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Rating Action:

Moody's assigns Baa2 rating to Mosaic Transit Partners General Partnership senior secured bonds; outlook is stable

20 Apr 2018

Approximately CAD 183 million of debt securities.

Toronto, April 20, 2018 -- Moody's Investors Service, (Moody's) today assigned a first-time Baa2 rating to two amortizing senior secured bonds totaling approximately CAD 183 million to be issued by Mosaic Transit Partners General Partnership (MTP or Project Co). The rating outlook is stable.

Project Co will use the funds to finance a portion of its obligations under a long term project agreement (Project Agreement) with Ontario Infrastructure and Lands Corporation (Aa2 negative) and with Metrolinx (together, the Contracting Authority) to design, build, finance, maintain and rehabilitate the new Finch West Light Rail Transit (LRT) project in Toronto, Ontario (the Project). During construction, MTP will receive construction period payments as well as a substantial completion payment from the Contracting Authority. Once the Project reaches substantial completion, MTP will receive availability payments from the Contracting Authority designed to cover maintenance, rehabilitation, debt service and equity returns. The availability payments will only be subject to deductions for unavailability and service or quality failures.

RATINGS RATIONALE

The Baa2 rating reflects the well-understood Project Agreement with credit worthy parties. The Project Agreement incorporates a typical Infrastructure Ontario risk allocation that has been used on other LRT projects such as Eglinton LRT. We view the Project at the low end of complexity for an LRT project as the Project construction does not entail material tunneling, or vehicle procurement with most of the complexity and planning centered around utility relocation, systems, traffic management and some bridge work. The Baa2 rating factors in an adequate liquidity profile that can withstand a twelve month construction delay on top of a construction schedule that seems to have substantial room. The rating recognizes the experience of companies building the Project (affiliates of ACS Group, Aecon Group Inc. and CRH plc (Baa1 stable)) as all have a solid knowledge of LRT/train projects, public-private partnerships in Canada and Ontario. Once completed, ongoing maintenance and most but not all rehabilitation is subcontracted for the term of the Project Agreement on a back-to-back basis to an experienced entity (the M&R Contractor, formed with affiliates of ACS Group and Aecon Group Inc.). Project Co is not responsible for any actual operation of the new LRT and neither is it responsible for fare collection or security on the line. While the performance regime is typical of an LRT P3 project that does not entail operations, it is designed to provide clear incentives to achieve high levels of availability especially with respect to the LRT vehicles but Project Co should perform with low levels of deductions and failure points. For one, MTP will always have one hot spare revenue vehicle and two vehicles in maintenance. Moreover, there are extensive non-Project Co causes that will help reduce unavailability calculations and there will be redundancies in the system so that deductions and failure points should be minimized.

These credit attributes are tempered by the following considerations. Specifically, the credit profile of the guarantors of the parties forming the Construction Contractor and the M&R Contractor is considered speculative grade, although this risk is mitigated by the concept of an "acceptable remaining party" which should avoid the need to negotiate a new construction or service contract if only one party becomes bankrupt as long as any two of the construction guarantors or any one of the maintenance and rehabilitation guarantors remains. As well, apart from the liquidity supporting the payment of delay liquidated damages, and the parental guarantees, there is no additional security supporting the 35% liability cap. We also observe that the minimum annual all-costs cash break even ratio is weak at about 11% and could worsen over time. Similarly, we view the debt structure as somewhat weak owing to the debt service coverage ratio (DSCR) event of default being set at 1.0x with equity cures. Additionally, we view the rehabilitation and maintenance program needed to cover the LRT vehicles as being more complex than the rehabilitation and maintenance of standard civil infrastructure.

RATING OUTLOOK

The rating outlook is stable reflecting our expectation that the Project will be completed largely on time or with minimal delays and when completed, will operate with minimal deductions to its availability payments.

WHAT COULD CHANGE THE RATING UP

The rating has limited ability to be upgraded until after the end of the construction period and until there is a material track record of successful performance with a good control of maintenance and rehabilitation costs. Once in operation, in order to be upgraded, Project Co should demonstrate a consistent ability to meet its planned debt service coverage ratios.

WHAT COULD CHANGE THE RATING DOWN

The rating could be downgraded if:

• The construction of the Project is materially delayed

• The credit worthiness of any member of the Construction Contractor is weakening materially, or if any member is insolvent or bankrupt

• The providers of the letters of credit are rated below A3 and not replaced

• Once in operations, the debt service coverage ratio is below 1.15x on a sustained basis

• The credit worthiness of the parties to the Contracting Authority deteriorates materially

The methodologies used in these ratings were Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects published in June 2016 and Operational Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in March 2015 . Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Mosaic Transit Partners General Partnership is a single purpose partnership who will enter into a project agreement to design, build, finance, maintain and rehabilitate the new Finch West LRT Project in Toronto, Ontario. It is owned by affiliates of the ACS Group, Aecon Group Inc. and CRH plc (each with a third ownership interest).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Catherine N. Deluz
Senior Vice President
Project Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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