Fitch Downgrades Indiana Finance Auth's PABs to 'BB'; Bonds Remain on Negative Watch
Fitch Ratings has downgraded the Indiana Finance Authority's private activity bonds (PABs) issued on behalf of I-69 Development Partners LLC (I-69 DP or the Developer) for the I-69 Section 5 project to 'BB' from 'BBB-'. The bonds remain on Rating Watch Negative.
The downgrade reflects continued delays in construction and unresolved payment issues between the construction contractor and subcontractors, culminating in two Notices of Default issued by the Developer to the construction contractor, citing failure to promptly pay subcontractors and falling behind on an existing remedial plan, which have 20 and 60 day cure periods, respectively.
Delay risk is also heightened by the financial deterioration of Isolux Corsan SA (Isolux), parent of the construction contractor, Corsan-Corviam Construccion SA, whose rating was revised to 'RD' (Restricted Default) from 'C' on Aug. 3, 2016, reflecting the execution of a Distressed Debt Exchange following recent filings for forms of court protection. The company has confirmed that, to date, it has met payments but non-payments are planned under restructuring plans.
KEY RATING DRIVERS
Construction Delays, Weak Guarantor (Completion Risk -Midrange): The credit quality of Isolux Corsan SA (Isolux), the parent company of I-69's construction contractor Corsan-Corviam Construccion SA, has deteriorated significantly in recent months resulting in a downgrade to 'RD'. In addition, Fitch believes the revised recovery schedule completion date of June 28, 2017 will be challenging to meet, given that the construction contractor is substantially behind the anticipated expenditure curve for 2016. The project has a four month tail from the revised completion to the long stop date that provides some cushion. However, uncertainty remains. Fitch will continue to monitor the adequacy of this tail period.
Strong Counterparty, Clear Payment Mechanism (Revenue Risk - Stronger): Milestone and availability payments during the project are made by Indiana Finance Authority (IFA, or the grantor), and Fitch currently rates such counterparty obligations 'AA'/Outlook Stable. Indexation of 20% of periodic availability payments to the Consumer Price Index (CPI), with remaining 80% escalated at 2.5% per annum, hedges inflationary operating and lifecycle costs. The payment mechanism is in line with peers.
Straightforward Operations, Handback Risk Well Managed (Cost Risk - Midrange): The project company will self-perform most operation and maintenance (O&M) activities, exposing it to O&M and lifecycle cost risk over the project life. O&M works are generally considered relatively straightforward given the limited scope of the project. The major maintenance reserve account (MMRA) and handback requirements reserve account (HBRA) are both designed such that major works should be anticipated from a funding perspective several years ahead of incurrence. The project's cost profile is significantly back ended, with a large part of lifecycle works anticipated during the handback period; however, since final debt maturity is five years prior to concession maturity, bondholders are not exposed to handback risk.
Conservative Debt Structure (Debt Structure - Midrange): Structural features, including the fixed interest rate payable, full amortization, 1.15x dividend lock-up and debt service reserve account (DSRA), provide bondholders with protection against adverse developments over the project life. The DSRA is sized at six-month's debt service, which is at the tighter end of projects in Fitch's rated portfolio, constraining the risk factor assessment.
Metrics Indicate Financial Resilience: While Fitch base and rating cases reflect debt service coverage ratio (DSCR) profiles consistent with a 'BBB' rating post construction, averaging above 1.50x and falling no lower than 1.22x, current construction issues warrant a lower rating.
Peer Analysis: The project's closest peer is WVB Partners, which also features IFA as grantor/issuer and a similar contractual framework; while WVB Partners features a stronger construction JV, works are considered materially more complicated and, furthermore, I-69 features a stronger performance security package. Delays have been experienced on both projects, although issues during construction appear to be more acute for I-69. Minimum DSCRs between the two projects are comparable, while I-69 demonstrates stronger average.
Negative - Failure to Cure Contractor Defaults: The contractor's failure to cure existing events of default within the requisite cure period could lead to further delays in completion and likely result in further rating downgrades.
Negative - Further delays: Additional delays experienced that jeopardize the likelihood of meeting the revised recovery schedule completion date of June 28, 2017 would result in a further downgrade.
Negative - Operational Underperformance: Significant sustained payment deductions being levied against the project company or materially higher costs during the operating period than currently forecast, either of which reducing coverage levels well below current projections, would also place the rating under some pressure.
Positive - Unlikely During Construction Period: Positive rating migration during construction is highly unlikely given completion risk issues facing the project. If the project is successfully completed, positive rating migration back to its previous level will likely occur assuming no material change to the project's operating profile.
SUMMARY OF CREDIT
On April 7, 2016, Fitch downgraded the IFA's PABs to 'BBB-' on Rating Watch Negative, which reflected the deteriorating credit quality of Isolux coupled with the I-69 project's projected eight-month delay in substantial completion. The revised recovery schedule completion date is the result of delays in obtaining necessary permits and non-payment from the contractor that led to some subcontractors demobilizing from the site. Payment issues have not been resolved with all subcontractors leading to continued delays to the project, which is already significantly behind schedule.
The persistent payment issue between the construction contractor and subcontractors has resulted in the Developer issuing two Notices of Default to the construction contractor on Aug. 4, 2016 as follows: (i) Failure to promptly pay subcontractors (20 day cure period), and (ii) Failure to present a remedial plan (60 day cure period).
Fitch believes the revised recovery schedule completion date of June 28, 2017 will be challenging to meet. Based on the revised cash-flow schedule, Isolux is substantially behind the anticipated expenditure curve. Actual drawdowns from April to June 2016, a means Fitch uses to measure construction progress, fell over 60% below the scheduled amount. Actual drawdowns for the month of July are expected to be significantly under the scheduled drawdown of $18.4 million. In total, the project is behind the anticipated cumulative drawdown by over $38 million, which is over 10% of the entire contract value. Additionally, agreements required to start work on certain sites are still undergoing negotiations.
Significant construction progress (70% - 80% completion) in the next three months is critical in order for the project to meet its revised recovery schedule completion date of June 28, 2017. Fitch will evaluate the project's remedial plans under both notices of default and the progress on construction over the next few months. Unless significant construction progress occurs over the next several months and the default issues are adequately addressed, further negative rating action is likely.
For additional details, see:
--'Fitch To Monitor Indiana Finance Auth's PABs Following Delays & Isolux Downgrade' (July 20, 2016);
--'Fitch Downgrades Indiana Finance Auth's PABs to 'BBB-' on Rating Watch Negative' (April 7, 2016);
--'Fitch Downgrades Isolux to 'RD' (August 3, 2016).
Available at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
Rating Criteria for Availability-Based Projects (pub. 21 Jul 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
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