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Rating Action:

Moody's assignes first time (P)Ba2 rating to the $464 million of notes of Inversiones Alsacia S.A., being issued through BRT Escrow Corporation SpA

07 Feb 2011

New York, February 07, 2011 -- Moody's Investors Service has assigned a first time provisional (P) Ba2 rating to the Senior Secured Notes of Inversiones Alsacia S.A. ("Alsacia") due August 2018, to be issued in the amount of $464 million. The rating on the notes carries a stable outlook. The notes are being issued under Rule 144A of the Securities Act in the U.S. and pursuant to Regulation S outside the United States. Inversiones Alsacia S.A., and its affiliate Express Uno de Santiago S.A. ("Express") are Chilean corporations which hold concessions for bus rapid transit trunk lines in the City of Santiago, Chile.

Proceeds from the Notes will be used by Inversiones Alsacia S.A. to retire its existing debt, and after a series of changes to the ownership structure, to purchase the remaining ownership in Express de Santiago Uno S.A. and retire its debt, including breakage costs for current swap agreements. The remaining proceeds will be used to fill a portion of the debt service reserve and fully fund the dedicated overhaul account. The Notes will initially be sold by BRT Escrow Corporation SpA ("BRT"), a special purpose company established solely to issue the Notes. Once the transactions that will result in the full ownership of Express de Santiago Uno S.A. ("Express") by Alsacia's holding company GPS Group (incorporated in Panama) are complete, BRT will be acquired by Alsacia and the Notes will become senior secured debt of the latter.

Interest and principal on the notes will be payable semi-annually in February and August from concession related revenues received by Alsacia and Express for the provision of rapid transit bus service in Santiago. Collateral on the notes includes the concession rights under the operating agreements, including all economic rights, the shares of Alsacia and Express, all buses and terminals owned by the concessionaires with the exception of one which is carved out and pledged to Banco Internacional as collateral on a loan, as well as the main transaction accounts and insurance proceeds not required by the concession to be granted to third parties, among others. The notes are also unconditionally guaranteed by Express, and the two holding companies of Express, which will be Panamerican Investment Ltd. (Bermuda), and Inversiones Eco Uno S.A. (Chile), collectively referred to as the guarantors.

Rating Rationale

The (P) Ba2 rating reflects the well-developed and mature concession framework in Chile and the strength of the off-taker, which is the Ministry of Transportation and Telecommunication (MTT) of the Government of Chile (rated Aa3/Stable outlook). However. this strength is somewhat tempered by the fact that this concession is the only one of its kind and does not have the tenure and history of other types of infrastructure concessions in the country. An important factor in considering the strength of the sovereign offtaker is the fact that the subsidy of the system is only guaranteed in legislation through 2014. Moody's expects that the Government of Chile has both the willingness and ability to continue to support the system, at least until the termination of the concession agreements. The rating also incorporates the nature of the revenue formula by which Transantiago calculates the concessionaires' earned revenue, which protects revenue fluctuation within a band that ensures a certain level of stability in the companies' revenues. The projected debt service coverage ratios appear to be fairly resilient to singular shock events in ridership and scenarios of cost increases.

Each concessionaire works under a separate concession agreement between it and the MTT to provide defined trunk line services under the Transantiago urban transit system. Alsacia has the concession for Trunk Line 1 and Express has the concession for Trunk Line 4. The concession for Trunk Line 3 was recently terminated by the Chilean Government and each of Alsacia and Express now have a portion of that route package. The concession agreements with the MTT have been in effect since 2003 and expire in October 2018.

The Transantiago system incorporates the Bus Rapid Transit (BRT) and the city's metro systems. The BRT became fully operational in its current form in February 2007. The concessionaires are paid bi-monthly according to a formula set by the MTT in the concession agreement that takes into consideration factors of inflation and shifts in the cost of fuel, labor, and other inputs, as well as the exchange rate of the Chilean peso to the U.S. dollar. The formula comprises a fixed revenue portion established at the beginning of the concession, and a variable revenue portion which in addition to the above inputs takes into consideration the passenger demand, the number of kilometers traveled by the buses and the number of places made available to users. One of the most important aspects of the revenue formula is the service fulfillment ratio, or ICPKH as per the abbreviation in Spanish, as it measures the performance of the concessionaires' operations compared to a predetermined schedule that is agreed with Transantiago for each month. The ICPKH is multiplied against the revenue result directly so that, for example, a lower service fulfillment ratio results in a direct effect on the entire amount a concessionaire receives. The ICPKH for Alsacia over the last year has been in the range of 97%, where that of Express has fallen to around 94% which is lower than its historical trend. After the purchase of Express by the holding company of Alsacia, the company expects to increase the ICPKH to similar levels as well as to achieve some cost synergies.

The payment mechanism under Transantiago consists of a consolidated revenue collection system under the control of the Transantiago Funds Administration (AFT). The AFT is a consortium of banks that was set up to serve as a clearing house for all of the revenues generated by Transantiago and owed to all concessionaires, including the bus and metro operators. Under specific agreements with each of the concessionaires, the AFT is responsible for the sale of the fare cards and for the collection of all of the ridership revenue, which goes directly to AFT. The AFT also receives a national government subsidy, as the revenues from the system provide only about 50% of the total revenues required by the system to meet the payment requirements of all of the concessionaires and the metro.

The national subsidy is established under a 2009 law and together with additional amounts that have been approved over the last year, provide for the national government to pay roughly $1.8 billion in the years spanning 2011-2014. Despite the fact that the current subsidy will expire in 2014, at which point 62% of the original debt will be outstanding, Moody's is confident that the Government of Chile will continue to support the system given public policy considerations including the importance of the mass transit system to the mobility of the Santiago metro area and its economy. Our opinion is also formed in the context of the country's proven commitment to follow through on concession programs, and finally on its ability to continue funding the system given that the annual amounts provided to the AFT from 2010-2014 do not surpass .01% of GDP.

