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Rating Action:

Moody's assigns a Aa2.br rating to ViaOeste's subordinated debentures; outlook stable

 The document has been translated in other languages

Global Credit Research - 18 Feb 2011

Approximately BRL150 million of debt instruments affected

Sao Paulo, February 18, 2011 -- Moody's America Latina (Moody's) has assigned issuer ratings of Baa3 on the Global Scale and Aa1.br on the Brazilian National scale to Concessionaria de Rodovias do Oeste de Sao Paulo - ViaOeste S.A. (ViaOeste). At the same time, Moody's assigned Ba1 and Aa2.br ratings to ViaOeste's proposed issuance of BRL150 million subordinated debentures due in 2015. The outlook is stable for all ratings. This is the first time Moody's has assigned ratings to ViaOeste.

The proceeds from the proposed debentures will be used to help fund working capital and to support dividend payments in the near term.

Assignments:

....Issuer: Concessionaria de Rodovias do Oeste de Sao Paulo - ViaOeste S.A. (ViaOeste)

....Issuer Rating: Baa3 (global scale) / Aa1.br (Brazilian national scale)

....BRL150 million subordinated debentures: Ba1 / Aa2.br

RATINGS RATIONALE

The Baa3 and Aa1.br issuer ratings reflect ViaOeste's strong asset features as a road system with a favorable alignment connecting the west metropolitan area of Sao Paulo to Sorocaba. The ratings also reflect the mature nature of this concession evidenced by a solid operating track record that dates back to 1998. The relatively stable regulatory environment for operating toll roads in the state of Sao Paulo and ViaOeste's strong credit metrics further support the ratings.

The risks associated with the high level of investment activity of its controlling shareholder constrain the rating, as does the risk of additional investments in the concession that could lead to further borrowings taking place when capital markets are not necessarily favorable. The ratings also reflect ViaOeste's relatively weak liquidity and debt maturity profile when compared with other investment grade operating toll roads.

The Ba1 and Aa2.br ratings assigned to the proposed BRL150 million debentures are one notch lower than ViaOeste's issuer ratings to reflect the subordination of the debentures to existing BRL506 million senior secured debentures issued by ViaOeste in 2007.

ViaOeste's proposed debentures provide adequate protection clauses for the bondholders. These legal provisions limit additional debt issuances ranking above the subordinated debt class only to the financing of new capital expenditures acknowledged by the regulator in the concession agreement or to support working capital needs up to BRL60 million. Additionally, there are financial covenants that largely restrict the distribution of dividends when the debt service coverage ratio is lower than 1.2 times and net debt to EBITDA is above 4.0 times (or above 3.0 times according to the provisions included in the indenture of ViaOeste's other debt outstanding until 2015). Moreover, the concession agreement requires the company to maintain a minimum equity capital of 10% of the amount of accumulated investments in the concession and projected for the next 12 months.

Moody's notes that ViaOeste's other existing debt agreements also contain cross default provisions with Companhia de Concessoes Rodoviarias (CCR), its parent company. In the event that CCR goes bankrupt or files for reorganization under the Brazilian bankruptcy law, the ViaOeste debenture holders could call an early maturity event and execute their rights derived from the debentures' guarantees. As a result, ViaOeste's issuer rating also incorporates the risk profile of CCR on a consolidated basis.

The CCR group has a strong track record of sizeable investments that include participating in auctions for new concessions and acquiring operating companies, as illustrated by the recent acquisition of Rodovias Integradas do Oeste S/A, a 516- kilometer concession in the state of Sao Paulo for approximately BRL1.3 billion. Notwithstanding its strategy of pursuing opportunistic investments in the transportation industry, CCR has historically behaved like a prudent investor, seeking new ventures only with the expectation of reasonable rates of return. On a consolidated basis, additional leverage is largely limited by financial covenants that requires the net-debt-to-EBITDA ratio lower than 3.0 times and the EBITDA-to-net-interest expenses higher than 2.0 times.

CCR's access to the local banking and capital markets has been resilient, supported by its experienced management team and relatively high corporate governance standards compared to local peers. Financing for CCR's various concessions has been mostly in the form of long-term project finance debt. Thus, Moody's views the risk of any major cash draining of ViaOeste in order to fund new CCR group projects as relatively low in the near term.

ARTESP, the concession authority of Sao Paulo since 2002, is generally supportive of toll road operators in the state as the recent amendments in the concession agreement with ViaOeste demonstrates. Although not completely independent of political influence, from a credit perspective the regulatory framework of Sao Paulo can be considered above the Brazilian average in terms of the transparency of its tariff-setting mechanisms and the protection against events outside the control of the concessionaire. The concession agreement provides for annual tariff increases in line with inflation as measured by the general price index (IGP-M).

In 2006, ARTESP extended the concession of ViaOeste for an additional 57 months in order to restore its financial equilibrium which had been impacted by additional investments mainly for road improvement in the regions of Sorocaba and Sao Roque. In 2009, ViaOeste engaged in other significant capital expenditures of approximately BRL250 million primarily to help reduce traffic congestion in metropolitan Sao Paulo. These investments triggered another review of the concession agreement for the economic-equilibrium restatement through partial retention of concession liability payments. At the same time, the concessionaire agreed to reduce tariffs at certain toll plazas that were reconfigured to capture higher traffic volumes. These adjustments to the concession agreement are indicative of the reasonable and supportive nature of the concession framework.

Going forward, ViaOeste is committed to BRL517 million in investments over the remaining 12 years of the concession, of which approximately 80% will be disbursed over the next five years. Investments in the near term include the construction of 14 kilometers of side lanes and bridges in the Sorocaba region. These investments are consistent with the current concession agreement and will not be subject to review for additional compensation.

