Downgrade affects $1.1 billion of outstanding debt
New York, October 15, 2013 -- Moody's Investors Service has downgraded the ratings of the SH 130 Concession
Company, LLC ("the Project") to Caa3 from B1,
including the Senior Bank Facility with $686 million outstanding
and the subordinate Transportation Infrastructure Finance and Innovation
Act (TIFIA) loan with $493 million outstanding. The rating
outlook is negative.
SH130 Concession Company LLC is a limited liability company owned by Cintra
TX 56, LLC (65% ownership) and Zachry Toll Road 56,
LP (35% ownership). The Project has a concession granted
by the Texas Department of Transportation (TxDOT) for the southern-most
tolled sections of SH 130, comprising 41 miles of a 90 mile bypass
around the city of Austin, TX.
RATINGS RATIONALE
The downgrade to Caa3 from B1 reflects the increased prospects for a payment
default owing to rapid deterioration in the Project's liquidity
in 2013 due to substantially weaker than forecasted traffic and revenue
performance since the April 2013 downgrade to B1. The continued
subpar performance has resulted in the near full use of the $35
million liquidity facility to fund the June 2013 debt service payment.
Moody's revised forecasts now indicate that nearly all of the $30
million of available contingent equity will be used to fund the December
2013 debt service payment and a part of the June 2014 debt service payment.
Absent a marked increase in traffic and revenue over the next eight months
or significant remediation support from the sponsors, Moody's
expects that the Project will have insufficient cash to meet is debt service
payments due in June 2014. A payment default would have uncertain
near-term ramifications for the Project given the multiple bank
swap counterparties could terminate their swap agreements and demand a
termination payment (swaps are currently about $107 million out
of the money). An ongoing payment default could lead to events
that eventually allow TXDOT to terminate the concession agreement,
which could limit the lenders' ability to take possession of the
collateral. A concession termination would significantly increase
the potential loss given default; however, the lenders could
exercise their rights to remediate the default to prevent a concession
termination. The rating on the TIFIA loan is parity with the senior
bank loan, given the springing lien on the TIFIA facility,
which makes TIFIA pari passu with senior debt if there is a bankruptcy
related event of the company. The Caa3 rating further incorporates
our current expectation of a moderate level of impairment, given
a serious near-term shortfall in cash available for debt service,
balanced against the 20-year concession tail after the current
senior debt amortizes and the flexible repayment terms of the subordinate
TIFIA loan.
OUTLOOK
The negative outlook reflects Moody's view that traffic and revenue will
continue to grow at a slow to moderate, yet inadequate pace in order
to meet the current debt service profile. The outlook also reflects
the uncertainty regarding additional sponsor support and the ultimate
lender recovery rate in a post payment default environment.
What Could Change the Rating - Up
A rating upgrade is unlikely at this time. The rating could recover
if over a long and sustained period, the toll road is providing
sufficient cash flow to pay debt service on a current and forward-looking
basis.
What Could Change the Rating - Down
The rating on the Project would be further pressured if Moody's
determines the loss given default will be higher than currently expected.
RECENT DEVELOPMENTS:
In April 2013 we downgraded the ratings to B1 to reflect the weak traffic
and revenue performance during the initial ramp up phase of the new toll
road that began operating in November 2012. Since then, the
additional 6 months of traffic and revenue show monthly growth,
but not at rates necessary to generate sufficient revenue to meet operating
and debt obligations through the June 30, 2014 debt service payment.
Moody's forecasts in April 2013 have not been realized and new forecasts
based on 10 months of real data indicate a slow growth profile rather
than a steep ramp up as would have been expected for new toll roads in
their first years of operations.
TXDOT has shown support for the toll road by subsidizing a one-year
heavy truck toll discount and funding new signage in key areas north and
south of the route to build awareness of the new 35 alternative and its
current discount for large trucks. The company has also embarked
on an aggressive marketing campaign that extends to NAFTA truckers in
Laredo. These combined efforts have resulted in traffic and revenue
growth, but the growth rates remain well below those required to
generate sufficient revenues to meet all near term obligations.
