OREANDA-NEWS. Fitch Ratings has affirmed Red de Carreteras de Occidente, S.A.B. de C.V.'s (RCO) MXN7.5 billion senior secured notes at 'BBB'. The Rating Outlook is Stable. Fitch also has affirmed the 'AAA(mex)' ratings on the issuances placed in the local market in 2012 and 2014.

The affirmation reflects the FARAQ 1 project's resilient traffic base and its strategic location - connecting several major cities in the central part of the country - coupled with a mid-range debt structure. Rating case average debt service coverage ratio (DSCR) and loan life coverage ratio (LLCR) of 1.45x and 1.70x, respectively, are strong for the rating category according to Fitch's applicable criteria, constrained by a minimum DSCR of 1.22x. The project can withstand compounded traffic decreases of 1.5% before defaulting on its debt. Compared to toll road peer Concesionaria Mexiquense, S.A. de C.V. (Conmex), RCO has a stronger volume attribute, while Conmex's volume resists higher annual traffic decreases of -2.5%.

KEY RATING DRIVERS

--Diversified and Strategically Located Assets [Revenue Risk: Volume - Stronger]: The company's pool of toll roads is located in one of Mexico's most dynamic regions, which accounts for around 15% of national GDP. They are part of a system of trunk routes that serve major industrial centers and cities, and that connect the two largest cities in Mexico. Historical performance since the early 1990s has been positive and has been resilient to economic downturns, with only modest declines during the recent economic crises.

--Timely Toll Rate Increases [Revenue Risk: Price - Midrange]: Toll rates can be increased annually with inflation, while additional increases can be approved whenever Mexico's Consumer Price Index (CPI) exceeds 5% in a given year. We believe this feature is crucial, especially since a portion of the rated debt is linked to inflation. Tolls have historically been adjusted in a timely manner.

--Well-Maintained Infrastructure [Infrastructure Development & Renewal - Midrange]: The 470 miles of the six asphalt roads are in good physical condition having been upgraded under the terms of the concession agreement. Pursuant to the agreement, the company has to invest in two additional mandatory roadway and network improvements. One keeps the outstanding amount to invest in a separate trust, while the second will be financed with cash flow remaining after debt service. There is a five-month reserve fund for major maintenance.

--Standard Debt Structure [Debt Structure - Midrange]: All rated debt is pari passu and is structured in line with industry standards, as it includes a 12-month debt service reserve fund (DSRF), and tests to distribute excess cash if minimum coverage levels are not reached, among other things.

Metrics:
--Financial Resilience under Stress Conditions: Even under harsh scenarios, the debt service coverage profile is robust and growing. Fitch's base case resulted in a minimum DSCR of 1.29x that averages 1.59x from 2016 to 2028, and LLCR of 1.89x. Fitch's rating case resulted in a minimum DSCR of 1.22x that averages 1.45x from 2016 to 2028, and LLCR of 1.70x.

--Peers: RCO's debt is comparable to that of Conmex, rated 'BBB'/Stable Outlook. Conmex's shorter operating history and lack of diversification, which results in a midrange attribute for volume risk, is offset by its stronger credit metrics with a base case minimum DSCR at 1.79x compared with RCO's at 1.29x.

RATING SENSITIVITIES
--Positive: A positive rating action could take place if traffic and revenue show growth rates significantly higher than those assumed in Fitch's base case;
--Negative: Traffic growth below 2% over a prolonged period;
--Negative: Operating and major maintenance expenditures growing 10% above inflation for a prolonged period;
--Negative: Significantly higher capital costs in connection with mandatory roadway and network improvements;
--Negative: Fitch base case LLCR under 1.60x.

SUMMARY OF CREDIT
Debt is backed by the toll collection rights of four highways (collectively referred to as FARAC I), and by the cash distributions made by Concesionaria Irapuato La Piedad, S.A. de C.V. (CONIPSA) and Concesionaria de Vias de Irapuato Queretaro, S.A. de C.V. (COVIQSA). These last two are handled by separate trusts.

Fitch does not rate the bank loans taken with Banobras and Banco Inbursa, S.A., originated in October 2013 and August 2014, respectively. However, both loans are considered in Fitch's financial projections as they are part of the same class of pari passu senior debt as the rated instruments. When adding the outstanding balance of loans and securitizations, RCO's balance of senior debt as of March 2016 was MXN35.7 billion.

As of January 2016, the DSRF maintains its minimum balance required, while the balance required by the Major Maintenance Reserve Fund (MMRF) is kept through a credit facility that RCO contracted with Banco Santander in December 2014.

At the end of 2015, FARAC I's weighted average annual daily traffic (WAADT) was 11,159 vehicles, reflecting 7.0% growth compared to 2014. This was above Fitch's growth expectations (2.3%), mainly because traffic in the Maravatio-Zapotlanejo and Leon-Aguascalientes toll roads grew 8.2% and 9.1%, respectively. According to the operator, this growth is the result of a number of things, such as the improvement in safety levels in the state of Michoacan, the recent opening of the Leon-Salamanca highway, (which has increased traffic to RCO's highway) and the installation of a car factory in the state of Aguascalientes, which has contributed to improve the economic development of the region.

As in traffic, income was above projections, reaching MXN5,127 million, which represents an increase of 12.7% over 2014. This derived not only from the traffic performance, as previously mentioned, but also from the gradual change in traffic mix observed in the last years, which benefitted from an increase in heavy vehicles, which pay the highest tariffs. In 2011, 24.4% of vehicles passing along the four highways were trucks; in 2015 this percentage had increased to 29.3%.

As of January 2016, FARAC I's WAADT grew 9.2% with respect to the same period of 2015. Income amounted to MXN465.5 million, reflecting an increase of 12.2%.

The costs of operating and maintaining FARAC I stood at MXN817 million, higher than the MXN786 million expected by Fitch. However, this was fully offset by the income growth previously mentioned.

DSCRs for February 2015 and August 2015 were 1.56x and 1.49x, respectively, for an average of 1.53x, higher than the average coverage of 1.32x expected by Fitch.

Fitch's base case assumed a traffic compounded annual growth rate (CAGR) of 2.7% from 2016 to 2032. In addition, operating expenses were increased yearly at inflation plus 5%, while major maintenance was increased at inflation plus 5% above its respective maintenance program. Tariff lag was assumed at 5% with respect to Mexico's CPI for each year. Inflation was considered at 3.1% for 2016, 3.2% for 2017 and then fixed at 4% for the rest of the term.

Fitch's rating case assumed traffic CAGR of 1.7% from 2016 to 2032, tariff lag at 5% with respect to CPI, and 7.5% real increase to operating expenses and major maintenance.

Additionally, to reflect the behavior observed in the last five years, projected traffic mix was modified by Fitch.

Base case natural coverage ratios - not considering reserves or the partial guarantee - were 1.29x minimum and 1.59x average; under the rating case, the results are 1.22x minimum and 1.45x average. To avoid distortions arising from the high levels expected in the latter years of the projection, average coverage was calculated from 2016 to 2028. The LLCR base case yields 1.89x minimum and 1.70x average under the rating case.

Red de Carreteras de Occidente, S.A.B. de C.V. (RCO) is a company created in 2007 whose principal activity is to operate, maintain and preserve the aforementioned toll roads. In 2007, RCO was awarded a 34.5-year federal concession over a four-toll-road package known as 'FARAC I'. In September 2011, the company completed the acquisition of COVIQSA and CONIPSA. Currently, RCO is owned by GS Global Infrastructure Partners I, LP (70%), and several investors through Capital Development Certificates (30%).