Fitch Affirms ITRCC at 'BBB'; Outlook Remains Stable

NEW YORK--()--Fitch Ratings has affirmed ITR Concession Company LLC at 'BBB' with a Stable Rating Outlook. The rating applies to $2.8 billion of debt outstanding, including $1.05 billion of series A-C notes, a $776 million term loan facility, $700 million in private placement notes and a $329 million capex facility.

The rating reflects a stable, mature and monopolistic asset that serves as a vital route for both commercial and passenger traffic, which has shown resilience despite toll increases and economic shocks. It is also driven by a tolling framework that affords for considerable rate-making flexibility. The operating profile and long concession term allow for relatively high leverage compared with peers and, when coupled with debt covenants, partially mitigate potential refinance or economic stress risk. Current leverage is high at above 13x and expected to evolve down to about 10x within five years, consistent with Fitch's toll road criteria guidance for large networks. Also, a 2.25% toll revenue growth rate breakeven (reflecting Fitch's base case refinancing assumptions, concession revenues and operating expenses), demonstrates resilience to low traffic and revenue growth scenarios.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger

Critical Midwest Corridor: 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.

Revenue Risk - Price: Midrange

Moderate Rate-Making Flexibility: 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.

Infrastructure Development & Renewal: Midrange

Adequate Condition, Debt-Funded Plan: 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.

Debt Structure: Midrange

Bullet Structure, Adequate Covenants: 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.

Financial Metrics

Elevated Leverage, Ample Coverage: Current leverage is high, at 13.7x in 2015. Fitch's rating case refinancing risk analysis yields an average DSCR of 1.6x, reflecting refinancing of initial bullet maturities in to an amortizing structure assuming a stressed interest rate, and indicating that refinancing risk is not a constraint on a 'BBB' category rating.

Peers: 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). However, the lower rating on ITR reflects more limited rate-making flexibility and ITR's requirement to provide shareholders a return on equity. 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, should opex summarily increase as a result of deferred maintenance. 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.

SUMMARY OF CREDIT

The debt was issued in mid-2015 in order to refinance the 2015 acquisition financing IFM Investors put in place to acquire ITRCC after a bankruptcy restructured sale process completed by the prior concessionaires and lenders. As such, with a fiscal year ending Dec. 31, there is a partial year (post-refinancing) of audited financial results available demonstrating DSCR of 1.69x, similar to financial cases produced at the time of acquisition. Cases going forward remain unchanged as indicated above.

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. 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 predominantly carries commuter traffic, while the eastern segment predominantly serves long-distance commercial traffic.

From January to August 2016, barrier traffic was up 1.7% compared to 2015, with over 50,000 average daily vehicles. On the ticket system the average daily vehicles are down 3.5% from 2015 to just over 25,000, although even with the budget overall. Management attributes the vehicle decline mostly to construction activities.

To that end, capital expenditures in 2016 will be higher than originally forecast during refinancing due to a calendar-compressed and mileage-extended repaving construction schedule (to take place over two years rather than three and on 70 miles rather than 60), but there are no changes to overall capital spending plans.

Leverage remains high, as expected at over 13x, still evolving down to under 10x by 2022, and continuing to leverage down throughout the life of the debt under the rating case that assumes amortization as bullets come due. Toll revenue, meanwhile is up 5.2% for the eight-month 2016 period to $30.5 million on the barrier system, while on the toll system it is up 0.1% to $117.1 million, reflecting toll increases throughout the system.

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. In particular, the covenant within the private placement note purchase agreement restricts 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.

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 are secured on a pari passu basis with each other and 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 has 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.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)

https://www.fitchratings.com/site/re/886038

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013369

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013369

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Adam Torres
Director
+1-212-908-0515
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Astra Castillo
Senior Director
+52-81-8399-9100
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com