Fitch Affirms Portsmouth Gateway Group Sr. PABs & Sub. TIFIA Loan at 'A-'; Outlook Stable
Fitch has also affirmed the 'A-' rating on approximately $208 million subordinate Transportation Infrastructure Finance and Innovation Act (TIFIA) loan for the project. The Rating Outlook for both instruments is Stable.
KEY RATING DRIVERS
The 'A-' rating reflects the project's low level of completion complexity which is bolstered by experienced contractors within the design-build joint venture (DBJV), and the project's robust security package well in excess of the required liquidity to withstand a worst-case replacement contractor scenario. The rating further reflects the relatively limited scope of operations for which PGG is responsible when the project is completed. The project's limited scope leads to minimal cost risk exposure, resulting in a resilient all-in cost breakeven of 81% and robust ROC multiple of over 16x which allows the DSCR profile to achieve an 'A' category rating.
Experienced DBJV with Robust Security Package - Completion Risk: Stronger (revised from Midrange)
The low-complexity project is currently being constructed via a DBJV consisting of experienced contractors, including Dragados USA (parent company Dragados, S. A., the construction arm of ACS Group), with a joint and several liability. Favourably, the contract is fixed-price and date-certain with design-build requirements passed down to the DBJV under the public-private agreement (PPA). Completion risk is strongly mitigated by the PGG's robust security package, which materially exceeds the liquidity thresholds which would currently be required to withstand a severe downside scenario, offsetting Fitch's credit view of the contractor. The project is nearly 50% complete as of July 2016.
Limited Scope, Significant Public Responsibility: Cost Risk - Stronger
The project benefits from a relatively limited scope of operations being a rural road with solely non-complex bridges, making future expected maintenance costs reasonably predictable and marginal. Fitch views ODOT's significant retainage of O&M responsibility favourably and self-performance of operations by PGG's experienced consortium is expected to allow for successful operations of the facility.
Payments Supported by Strong Counterparty - Revenue Risk Stronger
The project's financial position is supported by milestone and availability payments from financially strong counterparty, ODOT. In Fitch's view, the project's contractual provisions establish strong incentives for grantor performance, involving strong compensation for debt and equity under a voluntary termination scenario. Positively, deduction exposure is deemed extremely minimal and cure periods for such events are considered sufficient.
Conservative Structure, Adequate Reserves - Debt Structure: Midrange
PGG's debt structure is considered conservative, characterized by fully amortizing, fixed-rate debt. Six month debt service reserve funds will be funded once the project is operational, which Fitch considers adequate. Though structurally subordinate, Fitch views the TIFIA loan as on parity with the PABs given its springing lien potential in a bankruptcy-related event.
Robust ROC Multiple, Solid Coverage Ratios
Fitch's rating case, which includes a 5% ROC, as deemed reasonable following discussion with the LTA, yields solid minimum and average coverage of 1.22x. The project also benefits from a high all cost breakeven of 81%, which translates into a healthy ROC multiple of over 16x.
PGG's limited scope and significant public support renders the project relatively less exposed to cost risk than peer, WVB East End Partners (WVB, 'BBB+'/Stable Outlook). Consequently, in line with criteria, PGG is able to achieve a higher rating with lower DSCRs but a higher ROC multiple at 1.22x and 16x, respectively, than WVB at 1.28x and 8.53x, respectively.
--Credit deterioration of project counter-parties leading to weaker risk mitigation within the project.
--Construction delays beyond scheduled substantial completion and anticipated final acceptance dates which consequently threaten the project's financial position.
--Significantly higher than expected payment deductions during operations which reduce coverage levels well below 1.2x and materially weaken the ROC break-even multiple on a sustained basis.
--Given the nature of the project, upward rating action is unlikely.
SUMMARY OF CREDIT
The debt was issued to fund the development of an approximately 16-mile four lane, divided, un-tolled limited access highway, to be designated State Route 823, around the City of Portsmouth in Scioto County, Ohio, bypassing approximately 26 miles of US 52 and US 23.
The project is nearly half complete as of July 22, 2016 and construction works have been progressing on-time and on-budget. The project encountered a few large change orders, permitting issues, and transmission line distribution delays since Fitch's last review. However, the previous issues appear to be extremely minor and substantially resolved, unlikely to impede PGG's ability to reach its planned substantial completion date of December 2018. Moreover, cost overrun exposure is negligible given contractual provisions within the PPA which leave ODOT liable for any such department initiated change requests, compensation events, and relief events.
Completion risk is currently viewed more favourably given PGG's healthy security package which more than offset Fitch's view of the contractor's credit quality. Specifically, reasonable potential liability as a percentage of the construction price going forward is expected to range from 18% - 22%, rendering the 40% liability cap, 6% letter of credit and embedded cost headroom assumed within the cash flow model ample to withstand these reasonably stressful scenarios. Fitch still views the rating as in-line with PGG's construction and expected operational profiles despite the agency's revised view of completion risk.
Fitch's rating case includes O&M and lifecycle cost assumptions as deemed reasonably stressful by the LTA, including a 5% contingency for realistic cost overruns, in line with Fitch's required ROC stress for projects with lower amounts of cost risk. As a result of the relatively marginal O&M and lifecycle costs expected due to the project's limited scope, the all costs breakeven (including O&M, lifecycle costs, and overhead) is high at 81%, resulting a robust 16.2x ROC multiple. Solid average coverage levels of 1.22x are on the lower end of indicative stronger cost risk criteria guidance for the 'A' category and higher end for 'BBB' category, rendering PGG's financial profile commensurate with an 'A-'rating when viewed alongside its high ROC multiple.
The debt is secured by security interest in the borrower's right, title, and interest in the project. The long-term PABs constitute senior obligations of the concessionaire and along with the other senior obligations, rank in priority to all unsecured obligations of the concessionaire. Obligations under the TIFIA loan are secured by a second priority security interest in project revenues - subordinate only to the liens securing the senior obligations, which has springing senior lien potential in a bankruptcy related event.