MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has maintained on Rating Watch Negative the 'BBB' and 'AAA(mex)' ratings assigned to the following Concesionaria Mexiquense, S.A. de C.V. (Conmex) debt issuances:
--UDI1.6 billion notes due 2035;
--UDI0.6 billion notional amount zero-coupon notes due 2046;
--MX$6.5 billion Goldman Sachs loan due 2027.
Fitch has also maintained the 'AAA(mex)' rating on the UDI1.5 billion notes placed in the local market in August 2014 on Rating Watch Negative.
The ratings reflect the toll road transactions' performance, which has been in line with Fitch's base case expectations, supported by the asset's strength given its location and purpose of usage, strong credit metrics and solid debt structure.
Fitch placed Conmex's ratings on Negative Watch on May 29, 2015 in connection with the outstanding investigation by the Mexican authorities of alleged illicit activities involving OHL Mexico (Conmex's sponsor) operations. Since then, there have been no reported additional developments that could lead to resolution of the Rating Watch.
KEY RATING DRIVERS
Volume Risk: Midrange
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.
Price Risk: Midrange
Extraordinary Toll Increases Allowed: The concession allows for annual toll increases according to inflation, or, more often, if 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 until 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.
Infrastructure Development & Renewal: Midrange
Relatively New Asset in Good Condition: The toll road has been fully operational for approximately four 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.
Debt Structure: Midrange
Solid 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.
Metrics: There is ample space for volume and price movement. Fitch's base case projected DSCR is 1.79x minimum and 3.61x average, while the loan life coverage ratio (LLCR) is 3.35x.
Peers: Conmex can be compared to Red de Carreteras de Occidente (RCO, rated 'BBB'/Outlook Stable). Conmex has a shorter operating history and lacks diversification as it is a single asset, resulting in a midrange assessment of volume risk, while RCO's assessment is stronger. The latter is to some extent compensated by Conmex's more solid debt structure and LLCR at 3.33 versus 1.71x for RCO; however, both maintain a similar Debt/EBITDA ratio at 8.09x for Conmex vs. 7.93x for RCO. Both transactions have midrange assessments for price, infrastructure development and renewal and debt structure.
Positive: Traffic performance substantially better than Fitch's expectations over a sustained period of time.
Negative: Severe and prolonged deterioration in traffic volumes.
Negative: Tariff increases significantly below expected level.
Negative: Significant deterioration in LLCR.
Negative: 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.
Negative: Adverse outcome for the concession resulting from the governmental investigation of alleged illicit activities involving OHL Mexico.
As of June 2015, traffic grew 9.9% compared with the first half of the previous year, making up for the slightly lower than expected growth registered in 2014 and reaching the volume projected in Fitch base case. According to the concessionaire, the recent performance has been mainly driven by improvements to the electronic payment system of the road since November 2014, increased congestion present in a competing road caused by the implementation of a BRT system that now uses one lane of the street for buses exclusively, and major maintenance work being performed on another competing road. While the maintenance will eventually be completed, Fitch expects the other two factors to have a permanent positive effect on the toll road's traffic volumes.
As of June 2015, revenue grew 23% as a result of the traffic performance, the update in toll rates given by inflation and a 4% increase in real terms established in the concession title, as well as a higher participation of heavy vehicles in total traffic mix.
DSCR for 2014 was 2.18xwhich compares positively against the 1.58x Fitch projected in its base case for such period. The better than expected DSCR is explained by extraordinary financial revenues related to the asset refinancing process along with a tight control on the expenses by the concessionaire. No information for the June 2015 coupon payment was available at the time of this review.
Among other considerations, Fitch's base case assumed 4% fixed inflation, O&M expenses and major maintenance at the issuer's budget which increased by inflation plus 5% 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 Independent Engineer's (IE) assessment of growth rates at 85%. Under this scenario, DSCR is 1.79x minimum, 3.61x on average, and LLCR is 3.35x.
Fitch's rating case assumed O&M expenses and major maintenance at issuer's budget increased by inflation plus 10% real for every year, and traffic CAGR of 2%. The traffic scenario was based on the IE's growth rates at 70%. Under this scenario, DSCR is 1.69x minimum, 3.17x on average, and LLCR is 3.03x.
Several additional stress tests were also run and found that even if traffic remains at current levels (0% growth) and toll rates are updated only by yearly inflation, total debt can still be paid, albeit by using reserve funds in 2029-2033.
The toll road is 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 tollways. The concession comprises 155 kilometers (km) of which, 110km have been built and in full operation since 2011. The remaining 45km 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 on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 20 Aug 2014)