantees of the DB contractor, a 40% limitation of liabilities, a 10% liquidated damages cap and a 10% LOC, which Fitch finds adequate given the complexity of the project and experience of the contractors.
Cost Risk: Stronger
Operations Self-Performed and Capital Expenses Passed-Through: Project operations are contracted to Ledcor under the Services Contract in three 10-year contracts to allow for pricing and service definition adjustments over the life of the concession. Additionally, the performance requirements under the Service Level Agreements (SLAs) for the project are on the lower end of comparable commercial fiber networks. Due to the inability to forecast advances in technology over the concession term, the project will undertake two equipment refreshes prior to years 11 and 21. The Commonwealth and project company will mutually agree upon the replacement equipment and the upgrade cost will be fully compensated through an adjustment in the availability payments, such that the Commonwealth effectively bears the risk of the refresh.
Revenue Risk: Stronger
Availability and Periodic Payments Supported by Strong Counterparty Obligation: Payments during construction and operation of the project stem from an in-kind contribution, milestone payment, and availability payments from the Commonwealth of Kentucky. Fitch assigned a rating of 'A' to the Commonwealth's commitment to make these payments. The grantor's obligations meet Fitch's expectations for a rateable PPP counterparty obligation. Structural provisions are sound with the PA establishing an explicit commitment on the part of the Commonwealth to make performance-based payments to the project company. The Commonwealth itself, rather than a subsidiary agency or department, serves as the grantor and obligated counterparty under the agreement.
Debt Structure: Midrange
Typical High Leverage Offset by Conservative Structure: As for virtually all availability-based projects, leverage is initially high (15x range Net Debt/CFADS in the first steady state year). The presented debt structure is fixed rate with no refinance risk. There is a six-month tail on the senior bonds. The expected covenant package is adequate with a debt service reserve fund equal to six months of debt service and a lockup trigger of 1.10x.
Solid Coverage Ratios
The Fitch case demonstrates average and minimum coverage of 1.25x. Fitch ran a sensitivity case with a 10% increase to all O&M costs excluding special project vehicle (SPV), with a lower sensitivity applied to insurance, based upon the technical advisor's (TA) assessment of a realistic outside cost (ROC) estimate in the project. This resulted in an average and minimum coverage of 1.18x. After year 10 the O&M contract would be reset, taking into account the increased cost realized over the first term, returning the project to a higher coverage level near the Fitch case.
Peer Group: Fitch-rated comparables include I-69 Development Partners LLP ('BBB'/Stable Outlook) and Portsmouth Gateway Group ('BBB'/Stable Outlook). Both include low operational risk, similar debt service coverage ratio (DSCR) profiles and construction security packages. The notch difference in this project is related to better protections against potential cost increases as seen in the O&M contract approach.
RATING SENSITIVITIES
Negative -- Diminished Counterparty Credit: Credit deterioration of project counterparties leading to weaker risk mitigation within the project.
Negative -- Project Delays: Construction delays beyond scheduled substantial completion and anticipated final acceptance dates.
Negative -- Payment Deductions: Significant payment deductions during operations that reduce coverage levels well below current projections.
Positive -- Outperformance During Operating Period: Successful completion and sustained operating performance materially above expectations.
SECURITY
All secured obligations will be secured by a security interest in the borrower's right, title, and interest in its assets (subject to exclusions), including the right to availability payments and other payments due or to become due under the PA. The senior revenue bonds will constitute senior secured obligations of KWIC, and along with the other senior secured obligations, will rank in priority to the secured subordinate revenue bonds, which rank in priority to all unsecured obligations of KWIC.
For a complete review of Fitch's analysis of the project, please refer to 'Fitch Assigns Expected Ratings to KentuckyWired Infrastructure Company, Inc.'s Senior Indebtedness', dated Aug. 18, 2015 and Fitch's presale report 'KentuckyWired Infrastructure Company, Inc.', dated Aug. 18, 2015.
In its press release related to this transaction dated Aug. 18, Fitch included the statement 'Fitch has assigned an expected rating of 'A' to the Commonwealth's commitment to make these payments.' Fitch hereby corrects the record as at the time the related product was a Credit Opinion not an expected rating. Fitch concluded its formal rating process for the expected rating on Aug. 21, 2015.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Exposure Draft: Rating Criteria for Availability-Based Projects (pub. 17
Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866241
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Public-Sector Counterparty Obligations in PPP Transactions (pub.
23 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868665
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990297
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990297
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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