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Rating Action:

Moody's assigns (P)Baa3 to RTD's Series 2010 Denver Transit Partners Eagle P3 Project PABs

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 possibilities.

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 bondholders).

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' Technical Advisor.

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 payment.

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.

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

New York
Aaron Freedman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns (P)Baa3 to RTD's Series 2010 Denver Transit Partners Eagle P3 Project PABs
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