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Global Credit Research - 23 Jul 2010
Approximately $400 million debt affected
New York, July 23, 2010 -- Moody's Investors Service has assigned a provisional rating of (P)Baa3
to the Regional Transportation District's (RTD) $404 million
Series 2010 Denver Transit Partners Eagle P3 Project Tax-Exempt
Private Activity Bonds. The outlook is stable. Proceeds
of the bonds will be lent to Denver Transit Partners, LLC (DTP)
in order to help finance the construction of the Eagle P3 Project in the
Denver region. DTP has been awarded a concession by the RTD to
design, finance, construct, operate, and maintain
the project, which includes two commuter rail lines and associated
facilities and equipment, including rolling stock. The bonds
will be secured by loan payments from DTP along with a lien on substantially
all of DTP's assets, including its rights to the concession
agreement. In return for performing its obligations under the concession
agreement, DTP will receive availability payments from RTD which
are sized to cover DTP's debt service and expected operating expenses
and to provide a return on equity. RTD will also be providing a
substantial upfront capital contribution to the project which will help
finance remaining construction and financing costs along with an equity
contribution from DTP's sponsors. The rating is constrained
by construction risk. While the project is not overly complex and
Moody's views the probability of default during construction to
be relatively limited for the rating category, loss given default
could be high because of the project's heavy reliance on grant funding
arranged by the RTD. While Moody's believes that project
operations are somewhat more complex than for a typical public-private
partnership (P3), we nevertheless feel that operating risk is manageable.
Upon review of substantially final documentation, in the event that
there are no material changes to the project and transaction information
reviewed to date, we would expect to assign a definitive rating
of Baa3 to the PABs.
The project actually entails two distinct phases, for each of which
the RTD will make a specific capital contribution. The Concessionaire
will commit to undertaking both phases, but RTD will retain the
option to cancel Phase 2 until December 2011. Should the RTD cancel
Phase 2, additional financing will be required to complete Phase
1. This is because the required RTD capital contributions with
respect to Phase 2 are larger than the Phase 2 construction cost under
the EPC Contract. Thus if Phase 2 is cancelled, the Concessionaire
may attempt to issue an additional $412 million in bonds.
Otherwise, the RTD will provide the needed funding itself.
Given the Concessionaire's lack of discretion regarding whether
or not to undertake the Phase 2, our analysis considers all of these
Design and construction will be undertaken by a joint-venture of
Fluor Enterprises Inc. and Balfour Beatty Rail Inc. (the
EPC JV) pursuant to a fixed-price, date-certain EPC
contract that covers the provision of rolling stock in addition to the
civil work. The rolling stock will be supplied by Hyundai Rotem
USA Corporation, a subsidiary of Hyundai Motor Group (rated Baa3)
pursuant to a separate fixed-price contract with the EPC JV.
The contractors are highly qualified and possess significant financial
strength (particularly on a joint-and-several basis) and
the support package they are providing together with their parents,
Fluor Corporation (sr. unsec. A3 stable) and Balfour Beatty
plc, is adequate given the moderate project complexity and manageable
raw construction risk. The civil work required for the project
is straightforward in terms of engineering and construction. In
Moody's opinion, the manufacture of the rolling stock is not
particularly complex either, though the integration of the rolling
stock and the systems may be somewhat more complex and challenging.
The construction budget is considered reasonable, with contingency
and escalation combined with the contractor's profit margin expected
to be sufficient to absorb any unexpected cost increases. The lengthy
construction schedule, which is largely driven by RTD's requirements
to provide the necessary right-of-way, is adequately
conservative with sufficient float in the view of the lenders' technical
advisor. However, in the unlikely event the contractor is
unable to complete the project in a timely manner and the concession is
terminated, the heavy reliance on grant funding from the RTD increases
bondholders' exposure to cost overruns and the ensuing risk of a
shortfall in the termination payment from the RTD. This is because
the concessionaire termination provisions will ensure recovery of RTD
grants prior to payment of termination compensation to DTP (and hence
Operations and maintenance are to be undertaken by another joint-venture
of Fluor and Balfour Beatty together with Alternate Concepts, Inc.