One credit weakness is that the concessionaires have no discretion in setting the fees charged for service. The aforementioned subsidy law established a panel of independent experts which is responsible for determining the passenger fare, taking into account the government support that is currently in place. If in the future this support were to be more limited or disappear, the panel is charged with setting a fare that would support the system at the same level. Recent rate increases amounting to a 30% rise in fares implemented in 2009, 2010, and January of 2011 have not, in and of themselves, had a direct negative effect on the ridership for the Alsacia and Express trunk line services. However, the possible effects of very large hikes in fares on ridership is difficult to determine given on the one hand, the relatively limited history of the concessions and the limited options for commuting in the city on the other.

Over the medium and long-term, the Transantiago Metro presents the most important competitive threat to the financial health of Alsacia and Express. Certain metro lines were extended in 2010 and several others are scheduled to open in the current and next year. Alsacia has estimated that it and Express will lose an additional 5.1.% and 13% of passengers to these improvements to the metro. As compensation, both concessions have received a portion of the services for trunk line 3, as mentioned above. Under the concession agreements, the effects of the additional service are reassessed at the end of the year to analyze if the compensation was adequate for the maintenance of economic equilibrium. Moody's expects that the national government will honor the principal of economic equilibrium under the concession agreements going forward, but will monitor the compensation to the concessionaires compared to the effect on their operations, as there is a very limited history of such compensation arrangements given the relatively short existence of the system.

The capital structure includes the proceeds from the bonds as well as $12 million from a loan with Banco Internacional de Chile, which has a senior lien on one of the bus terminals owned currently by Alsacia. Principal on the loan is due after the Notes are fully retired but may get prepaid subject to available cash in a position junior to the Notes.. The project waterfall is relatively straightforward, with the exception that interest on the Banco Internacional loan is paid prior to the payment of debt service on the notes, and although we note that this priority of payment is uncommon and in line with the subordinate lien on the loan, we also highlight that its effect on the debt service coverage on the Notes is actually negligible due to the relatively small amount it represents.

The Notes' debt service reserve requirement is the maximum of the next two semi-annual debt service payments, though it will not be fully funded at closing and will be filled with the cash flows through the waterfall, after the payment of debt service on the notes. The project also includes an overhaul reserve account funded at six months of projected bus overhaul costs.

The issuer will enter into a foreign currency swap agreements with a subsidiary of Bank of America Merrill Lynch (MLCP) and potentially with a another international similar rated financial institution at its option, under which the foreign currency exchange rate will be initially protected within a band of 570 CLP and 750 CLP, with some narrowing of that band through 2018. The swap counterparty will always cover the portion of debt that falls within the band, and in the event that the exchange rate goes over the cap, the issuer would be responsible for that portion that is over and above that exchange rate. Moody's believes this type of swap provides an adequate amount of protection given the relative stability of the Chilean peso over the last 10 years, though we acknowledge that it leaves the issuer exposed at the tails of the foreign currency forward curve.

Moody's base case takes into account the full exposure of the foreign currency rate up to the low end of the protection band (or the strike rate), an ICPKH of the average for each of the concessionaires for the last year, and passenger growth ranging from 1.5% annually and decreasing to 0.5%. The revenue formula provides a natural protection to debt service given that it takes into account increases in prices of essential inputs, such as labor and fuel, as well as the exchange rate of the peso to the U.S. dollar. Hence at this rating category, the transaction can withstand debt service coverage ratios that are more in line with those of higher rated availability based public-private partnership projects that do not have demand risk.

The average debt service coverage ratio (DSCR) for the proposed financing structure is adequate at 1.20x.. The transaction provides for a cash trap mechanism if the DSCR is under 1.25x and a partial cash trap if it falls between 1.25x and 1.35x. If we include the funds which would be trapped in the transaction, and assume that the project is generating revenues to that level, the average DSCR with all funds available for debt service increases to 1.41x. The Ba2 rating is however based on the coverage by net revenues, the limitations imposed by the concession agreements, the transaction structure, and the fundamentals of the project.

Outlook

The stable outlook reflects Moody's expectation that both Alsacia and Express will continue to operate at least at the current levels of service which will in turn affect their revenue, and implement cost-saving synergies related to the effective consolidation of the two companies after the transaction closes. We expect that the average and minimum DSCRs will remain in line with projections. The stable outlook also incorporates the expectation that the concessionaires will be compensated adequately by the MTT, if the future lines of the Santiago Metro affect the concessionaires over and above the threshold agreed upon in the concession agreements.

What Could Change the Rating -- UP

The rating is well placed in its rating category and unlikely to increase in the near to medium term. However, it could experience upward pressure if there was a significant increase in the fares and ridership that allowed the system to become increasingly self-sustaining and resulted in consistently higher than anticipated debt service coverage levels.

What Could Change the Rating -- DOWN

The rating could experience negative pressure if either Alsacia or Express, or both, experienced consistently lower than anticipated service fulfillment ratios causing declines in revenues. We expect that consistently lower service fulfillment ratios would signal problematic operating issues such as a failure to maintain the bus assets properly and hence generate sufficient revenues to meet debt service payments at a level that is consistent with the currently assigned rating.

The principal methodology used in this rating was Generic Project Finance Methodology published in December 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

However, the credit rating action was based on limited historical data.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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New York
Laura Barrientos
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's Investors Service
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JOURNALISTS: 212-553-0376
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Moody's assignes first time (P)Ba2 rating to the $464 million of notes of Inversiones Alsacia S.A., being issued through BRT Escrow Corporation SpA
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