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Rating Action:

Moody's downgrades SH 130 Concession Company to Caa3 from B1; Outlook negative

Global Credit Research - 15 Oct 2013

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
No Related Data.

 

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