In the medium term, the concessionaire could also invest BRL67 million for the construction of an extension of the Castello Branco road to the CEAGESP, the largest agricultural distribution center in the metropolitan Sao Paulo area; however, this investment is still under negotiation with the regulator. Another potential investment for ViaOeste is the incorporation of an additional section of the Raposo Tavares road between the City of Cotia and the metropolitan area of Sao Paulo. Moody's estimates that the investments for recovery and improvement of this road section could cost from BRL1.3 billion to BRL 1.7 billion. This investment also depends on negotiation with the regulator for additional compensation. The ultimate magnitude and timing of these potential capital investments could exert pressure on ViaOeste's financial performance.

ViaOeste's road system connects the cities of Sao Paulo and Cotia to Sorocaba, in the interior of the state, passing through Barueri and Osasco. Real estate developments initiated during the 1970's coupled with fiscal incentives resulted in a strong and dynamic economy in the region. The industries along the concession area include a notable service economy, complemented by large distribution centers for retail and building materials. It is also an important route for agricultural freight (mainly sugar cane) coming from rural areas in the interior of the state.

Around 80% of ViaOeste's total traffic volumes are at the Castello Branco road section, which is considered one of the best Brazilian roads in terms of quality and safety. Castello Branco runs about the same direction as Raposo Tavares, so the immediate competition is largely limited within the concession. The large alternative routes are Anhanguera and Bandeirantes (the AutoBan system), which are connected to the Castello Branco road section through the Rodovia das Colinas and the Rodoanel West section. These routes also have toll plazas, which mitigate competition Depending on the final destination, there are other smaller alternative routes but those are not comparable in terms of quality and safety.

ViaOeste has demonstrated a solid track record of traffic volumes well balanced between commuters and commercial vehicles. From 1999 through 2009, Viaoeste's toll traffic achieved an average growth rate of 6.4% per year, which compares favorably with the Brazil's average GDP growth of 3.3% per year during the same period. Despite the tighter economic conditions that led to no growth in the Brazilian GDP in 2009, traffic volumes at ViaOeste increased 1.3% in 2009. The comparison of traffic trends in 2010 is somewhat impaired by the changes in the configuration of certain toll plazas that are reflected in a significantly larger traffic volume reported by the company. Excluding the impact of new toll plazas, Moody's estimates that traffic volumes grew by 10.3% in 2010, indicating strong recovery since 2009.

The solid traffic volumes and the stable regulatory environment in the State of Sao Paulo support ViaOeste's strong credit metrics for its rating category. The funds from operations (FFO) to debt has been around 20% in years of significant capital expenditures, such as 2007 and 2009, improving to 23%-24% thereafter. The cash interest coverage ratio has been in the 3.8x- 4.5x range over the last three years while leverage as measured by the debt-to-EBITDA ratio has been around 2.8x. These strong indicators are partially offset by a low retained cash from operations driven by high dividend distributions. This practice is generally in line with other mature toll road concessions.

Moody's adjusts ViaOeste's debt to include the off-balance-sheet concession liabilities of approximately BRL300 million and refinanced taxes of approximately BRL60 million generated through the company's adherence to the Federal Program of Fiscal Recovery (REFIS).

The stable outlook reflects Moody's opinion that ViaOeste's operational performance will continue to be strong during the remaining life of the concession, albeit with a relatively weak liquidity profile. Expected growth in the Brazilian GDP should support solid credit fundamentals. We expect that the payment of dividends and additional leverage are likely to continue over the next years but we expect them to be prudently managed with credit metrics remaining within the current rating category.

The rating or the outlook could be upgraded if the company were to steadily improve its liquidity profile and produce credit metrics in line with or exceeding historical performance so that the FFO-to-debt ratio remains above 30% and interest coverage stays above 5.5 times on a sustainable basis.

The rating or the outlook could be downgraded if there is a significant and sustained deterioration in credit metrics so that the FFO-to-debt ratio falls below 20% and interest coverage ratio is below 4.0x for an extended period of time. Deterioration in the liquidity profile or credit quality of CCR could also exert downward rating pressures.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's Global Scale Ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only (GSR) with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".br" for Brazil. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings"

The principal methodology used in rating ViaOeste was Operational Toll Roads rating methodology published in December 2006. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Concessionaria de Rodovias do Oeste de Sao Paulo - ViaOeste S.A. (ViaOeste) is an operating subsidiary of Companhia de Concessoes Rodoviarias (CCR, unrated), one of Brazil's largest toll-road concession groups, which controls approximately 2,093 kilometers of toll road concessions. CCR is controlled by a consortium of AGConcessoes, Camargo Correa and Soares Penido Concessoes. In the last 12 months ended Septermber 30, 2010, CCR attained consolidated revenues of BRL3.6 billion (USD2.0 billion) and an EBITDA of BRL2.5 billion (USD1.4 billion), ViaOeste accounted for 16% of the revenues and 17% of the EBITDA.

ViaOeste holds a 25-year concession to operate the toll road services of the Castello Branco-Raposo Tavares road system, a 173-kilometer concession in the State of Sao Paulo, which the state regulatory agency, Agencia Reguladora de Serviços Publicos Delegados de Transporte (ARTESP), granted in March 1998. In the last 12 months ended September 30, 2010, the company reported an annual tolled traffic of 95 million of equivalent vehicles.

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, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' 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.

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.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Sao Paulo
Cristiane Spercel
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

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

Moody's America Latina Ltda.
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SUBSCRIBERS: 55-11-3043-7300

Moody's assigns a Aa2.br rating to ViaOeste's subordinated debentures; outlook stable
No Related Data.
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