Fitch Assigns Indiana Finance Auth's PABs 'BBB(EXP)' Expected Rating; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: I-69 Development Partners LLP
Fitch Ratings has assigned an expected rating of 'BBB(EXP)' to the following private activity bonds (PABs) to be issued by Indiana Finance Authority (IFA) on behalf of I-69 Development Partners LLC (I-69 DP or the project company) for the I-69 Section 5 project (the project).
--Approximately $3.5 million serial bonds, due 2016;
--Approximately $246.5 million term bonds, due 2046.
The Rating Outlook is Stable.
The final ratings are contingent upon the receipt by Fitch of final documents and legal opinions conforming to information already received and reviewed as well as the final pricing of the bonds. The PABs are expected to price on July 8, 2014 and the proceeds will be loaned to I-69 DP to pay a portion of the project's costs.
KEY RATING DRIVERS
Experienced Contractor, Supportive Security Package: Performance and financial obligations of the design-build (DB) contractor, Isolux Corsan LLC, are guaranteed by Corsan-Corviam Construccion S.A. (Corsan Corviam), an experienced Spanish construction firm with an 80-year track-record, and subsidiary of Grupo Isolux Corsan S.A. (GIC; rated 'B+'/Outlook Stable). The construction security package should be of sufficient size to ensure project completion in a worst case contractor default scenario. Completion Risk: Mid-Range
Strong Counterparty, Clear Payment Mechanism: Milestone and availability payments during the project are made by Indiana Finance Authority (IFA, or the grantor). Indexation of 20% of periodic availability payments to the Consumer Price Index (CPI), with remaining 80% escalated at 2.5% per annum, hedges inflationary operating and lifecycle costs. The payment mechanism is in line with peers - the lender's technical adviser (LTA) has opined that non-compliance event cure periods should ensure minimal deductions. Revenue Risk: Stronger
Straightforward Operations: The project company will self-perform most operation and maintenance (O&M) activities, exposing it to O&M and lifecycle cost risk over the project life. O&M works are generally considered relatively straightforward given the limited scope of the project. Operation Risk: Mid-Range
Handback Risk Well Mitigated: Although lifecycle works are back-ended, bondholders are well-protected against handback risk by the five-year debt-free concession tail. The three-year look-forward major maintenance reserve account (MMRA) somewhat mitigates lifecycle risk earlier in the project life. Infrastructure & Renewal Risk - Mid-Range
Conservative Debt Structure: Structural features include fixed interest rate, full amortization, 1.15x dividend lock-up and six month debt service reserve account. Debt Structure - Mid-Range
Metrics Indicate Financial Resilience: Fitch base and rating cases reflect debt service coverage ratio (DSCR) profiles consistent with a 'BBB' rating, averaging around 1.50x and falling no lower than 1.19x. The prolonged period of low coverage during the middle of the concession term is mitigated by the fixed nature of principal amortization, which largely drives low coverage during that period, as supported by breakeven analysis.
--Default of the DB contractor resulting in substantial cost increases or delays being experienced by the project, or construction delays beyond scheduled substantial completion and anticipated final acceptance dates, could pressure the rating.
--Significant sustained payment deductions, or materially higher costs during the operating period than currently forecast, either of which reduce coverage levels below current projections, would place the rating under pressure.
The bonds will be secured by a first priority lien on I-69 DP net revenues.
IFA announced on Feb. 19, 2014 that it had selected I-69 DP to design, build, finance, operate, and maintain Section 5 of I-69. I-69 DP is a special purpose vehicle (SPV), ultimately owned and controlled by Isolux Infrastructure Netherlands B.V., (Isolux Infrastructure, 51%) and Infra-PSP Canada Inc., (Infra PSP). Isolux Infrastructure is a joint venture between Grupo Isolux Corsan Concesiones S.A. (GICC, 80.8%), itself a wholly-owned subsidiary of GIC, and PSPEUR, S.a.r.l., a wholly owned subsidiary of Public Sector Pension Investment Board (PSP Investments, 19.2%). Infra PSP is wholly owned and controlled by PSP Investments.
The project is being procured as a PPP by IFA based on an availability payment mechanism. Construction is expected to take 27 months from the start of construction, followed by a 35-year operating period.
The project consists of the development, design, construction, financing, operation, and maintenance of a roadway between Bloomington and Martinsville, IN. The objectives of the project are, among other things: to provide congestion relief and improve safety along the SR-37; encourage economic development in Monroe and Morgan counties; and to seek private sector innovation and efficiencies, encouraging design solutions that respond to actual and anticipated environmental concerns, permits, and commitments.
The design-build contract has been constructed using a 'back-to-back' principle, passing the construction risks of the public private agreement to the design-build contractor, Isolux Corsan LLC, whose performance and financial obligations are guaranteed by Corsan Corviam. The design build contractor will also be responsible for undertaking a portion of the operations and maintenance during the construction period.
Fitch's base case reflects the sponsor's base case, adjusted to reflect the lender's technical adviser's assumption as to a reasonable level of deductions throughout the operating period, which Fitch has applied on a real basis. DSCR metrics in this scenario are robust, with the minimum being 1.23x and average being 1.54x. A sustained period of coverage close to the minimum level around the middle of the concession life reflects increased bond principal amortization at this time. Fitch views this prolonged low coverage as mitigated by the fixed nature of such debt repayment costs, with higher exposure to variable operating and lifecycle costs arising at times when there is greater financial flexibility.
Fitch's rating case scenario reflects the additional impact of 10% higher operating, SPV and lifecycle costs applied throughout the operating period on top of the other Fitch base case assumptions. DSCR remains resilient, averaging 1.50x, although - as with the Fitch base case - its profile features a sustained period close to its minimum level of 1.19x.
An important part of Fitch's analysis is forming an understanding of the project's sensitivity to above-inflationary cost increases. Fitch ran breakeven real cost increase scenarios to test each of operating and SPV costs (3.71%), lifecycle costs (4.98%) and the combination of both (2.64%), using the Fitch base case as the starting point. These metrics indicate the project's strong ability to withstand such risks.
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
Rating Criteria for Availability-Based Projects