OREANDA-NEWS. Fitch Ratings has assigned an expected rating of 'BBB(EXP)' to approximately \$231 million of senior Treasurer of State (Ohio) private activity bonds (PABs), series 2015 issued on behalf of the Portsmouth Gateway Group, LLC (PGG) for the Portsmouth Bypass Project (the project).

Fitch has also assigned an expected rating of 'BBB(EXP)' to an approximately \$209 million subordinate Transportation Infrastructure Finance and Innovation Act (TIFIA) loan for the project. The Rating Outlook for all instruments is Stable.

The final ratings are contingent upon the receipt by Fitch of final documents and legal opinions conforming to information already received and reviewed as well as the final pricing of the bonds. Fitch has not been provided any of the customary legal opinions as of the expected ratings. The PABs are expected to price on or about April 1, 2015 and the proceeds will be loaned to PGG to pay a portion of the project's costs. The TIFIA loan is expected to close on or about March 31, 2015.

The ratings reflect the experience of the managing partner of the design build joint venture (DBJV), Dragados USA (parent company Dragados, S.A., the construction arm of ACS Group) and adequate construction security package, which do not constrain the rating during the construction phase of the project. The ratings further reflect the project sponsor's experience operating similar projects worldwide as well as the relatively low complexity of operation, maintenance, and lifecycle requirements along with the strong revenue counterparty in the Ohio Department of Transportation (ODOT). The ratings also reflect the project's ability to withstand reasonable financial stresses during the operating phase.

KEY RATING DRIVERS
Experienced DBJV with Sufficient Security Package - Completion Risk: Midrange
The project will be constructed via a DBJV whose members (Dragados USA, Beaver Excavating, and John R. Jurgensen) are experienced contractors. Design build requirements under the PPA are passed down to the DBJV. Completion risk in the 44-month design and construction schedule is mitigated by an adequate completion security package that includes the joint and several nature of the DBJV and by the parent company guarantee from Dragados S.A. to Dragados USA, a 6% letter of credit, both payment and performance bonds of 100% of the DB price, a 16% liquidated damages cap of the DB price, a 40% limitation of liabilities, and contingent retainage. The lender's technical adviser's (LTA) replacement analysis shows that in the unlikely event that all contractors simultaneously default the security package would be sufficient to bring in a replacement contractor to complete the project.

Availability and Periodic Payments Supported by Strong Counterparty - Revenue Risk Stronger
Payments during construction and operation of the project stem from milestone payments and availability payments from a strong counterparty, ODOT. The availability payment is split with 80% of the payment fixed to an annual escalator of 1% while the remaining 20% is linked to the consumer price index (CPI). The payment mechanism is broadly in line with peers, and the LTA has suggested that cure periods for non-compliance events are sufficiently long to ensure minimal payment deductions are incurred by the project.

Operations Self-Performed - Operation Risk: Stronger
Project operations are expected to be self-performed by Portsmouth Gateway Group. The sponsors have extensive experience in performing O&M obligations on comparable projects around the world. In addition, the scope of operations is relatively low complexity relative to peers with ODOT retaining responsibility for winter maintenance and the road is un-tolled.

Adequate Life Cycle Plan - Infrastructure & Renewal Risk: Midrange
The LTA has opined on the adequacy of the developer's approach and budget for lifecycle costs. The developer will perform regular condition and performance monitoring inspections in a systematic manner that allows it to better understand the remaining life of its assets. Funding of a four-year major maintenance reserve and two-year handback reserve account provide adequate protections and are incorporated into the financial model.

Typical High Leverage Offset by Conservative Structure - Debt Structure: Midrange
As for virtually all availability-based projects, leverage is initially high (18x range Net Debt/CFADS in the first operational year). The presented debt structure is fixed rate with no refinance risk. There is a 6 month tail on the PABs and two-year tail on the TIFIA loan. The expected covenant package is consistent with similarly rated transactions with debt service reserve funds equal to six months of debt service, and an equity lockup trigger of 1.15x.

Solid Coverage Ratios - Financial Metrics
The sponsor base case, which was adopted as the Fitch case, demonstrates minimum and average coverage of 1.22x. This case contains contingencies of 3% to O&M and 5% to lifecycle costs as well as another 2.5% allowance made in the O&M budget for unavailability and noncompliance risk which Fitch felt, after analysis and dialogue with the LTA, is sufficient to mitigate a likely downside scenario. Sensitivity and breakeven analysis suggests that the project should be able to withstand a considerable level of stress with respect to each of O&M (290%), O&M and overhead (130%), lifecycle (250%), and all costs (81%).

Peer Group
Fitch-rated availability payment comparables include I-69 Development Partners LLP (BBB/Stable) and WVB East End Partners (BBB/Stable). Both include similar average debt service coverage ratio profiles, cost breakevens, and construction security packages, providing adequate protection in the case of a contractor default.

