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Rating Action:

Moody's assigns a first-time rating of Baa3 to Ruta al Mar's issuance of notes

08 Dec 2017

New York, December 08, 2017 -- Moody´s Investors Service ("Moody´s") assigned a Baa3 rating to Series A COP505 billion Senior Secured UVR Indexed Notes Due 2044 to be issued by Fideicomiso P.A. Concesion Ruta al Mar (the Issuer), with Concesion Ruta al Mar S.A.S. as co-obligor (the Project, or RaM). The outlook is stable.

The notes will be issued in COP but are settled in USD. The Issuer will use the proceeds raised in connection with the Notes offering to partially fund the construction of the project, a toll road concession awarded in 2015 as a Private Initiative under Colombia's 4G program. Committed bank facilities in total notional amount of COP950 billion and injected/committed equity from the sponsor in total amount of COP620.0 billion, backed by letters of credit from institutions rated at least Baa3, will complement the remaining proceeds.

The Project encompasses the construction, rehabilitation, and operations and maintenance of 491 km of tolled roads located in the States of Antiochia, Cordoba, Bolivar, and Sucre, in Colombia (Baa2 stable). It connects the manufacturing and consumer centers in central Colombia to the country's northern coast, which serves as a hub to several ports.

RATINGS RATIONALE

The project's credit profile is primarily driven by the overall leverage and financial profile throughout its operating phase, best measured through the average CLCR of 2.49x (Moody's Case) during the first ten years of full operational activity and average actual DSCRs of 1.64x (Moody's Case) over the life of the project.

Initial works encompass 113 km of new construction and another 224 km of rehabilitation, still at an initial stage. The relatively low complexity, progress obtained in required right of ways so far (50.3%), and the concession agreement terms which provide for caps on shared risks provide adequate mitigants. The ability to partially deliver milestones in the occurrence of events which most commonly cause delays in project delivery, and ultimately, termination payments sized in excess of existing debt are elements which provide further comfort.

The project has signed a fixed-priced lump-sum EPC contract with Construcciones El Condor (unrated) which encompasses construction works as well as management of right-of-ways, environmental permitting/licensing, and utility network relocation. Key credit strengths throughout the project's construction phase include the contractor's experience in managing similar projects within that region and the low complexity of works. The contractor's track record of managing right-of-ways, environmental permitting, and utility network relocation, particularly within the Transversal de las Americas toll road, coupled with progress obtained so far on RaM (50.3%), and the shared risk allocations, provide comfort as to their ability to conclude works without incurring into substantial delay penalties. The mechanisms embedded in the concession agreement which allows for partial delivery of works and/or delay penalties in the form of revenue deductions instead of direct payments to the grantor provide flexibility in case of schedule delays.

The credit weaknesses of the construction phase are the weak credit quality of the sole construction contractor, with very few allocation to subcontractors, and the limited visibility on the robustness of the construction cost contingencies and profit margins embedded in the EPC agreement. These act as the first layer of protection against actual cost overruns within the original contractor's budget. The relative size of the project to the construction contractor is substantial, with annual spend close to 100% of average annual revenues (2015-2016), and indicate limited financial flexibility to conclude the project in case of cost overruns beyond contingencies and profit margins. That being said, the project benefits from a performance bond equivalent to 17.8% of construction costs, sufficient to withstand the contractor's replacement as per the Independent Engineer's analysis.

The project is fully exposed to traffic risk, with historical traffic information on seven of the eight toll stations providing a base for traffic projections. The expectation is however of important traffic ramp-up as users get used to tariff increases in 2016/2017, the opening of new toll plazas, and expected relocation of the Purgatorio toll plaza. Additional traffic gains are expected following tariff increases upon completion of overall works in 2021 and tariff increases in competing roads later throughout the project's life, which overall place RaM very competitively in terms of overall travel time, safety, and transportation costs. Moody's traffic cases have been adjusted to partially recognize these strengths, with an expected CAGR of 3.9% in contrast to the independent traffic provider's expectation of 5.0%.

The exposure to competing routes and the generally low income characteristic of light traffic users provide for sensitivity to toll increases. Historical traffic performance has shown volume decreases at times of low economic performance. Nonetheless, the ability to pass along accrued inflation to tariffs on an annual basis, and the mechanisms embedded in the concession agreement for compensation to adverse scenarios are positive qualitative factors.

Overall leverage metrics are relatively high for the assigned rating at full project completion under the Moody's Cases, with FFO/Debt and interest coverage ratios averaging 7% and 1.83x throughout the first ten years of operations. Naturally, these ratios improve with time given the fully amortizing nature of the debt structure. DSCR metrics and the CLCR ratio average 1.59x and 2.49x, respectively, for the same period and are more stable throughout the transaction's life.

The overall credit profile throughout the operating phase is enhanced by the strong structural features embedded in the transaction. In addition to the standard six-month DSRA and six-month O&M reserve accounts, the structure includes backward and forward looking restricted payment tests set at 1.35x or 1.45x, depending on how traffic performs throughout the construction period. Other features include the validation of annual budgets which provide incentives for the issuer to maintain a lean operating structure to manage costs and expenses, as well as cash sweep mechanisms in case of traffic overperformance, mitigating the risk of the debt schedule extending beyond concession maturity in upside scenarios, adequately preserving creditors position.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward rating pressure is unlikely before construction completion and traffic ramp-up. However, upward rating pressure would arise if the project performed close to its base case forecast after ramp-up and completed construction on time and on budget.

The ratings could be downgraded in case of meaningful delays or cost overruns during construction which cannot be passed through to the contractor or compensated by the grantor. In addition, negative ratings pressure can arise upon frustration on traffic ramp-up.

Fideicomiso P.A. Concesion Ruta al Mar (the Issuer) is a trust under the laws of Colombia created for purposes of the operations of Concesion Ruta al Mar S.A.S., a 491 km toll road through four states in northern Colombia. The project is sponsored by Construcciones El Condor (El Condor), a construction contractor and infrastructure sponsor with 39 years of experience in building and managing roadways, tunnels, and bridges. The company has participated in 27 infrastructure projects in the country, including the Transversal de las Americas and the Pacifico II and Pacifico III projects granted under the 4G Program. On the construction front, the company has been responsible for 2,150 km/lane of roadway work, 24.7 km of tunnels, and 3.8 km of major bridges.

The methodologies used this rating were Private Managed Toll Roads published in October 2017 and Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects published in June 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

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.

Bernardo Costa
Vice President - Senior Analyst
Public Proj & Infrastr Fin
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Michael J. Mulvaney
MD - Project Finance
Public Proj & Infrastr Fin
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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