(ACI) (together the OMR JV) pursuant to another fixed-price contract
(escalated annually in line with a basket of price indices) that will
extend for the life of the concession. Moody's views the
operations of the project to be somewhat more complex than for the typical
P3 project rated by us given that the Concessionaire is not just responsible
for maintaining physical infrastructure but for maintaining a significant
amount of mechanical and electrical equipment as well as full responsibility
for the actual operations of the rolling stock and various systems.
Nevertheless, we recognize that there is nothing unusual regarding
the operations of the system, that the partners to the OMR JV are
large, well established companies with strong credit quality and
significant experience, and that the performance metrics and penalties
for failure to achieve them are reasonable in the view of the Lenders'
The availability payments the project receives from the RTD will be broken
down into two components, the TABOR Portion and the Appropriated
Service Payment. The TABOR Portion is not subject to appropriation
and will be secured by a pledge of RTD 1.0% sales tax revenues
subordinate to the RTD's existing senior and FasTracks bonds,
but senior to its certificates of participation and O&M expenses.
This portion of the service payment will be sized to cover debt service
and provide a return on equity, protecting bondholders from appropriation
risk. Payments vary by year according to a schedule. The
TABOR Portion is fixed in nominal terms, while the annual scheduled
Appropriated Service Payments will be escalated according to the same
basket of indices that will be applied to the OMR provider's service
The payments are sized to provide the project with a minimum debt service
coverage of 1.35x if Phase 2 is constructed and 1.41x if
it is not. These ratios are comparatively robust for a project
of this nature. The debt will fully amortize prior to the expiration
of the concession at the end of 2044. However, we note that
the maximum cash breakeven ratio (which represents the largest percentage
by which the Concessionaire's total costs may be increased throughout
the term of the concession before debt service coverage falls below 1.0x,
or alternatively the smallest amount in any given year) is just 12%.
This figure is quite low in Moody's opinion and could potentially
constrain the rating somewhat during the operations period. This
low ratio is another consequence of the heavy reliance on grant payments,
which permits a much larger project to be constructed with a given amount
of debt and results in disproportionately high O&M expenses relative
to debt service.
In Moody's opinion, the Concession Agreement provides good
protection to the Concessionaire from changes to the Concession Agreement
as well as changes in law and the security afforded to lenders for this
transaction is consistent with our baseline expectations for a project
of this nature.
The stable outlook reflects our expectation that construction will proceed
on schedule and within budget. The rating could be downgraded if
the project falls significantly behind schedule or experiences unanticipated
cost overruns. The rating is likely to face upward pressure once
construction is complete if the Concessionaire demonstrates its ability
to successfully operate the project in accordance with the performance
requirements of the concession and to achieve the forecast financial metrics.
This provisional rating is subject to confirmation that the credit quality
of the providers of the construction and equity letters of credit and
fixed deposit agreements will have Moody's ratings at least equal
to A2, A3, and A3 respectively.
For more information, please see our forthcoming pre-sale
report on Denver Transit Partners.
This the first rating action on the Regional Transportation District's
Denver Transit Partners Eagle P3 Project.
The principal methodologies used in rating this project were "Construction
Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects"
and "Operating Risk in Privately-Financed Public Infrastructure
(PFI/PPP/P3) Projects", which can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Headquartered in Denver, CO, Denver Transit Partners is a
special purpose entity that was created to hold a concession with the
Regional Transportation District to design, build, finance,
operate, and maintain the Eagle P3 Project. At financial
close, DTP is expected to be 45% owned by Uberior Infrastructure
Investments (No. 4) Ltd, an affiliate of Lloyds Banking Group;
45% owned by an affiliate of John Laing Investments Ltd; and
10% owned by Fluor Enterprises, Inc. The Regional
Transportation District (RTD) was formed in 1969 to provide mass transportation
services for the Denver metropolitan area.
Chee Mee Hu
MD - Project Finance
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's assigns (P)Baa3 to RTD's Series 2010 Denver Transit Partners Eagle P3 Project PABs
No Related Data.
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