CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to rate the senior secured notes issued by Lima Metro Line 2 Finance Limited (LML2FL, the issuer) as follows:
--1.146 billion series 2015-1 notes 'BBB(exp)'; Outlook Stable.
Fitch's expected rating addresses the timely payment of interest and principal on a quarterly basis. Final rating assignment is subject to completion of legal documentation review and analysis.
The notes issued by LML2FL, are backed by investment recognition certificates or Retribucion Por Inversiones (RPI-CAOs) related to the construction and provision of rolling stock of Line 2 and the Faucett-Gambetta Branch of the Lima and Callao Metro (Linea 2). RPI-CAOs are unconditional and irrevocable rights to receive through the project trust a series of 60 quarterly payments of a fixed amount denominated in U.S. dollars.
KEY RATING DRIVERS
--No Construction/Performance Risk: RPIs are unconditional and irrevocable obligations of the Government of Peru (GOP, foreign currency Issuer Default Rating[IDR] 'BBB+'/Outlook Stable) to cover any shortfalls if the collections from the project are not sufficient to make timely RPI-CAO payments. Payments on the RPI-CAOs are not subject to the completion of further milestones or future performance of the project.
--Reliance on Sovereign Contingent Guarantee: Fitch assumes that payment on the notes will completely rely on government contingent support to make timely RPI payments. While the transaction has the right to tariff collections, Linea 2 is a greenfield project; thus, no historical information is available to validate the potential flows expected to be received from tariff collections.
--Moderate Budgetary-Approval Risk: Fitch believes that the most reliable and common source of RPI payment from the GOP will be through a regular annual budgeting process. The annual budget is approved by the Ministry of Finance (MEF) and could be exposed to political and budgetary risk, which is reflected in the rating assigned to the transaction. Budgetary risk is mitigated by adequate liquidity within the transaction.
--Rating Linked to Sovereign IDR: Not all payment defaults of the sovereign would cause a sovereign IDR default. RPI-CAOs are contractual obligations of the GOP but are not considered public debt. As sovereign ratings do not directly address all forms of obligations, it cannot be assumed that the credit profile of the government obligation backing this government-backed security (GBS) is consistent with Peru's IDR. To determine the strength of the government obligation and its differentiation from the relevant sovereign IDR, Fitch incorporated perspectives from its sovereign group and determined that the credit quality of the obligation is commensurate with the rating of the transaction, and one notch below Peru's foreign currency IDR. For more detail on this topic, see Fitch Research on 'Sovereign Rating Criteria,' published August 2014 and available at 'www.fitchratings.com'.
--Adequate Liquidity: The transaction will benefit from a 12-month (four quarterly RPI-CAO payments) debt service reserve account (RPI Reserve Account). The RPI reserve account is expected to be fully funded one year prior to the first RPI-CAO payment date. If the project is delayed and the reserve account is not fully funded, the government will budget the full amount. The trust agreement provides the MTC with clear guidelines in terms of timing and amounts to be budgeted to guarantee that the funds are sufficient and received in a timely manner to pay the RPI-CAOs.
--Mitigated Negative Carry Risk: Prior to the purchase of 100% of the RPI-CAOs (availability period), transaction expenses will be higher than the income generated by the RPI payments. The negative carry will be properly mitigated by the upfront funding of a trust account that will be used to cover expenses; transaction fees; and interest during construction (IDC). RPI-CAO payments will not begin until the earlier of the start of the operation of Phase 2 of the project and September 2019.
--Early Redemption Protections: Upon a commitment termination event (CTE), the noteholders will be made whole with the remaining amounts not invested to purchase RPIs, and with a protection letter of credit (LoC) issued by an eligible counterparty rated at least 'BBB+' or cash collateral, in each case provided by the CTE protection provider. The size of the LoC will be equal to the maximum remaining negative carry. At closing, the LoC will be funded in an amount equal to $107.4 million.
--Early Redemption Amounts: Following a CTE, the notes will be redeemed early in an amount equal to the amounts not invested to purchase RPIs. After that, the indenture trustee will revise the amortization schedule for the notes based on the expected cash flows from the RPI-CAOs that have been purchased.
The ratings expected to be assigned to the issuance of notes are sensitive to changes in Peru's foreign currency IDR. Additionally, any change in Fitch's view regarding the strength of the sovereign contingent guarantee may affect the rating assigned to this transaction.
Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Additional information is available at www.fitchratings.com.
Lima Metro Line 2 Finance Limited
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Global Structured Finance Rating Criteria (pub. 31 Mar 2015)