RATING SENSITIVITIES

Negative:
--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;
--Significant payment deductions during construction and operations that reduce coverage levels well below current projections.

Positive:
--Successful completion and sustained operating performance above expectations

TRANSACTION SUMMARY
The debt will be issued to fund the development of an approximately 16-mile four lane, divided, untolled limited access highway, to be designated State Route 823, around the City of Portsmouth in Scioto County, Ohio, bypassing approximately 26 miles of US52 and US 23 (the project). ODOT entered into a concession agreement with the PGG to design, build, finance, operate, and maintain the project for an approximately 41-year term. ODOT will compensate PGG through an availability payment mechanism. Construction is estimated at approximately \$430 million with a construction period of approximately 44 months, followed by a 35-year operating period. ODOT will contribute two milestone payments of \$14.5 million each at 70% and 80% construction completion as well as a substantial completion payment of \$15 million.

The developer is Portsmouth Gateway Group, LLC, a special project vehicle consisting of equity members ACS Infrastructure Development, Inc. (40%), InfraRed Infrastructure III General Partner Limited acting in its capacity as general partner of each of InfraRed Infrastructure III (No. 1) LP and InfraRed Infrastructure III (No. 2) LP and InfraRed Infrastructure III (No. 4) LP and InfraRed Infrastructure III (No. 5) LP (40%), and Star America Fund GP LLC acting in its capacity as General Partner of Star America Infrastructure Fund, LP and Star America Infrastructure Fund Affiliates, LP (20%) for purposes of design, build, finance, operate and maintaining the project. Total equity is estimated at approximately \$49 million and will be supported by an acceptable letter of credit at financial close. Fitch was not provided with a non-consolidation opinion; however, there is no majority party with a greater than 50% share of the consortium.

The construction is relatively straightforward and standard and the project is not considered overly complex project or large in scale. There is no new technology involved in the construction or operation, and ITS is not applicable as the road is not tolled.

Construction will be performed by a joint venture of Dragados USA (50%), Beaver Excavating Company (30%), and John R Jurgensen (20%) (collectively, the DBJV). The obligations will be joint and several and a parent company guarantee will be provided by Dragados S.A. to Dragados USA. The construction security package further includes performance and payment bonds, each for 100% of the DB contract; a letter of credit equal to six percent of the DB contract with forward-looking step-up provisions for additional liquid security; a 40% limitation of liabilities under the DB contract; liquidated damages capped at 16% of the DB contract; and retainage. In addition, the contract has 8% soft costs, which includes contingency and profit. Fitch's internal assessment of the contractors combined with the completion security package does not constrain the rating at the current level. Fitch analyzed completion risk in this project consistent with the approach outlined in Fitch's 'Completion Risk in Project Finance' special report dated Oct. 13, 2013.

PGG will self-perform the operation and maintenance of the asset during the operating period eliminating some of the risk from subcontracting. PGG has vertically integrated the construction design with the O&M plan and can better maintain the long-term viability of the asset to minimize capex and handback requirements. Further, the equity members of PGG have vast experience self-performing O&M and the requirements are less than many other U.S. P3s given ODOT's share of retained responsibilities. ODOT will remain responsible for services such as snow removal, incident response, road weather information system, and energy which are all typically held by the SPV and can amount to a material portion of the O&M budget. PGG developed its budget based on experience, contacting local companies, and consulting with O&M consultants, Asset Management Associates. An additional three percent contingency was then included in the budget to provide some flexibility for cost overruns. A five percent contingency was included in the lifecycle costs budget as well.

Fitch has adopted the sponsor's base case as the Fitch case due in part to Fitch's comfort level with the project's construction, O&M, and lifecycle cost assumptions as result of its own analysis and extensive dialogue with the LTA. The project is relatively small and in a rural area with little traffic. Further, the project is greenfield and not overly complex. Following construction, the O&M is relatively straightforward with a limited scope compared to other P3s seen in the U.S. The results of the Fitch case (1.22x minimum and average DSCR) are in-line with coverages typically seen in the 'BBB' category for availability projects, given their lack of volume risk.

Fitch analyzed a number of loan life coverage ratio breakeven scenarios related to the proposed financial structure and considers the levels consistent with investment grade. When run on the adopted Fitch case, the model indicates the financial structure can withstand a 250% increase in lifecycle costs, 290% increase on O&M cost, 130% increase in O&M and overhead costs (SPV, insurance, financing related costs), or an 81% increase to all costs including O&M, lifecycle and overhead.

SECURITY
All debt will be secured by security interest in the borrower's right, title, and interest in the project. The long-term PABs will constitute as senior obligations of the concessionaire and along with the other senior obligations, will rank in priority to all unsecured obligations of the concessionaire. Obligations under the TIFIA loan will be secured by a second priority security interest in project revenues - subordinate only to the liens securing the senior obligations.