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Fitch Downgrades Indiana Finance Auth's PABs to 'B'; Remains on Rating Watch Negative

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded the Indiana Finance Authority's (IFA) private activity bonds (PABs) issued on behalf of I-69 Development Partners LLC (I-69 DP) for the I-69 Section 5 project to 'B' from 'BB'. The bonds remain on Rating Watch Negative.

KEY RATING DRIVERS

The downgrade reflects continued delays in construction and unresolved disputes between I-69 DP Isolux-Corsan USA (the construction contractor), and the IFA resulting in a limited margin remaining to complete the project by the current Long-Stop date. This culminated in six Notices of Default issued by I-69 DP to the construction contractor, and a Notice of Non-Performance issued by the IFA to the Developer. In particular, Fitch notes that the fifth default, issued on Sept. 26, 2016, pertains to the failure of the contractor to replenish the Letter of Credit (LC) which was drawn upon two weeks prior (Sept. 15, 2016), for a total of $23 million. The subcontractors have now been fully paid, however, the construction contractor has not replenished the LC as required.

Based on the current status of the project, it appears that Substantial Completion is unlikely to occur before October 2017 which is the current Long-Stop Date under the concession agreement. Negotiations are underway between all stakeholders with regards to a global solution, which would resolve outstanding disputes including liquidity, timing and scope. Delay risk is further heightened by the financial deterioration of Corsan-Corviam Construccion SA, parent of the construction contractor, Isolux-Corsan USA, 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 as part of its restructuring plans.

It is Fitch's understanding that all items of dispute including project scope, timing, and liquidity are part of the on-going global settlement negotiations.

Fitch has revised the Completion Risk Key Rating Driver to Weaker from Midrange reflecting the current state of the project. The other Key Rating Drivers remain unchanged, however, they will be subject to changes should the outcome of the negotiations vary significantly from the original agreement.

RATING SENSITIVITIES

Negative

--Failure to reach global settlement between parties resulting in a greater likelihood of default under the concession agreement;

--Continued delays, ongoing disputes, inadequate liquidity, and further work suspensions which jeopardize the ability to meet a revised completion date.

--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

--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 Aug. 8, 2016, Fitch downgraded the IFA's PABs to 'BB' on Rating Watch Negative, which reflected 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.

The persistent payment issue between the construction contractor and subcontractors has resulted in the Developer issuing four additional Notices of Default to the construction contractor in September 2016 as follows: (i) Failure to promptly pay subcontractors (20 day cure period), (ii) Filing a temporary restraining order and preliminary injunction against the Developer regarding a draw on the Letter of Credit, (iii) Failure to replace the Letter of Credit (10 day cure period), and (iv) Additional failure to promptly pay subcontractors (20 day cure period) Fitch notes that one Notice of Default pertaining to contractor payment issues had been cured on Aug. 25, 2016, leaving five Notices of Default outstanding.

Fitch believes that it is highly unlikely that the contractor will achieve Substantial Completion by June 28, 2017 as previously discussed. Current negotiations are underway to finalize completion dates and ongoing disputes between the IFA, I-69 Development Partners and Isolux-Corsan USA (construction contractor). Based on the revised cash-flow schedule, Isolux is substantially behind the anticipated expenditure curve. Actual drawdowns from April to September 2016, a means Fitch uses to measure construction progress, fell over 60% below the scheduled amount. Actual drawdowns for the month of August were significantly under the scheduled drawdown of $17.7 million. In total, the project is behind the anticipated cumulative drawdown by over $73.4 million, which is almost 24% of the entire contract value. Fitch will continue to monitor progress and assess the outcome of any negotiated settlement when it is finalized.

Unless significant construction progress occurs during this time period, further negative rating action is likely.

For additional details, see the following Fitch press releases:

--'Fitch Downgrades Indiana Finance Auth's PABs to 'BB' on Rating Watch Negative' (Aug. 5, 2016);

--'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' (Aug. 3, 2016).

Additional information is available on www.fitchratings.com

Applicable Criteria

Distressed Debt Exchange (pub. 08 Jun 2016)

https://www.fitchratings.com/site/re/882737

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)

https://www.fitchratings.com/site/re/886038

Rating Public-Sector Counterparty Obligations in PPP Transactions (pub. 12 Jul 2016)

https://www.fitchratings.com/site/re/883969

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013787

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013787

Endorsement Policy

https://www.fitchratings.com/regulatory

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