MOODY'S ASSIGNS Baa2 RATING TO SOCIEDAD CONCESIONARIA COSTANERA NORTE, S.A.'S SERIES A SENIOR BONDS DUE IN 2016 AND SERIES B SENIOR BONDS DUE IN 2024 ; OUTLOOK IS STABLE
Approximately 9,500,000 Unidades de Fomento (UF's) Bonds Rated
New York, November 07, 2003 -- Moody's Investor's Service assigned an underlying rating of
Baa2 (global scale) to Sociedad Concesionaria Costanera Norte, S.A.'s
proposed issuance of senior secured Bonds in the Chilean bond market.
The issue will consist of Series A - 1,900,000 UFs
-- due 2016 and carrying an interest rate of 5% and Series
B -- 7,600,000 UFs -- due in 2024 and carrying an
interest rate of 5.5%. The Bonds are expected to
be insured by the Inter-American Development Bank (IDB) (rated
Aaa) and AMBAC Assurance Corporation (rated Aaa). Based on the
unconditional guarantees of the IDB and AMBAC, Moody's expects
to assign a rating of Aaa to the Bonds subject to Moody's review
of the insurance policies.
The investment grade underlying rating of Baa2 for the project reflects
the availability of the Minimum Revenue Guarantee from the Ministry of
Public Works (MOP), the fundamental importance of the alignment
to Santiago's urban transportation network, the synergies
expected from the timing and coordination with three other tollroad projects
in the greater Santiago area which will also feature free-flow
electronic tolling technology, and the advanced stage of construction
as well as the proven capabilities of the construction team which help
to mitigate completion risk. The rating outlook is stable.
One of four urban toll road projects granted as long term concessions
to the private sector by Chile's Ministry of Public Works (MOP),
the Costanera Norte toll road is one of the highest profile transportation
projects in Chile due to its alignment which follows the historic Mapocho
River in central Santiago. The 42 kilometer road consists of two
components: the main east-west roadway running along and,
in portions, under the Mapocho River, and the shorter Avenida
Kennedy. Both portions are existing roadways operating under various
levels of congestion. The eastern terminus is anchored by the higher
income Las Condes and Vitacura districts while the western terminus connects
with Route 68 (Rutas del Pacifico) which is another toll road concession
providing service from Santiago to the western coastal areas of Valparaiso
and Vina del Mar. Costanera Norte will also provide an alternate
route to Santiago Airport. Awarded through Supreme Decree No.
375 in 1999 for 30 years, the concession ends in 2033 while the
Bonds mature in 2024. The Baa2 rating for the project reflects
a number of credit factors including the following.
1) Project Fundamentals are Solid
Costanera Norte enjoys an excellent alignment overlaying an existing roadway.
Observable and well-documented congestion support a clear need
for the project which will provide expanded capacity, safer driving
conditions and electronic tolling technology that allows uninterrupted
free-flow entry to exit. The alignment slices through the
center of the nation's capital providing transportation connections
between residential areas, employment centers, government
office buildings, the airport and industrial/commercial activities
in the western portion and beyond that to the ports and tourism/vacation
areas along the western coastline. Service area characteristics
and historic traffic patterns off-set demand risk. The eastern
portion of the road benefits from some of the highest socio-economics
in the country, most notably high per capita income.
2) The Project Benefits From Strong Political and Regulatory Support
In recognition of the concession's critical role in alleviating
congestion and supporting future economic development in the nation's
most populated metropolitan center, the MOP extended to Costanera
Norte for 20 years the highest level of Minimum Revenue Guarantee (MRG)
to date. The MRG provides an effective safety net for periods of
lower than projected traffic. The administrative process for calculating
draws on the MRG is clearly proscribed and payment occurs six months after
the end of each year. Balancing the benefits of the MRG is the
concession's requirement to share 50/50 annual revenues that exceed
specified levels, effectively capping the sponsor's up-side
up-front. Further evidence of political, regulatory
support for the project is the legislation that has been put into place
clearly defining violations of the electronic tolling system and enforcement
penalties and procedures designed to ensure compliance with the electronic
tolling regime. The MOP is also supporting the project with contributions
of over UF 5.1 million. MOP staff work closely with the
project sponsors to coordinate land appropriation, permitting,
utility relocations, environmental compliance and construction progress.
3) The Financing Is Sized to Maintain Minimum 1.1 Times Coverage
Within the Schedule of Minimum Revenue Guarantees
The financing size and amortization profile has been designed to produce
at least 1.1 times coverage by defined annual MRGs embedded in
the concession agreement. These MRG revenues are in fact lower
than projected revenue provided by two consultant studies based on fairly
reasonable assumptions and models.
