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Rating Action:

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

07 Nov 2003
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 are standard.

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.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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