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The Journal Gazette

Friday, April 21, 2017 5:15 pm

Verbatim: Fitch downgrades Indiana's I-69 bonds; rating on negative watch

The Journal Gazette

Fitch Ratings issued this news release tonight:

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 'B'. The bonds remain on Rating Watch Negative.

The downgrade reflects growing uncertainty and a more limited margin of safety for the project as result of a failure to execute the terms of a Memorandum of Understanding (MOU) reached between project parties earlier this year which appeared to settle time and cost disputes. The lack of a global settlement heightens the risk to the project failing to meet the current longstop date of Oct. 31, 2017. In addition, it is unclear where additional sources of funding will come from, without a contribution from Grupo Isolux Corsan, SA (Isolux, rated 'RD'), the parent company of Isolux Corsan LLC (the design build contractor) to meet the requirements of a new global settlement should one be reached between the pertinent parties. Barring movement towards a new MOU with funding sources firmly in place, a downgrade to 'CCC' is likely in the next 60-90 days.

The MOU, signed on Feb. 13, 2017, addressed key issues such as increased costs, existing relief claims and outstanding notices of default, along with extending the substantial completion and longstop dates and was considered a positive development for the project. The MOU also required I-69 DP and Isolux to contribute $23.3 million and $52 million (includes funds to repay the letter of credit) to the project, respectively, and IFA would make an additional $28.2 million milestone payment. However, the deterioration in the restructuring of Isolux rendered the MOU unsuccessful as Isolux is not able to meet the terms of its obligations under the agreement, specifically the $52 million equity infusion. Negotiations between I-69 DP and the IFA are ongoing, as both parties work towards a global solution and successfully completing the project.

The outlook on the bonds remains at Rating Watch Negative. Resolution of the Negative Watch depends on a negotiated settlement between all parties, with updated documentation and bondholder authorization that resolves outstanding disputes surrounding liquidity, timing and scope. Notably, updated documentation would need to resolve construction delays and equity infusions, most importantly revising the substantial completion date and extending the longstop date.

KEY RATING DRIVERS

Construction Delays, Weak Contractor (Completion Risk - Weaker)

The project is not expected to be completed by the current longstop date of Oct. 31, 2017. Substantial completion was originally projected for Oct. 31, 2016, but the project is only approximately 56% complete. Without the execution of a global settlement that extends the longstop date, the project will not meet this deadline, which is a termination event under the documents. Additionally, the continued deterioration in credit quality of Isolux has strained the project.

Straightforward Operations, Handback Risk Well Managed (Cost Risk - Midrange)

Once construction is complete, 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 backended with a large part of lifecycle works anticipated during the handback period, but since final debt maturity is five years prior to concession maturity, bondholders are not exposed to handback risk.

Strong Counterparty, Significant Delays (Revenue Risk - Stronger)

Milestone and availability payments during the project are made by Indiana Finance Authority (IFA, or the grantor), whose obligation has been rated at 'AA'/Outlook Stable. While the IFA is a strong counterparty, poor relations between all project parties have resulted in delays and cost deductions. IFA and the Developer continue to be committed to successfully completing the project and working towards a solution.

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 Post Construction 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 Group

Fitch-rated peers include other availability payment structures within Fitch's portfolio, such as NYNJ Link Borrower LLC ('BBB'/Outlook Stable) and Kentucky Wired Infrastructure Company, INc. (KWIC; 'BBB+'/Outlook Negative). The projects have comparable construction packages and financial metrics. However, KWIC's Negative Outlook reflects an approximate one-year delay to the construction completion date.

RATING SENSITIVITIES

Negative - Failure to reach a new global settlement between parties with identified funding sources over the next 60-90 days would result in a rating downgrade.

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

Negative - Significant sustained payment deductions being levied against the project company or materially higher costs during the operating period than currently forecast, either of which reduce coverage levels well below current projections, would also place the rating under pressure.

Positive - Execution of a global settlement between parties that resolves outstanding issues in regards to liquidity, timing and scope and a construction schedule that is deemed to be technically sound and achievable, could result in a rating upgrade.

SUMMARY OF CREDIT

The MOU entered into between IFA and I-69 DP was a positive development for the project, but ultimately was unable to move forward. The MOU extended the project's substantial completion date to May 31, 2018 (from Oct. 31, 2016) and the longstop date to Nov. 30, 2018 (from Oct. 31, 2017). Additionally, the MOU required I-69 DP and Isolux to contribute $23.3 million and $52 million (includes funds to repay the LC) to the project, respectively. Furthermore, the IFA would make an additional $28.2 million milestone payment to I-69 during the remaining construction period and availability payments will be delayed to coincide with the new schedule, commencing in June 2018. A delay in Isolux's restructuring process has made the company unable to contribute funds at this time and an additional three to four months would be needed before Isolux could potentially infuse funds. Considering the project is already significantly delayed, the IFA and I-69 DP have abandoned the MOU.

Construction work is progressing and the most recent Technical Advisor (TA) report states notable progress has been made over the past number of months, assisted in part by favorable weather conditions, but primarily due to the agreement between all key stakeholders to resolve the completion issues. The TA also opines that, given the current status of construction, the risk of further delays related to design, utilities, permitting and geotechnical conditions is significantly reduced.

Subcontractors are working towards the MOU's revised substantial completion date of May 31, 2018. While a full review of the MOU's revised schedule and cost summary was not completed by the TA, the February 2017 report stated that the MOU timeline was considered reasonable and its terms achievable, based on the information provided.

Negotiations between all stakeholders have recommenced upon the dissolution of the MOU. Fitch will continue to monitor progress towards a settlement. Prior to taking any rating action, Fitch will assess the impact of any settlement on the project after the TA opines on the reasonableness of I-69 DP and Isolux to achieve the revised completion dates as well as the sufficiency of the additional funds to cover the revised cost to complete. In addition, Fitch will review the updated financial model, the remaining scope, any deviations from the original concession agreement, the achievability of the revised schedule, the remaining critical path items, the flexibility to absorb unexpected future delays, and any potential impact on the operating period.