Generally, the key assumptions underlying both consultants'
reports are not widely divergent. Steer Davies Gleave projects
average gross debt service coverages that are in excess of 4 times,
while Jacobs Consultancy projects coverages averaging 3 times.
4) Construction Risk is Manageable
With completion scheduled for the summer of 2004 and commencement of operations
no later than December, 2004, the most technically challenging
portions of the construction program -- the underground tunnel under
the Mapocho River -- are substantively complete. As of March
of this year, the below river tunnel excavations was 75%
complete with the walls and top slabs in place. The remainder of
the construction program over the next year is relatively straightforward.
With respect to land appropriations, 38 properties out of the total
of 242 (16%) remain to be turned over. However, land
appropriations are the responsibility of the MOP under the concession
agreement. Construction management is led by Impregilio,
a company experienced in heavy construction including toll roads in Latin
America. A performance guarantee equal to 5% of the construction
costs provides some additional protection. Insurance coverages
5) Free Flow Electronic Toll Collection (ETC) Presents Implementation
Challenges But Benefit From Synergies With Other Urban Toll Road Concessions
Along with the other urban toll road concessions in Santiago, Costanera
Norte is required by the terms of the concession agreement to utilize
ETC under free flow conditions. Unlike the earlier toll roads in
Chile, Costanera Norte will not require vehicles to stop at toll
booths to pay the toll. Instead, utilizing transponder technology
similar to those in current use in Australia, Canada, Israel
and the United States, Costanera Norte will "read" tags
attached to vehicles as they pass through gantries located strategically
throughout the system. The system administrator subsequently bills
user accounts. Infrequent users of the toll road must use day passes.
Any vehicle on the road without an electronic tag or a valid day pass
is considered a violator subject to legal fines. While the technology
is not new, smooth implementation of system mechanics and administrative
protocols with respect to revenue collection and violator tracking will
be key in the early stages of operating ramp-up. Post implementation
ramp-up, the road will benefit from synergies with the other
urban toll roads which will also use the same ETC technology and will
charge the same rate structure based on Base/Peak/Saturation traffic congestion
levels. All the urban toll roads will be required to distribute
pre-determined numbers of free tags to potential users.
Given the interoperability of the tags and the interconnections of all
the urban toll roads, customers will be able to drive seamlessly
from one toll road to the next.
6) Capital Structure is Reasonable
Equity and sub-debt as well as contributions from the MOP support
the project, reducing the level of project debt issued. The
project sponsors have injected over UF 2.6 million and the government
has committed over UF 5.1 million to total project costs.
Project debt constitutes approximately 55% of total funding.
7) Toll Rate Setting Mechanisms Provide Some Flexibility
The initial rate structure is consistent with those of the other urban
toll roads with a three-level pricing structure -- Base/Peak/Saturation
- pegged to vehicle speeds. Thereafter, each January
the project sponsors have the option to adjust tolls to reflect increases
in inflation (or any time if inflation exceeds 15%), plus
additional real increases by 3.5%. Quarterly,
the sponsors can adjust tolls up or down for any sections of the road
where congestion levels have increased or decreased as measured over 6
consecutive weeks according to the Base/Peak/Saturation schedule.
While these frequent periodic adjustments in toll rates may present administrative
challenges, nevertheless they provide management with additional
flexibility and they serve the MOP's goal of controlling speed and
congestion levels on one of the most well-used alignments in Santiago.
8) Standard Bondholder Protections Provide Debtholder Protection
The monthly waterfall structure is standard for a project of this type,
providing for timely set asides for debt service payments and replenishment
of various reserves prior to any sponsor distributions. Reserve
Funds include a 12-month debt service reserve that can be reduced
to 6-months once the debt service coverage ratio reaches 1.5
times for 4 calculation periods (or 2 years), an Operation and Maintenance
Reserve equal to 12 months of normal operation and maintenance costs that
can be reduced to 6 months under the same conditions as the debt service
reserve fund, and a contingency reserve equal to one year's
capitalized interest initially funded through a bank letter of credit.
Cash distributions to the project sponsors can only be made if debt service
coverages are at least 1.2 times for two calculation periods (1
year), if reserves are fully funded, and if debt service payments
have been made.
The rating outlook is stable, reflecting Moody's expectation
that the project will be completed on time and that implementation of
ETC systems will be effectively managed. The outlook also reflects
expectations that the working relationship between the sponsors and the
MOP will continue to be constructive and that administration of the MRG,
if needed, will be timely and smooth.
Sociedad Concesionaria Costanera Norte, S.A. is a
Chilean corporation whose shareholders are 70% Impregilio S.A.,
10% Simest, 10% Empresa Constructora Tecsa S.A.
and 10% Empresa Constructora Fe Grande.
Corporate Finance Group
Moody's Investors Service
Chee Mee Hu
Senior Vice President
Corporate Finance Group
Moody's Investors Service