The Project was structured from the beginning to use reserves during the
ramp up phase, but these are expected to be depleted by June 2014.
The Project has fully drawn its $35 million liquidity facility
and will use the majority of the $30 million of available sponsor
contingent equity to fund the December 2013 debt service payment,
comprised of senior lien interest and swap payments only as the subordinate
TIFIA loan's interest payments begin in 2017. Even under
optimistic scenarios, Moody's forecasts a shortfall in available
funds to pay the June 30, 2014 debt service payments. All
available liquidity facilities, contingent equity, and excess
revenues on hand will be fully utilized when the June 30, 2014 payment
is due. Thus, absent a sponsor injection of equity,
a debt restructuring, or some other method of generating significantly
more revenues, there is a high likelihood of a payment default in
June 2014.
It remains uncertain if the sponsors will provide additional equity support
for the Project. A new traffic and revenue study will be completed
by February 2014, as required by TIFIA. The fully drawn $35
million liquidity facility reportedly has a 30 year repayment term.
The counterparties are unable to terminate the swaps unless a payment
default occurs. Thus, given the higher likelihood of a payment
default, any of the multiple swap counterparties could decide to
terminate the swaps and ask for a termination payment, which the
Project cannot afford at this time. This ability to terminate also
heightens the Project's default risk.
Moody's notes that the Project has a favorable location and provides
congestion relief to the highly utilized I-35 NAFTA corridor.
However, the rate of traffic and revenue growth is not enough to
meet the debt obligations that continue to grow when TIFIA interest payments
begin in 2017. As a result, a debt restructuring of some
kind or sponsor equity support are the only feasible options, besides
allowing a payment default to occur. The senior lenders and TIFIA
could also wait until revenues are sufficient to meet required debt service
payments. Given the 20 year tail on the concession agreement after
senior debt is paid, Moody's believes any loss given default
will be low to moderate over the long-term. Even assuming
generous annual revenue growth rates, our discounted cash flow analysis
indicates the Project may be unable to fully support the current debt
quantum in the long-term, resulting in a higher than previously
forecasted loss given default that is commensurate with the current rating
category.
BACKGROUND:
The road opened to traffic in October 2012, which was one month
ahead of the start of operations per the facility agreement, but
approximately four months behind the originally anticipated date.
The road began charging tolls in November. The history of traffic
and revenue is limited to that of the 10 months since it has been in operation,
from November 2012 to August 2013.
The Project's financing was structured, from the beginning,
to contemplate the use of a $35 million liquidity facility that
was put in place in order to support debt service payments in the first
18 to 24 months of operations. The structure also includes a sponsor
commitment for contingent equity in an amount of $30 million.
Given the relatively modest delay in the start of operations and primarily
due to the lower than anticipated revenue generation, the liquidity
facility was used to augment operating cash flows for the debt service
payments in December 2012 and June 2013 and the contingent equity will
be used for the December 2013 and part of the June 2014 debt service payments.
A debt service reserve fund is also part of the security package,
but it is not required to be funded until 2016. The fact that the
debt service reserve is not yet funded is a further weakness. Even
if traffic and revenue grow sufficiently strongly to deliver 1.00
times coverage by 2017 when TIFIA interest payments start (increasing
total debt service to approximately $78 million per annum),
the absence of a cash reserve means the company will likely have no safety
margin and will be at an elevated risk of default and low near term recovery
over the next few years.
Moody's notes ongoing initiatives both by the company and TxDOT to stimulate
usage of the road, and still awaits an updated long term financial
plan from the company outlining the plan to meet debt service obligations.
The current debt service profile is too burdensome for the Project in
its current ramp-up phase and provides little breathing room,
especially given traffic has not materialized as expected.
The ratings on SH 130 Concession Company LLC incorporate the relatively
strong fundamentals of the Project, including the strong,
diverse, and growing economy in the Austin to San Antonio corridor,
and the generally supportive concession terms.
RATING METHODOLOGY
The principal methodology used in this rating was Operational Toll Roads
published in December 2006. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
John Medina
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Chee Mee Hu
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades SH 130 Concession Company to Caa3 from B1; Outlook negative
