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 AAA(mex) ratings on the issuances placed in the local market in 2012 and 2014.

The rating affirmation reflects the project's resilient cash flow performance, coupled with the elimination of the refinancing risk present until December 2014 when RCO 14 was issued. The rating is also supported by the asset's strength and diversification, its strategic location - connecting several major cities in the central part of the country, and by its solid expected coverage ratios illustrated by a loan life coverage ratio (LLCR) of 1.78x under Fitch's base case.

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.

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 the diversified 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, experiencing 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. 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]: The 2014 issuance ended with RCO's refinancing plan which started in 2012. All debt is pari passu and has a structure which is 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 others.

--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 debt service coverage ratio (DSCR) of 1.26x that averages 1.57x from 2015 to 2028, and LLCR of 1.78x. Fitch's rating case resulted in a minimum DSCR of 1.15x that averages 1.38x from 2015 to 2028, and LLCR of 1.55x.

--PEERS: RCO's debt is comparable to that of Concesionaria Mexiquense, S.A. de C.V. (Conmex), rated 'BBB' with a Stable Outlook by Fitch. The different rating derives from Conmex's shorter operating history and lack of diversification as it is a single asset, which results in a midrange attribute for volume risk, while RCO's assessment is stronger. Both transactions have midrange attributes for price and infrastructure development and renewal. Conmex has a stronger debt structure than RCO; however, both maintain similar Debt/EBITDA ratios at 7.93x vs. 8.09x for RCO and Conmex, respectively.

RATING SENSITIVITIES

--Positive: Unlikely in the short term given the notes' recent upgrade. In the medium term a positive rating action could take place if traffic and revenue grow significantly and consistently over Fitch' base case;
--Negative: Traffic growth expectations of 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 under 1.60x.

CREDIT UPDATE

Fitch rates RCO 12 and RCO12U issued in the local market in September 2012, the June 2013 issuance placed in the international markets, and RCO 14, issued in the local market in December 2014. Fitch does not rate 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 2015 was MXN34.9 billion.

The debt has structural protections which include a DSRF that maintains 12 months of principal and interest, a Major Maintenance Reserve Fund (MMRF) of five months, and prohibitions to distribute excess cash if: i) DSCR for the last and next 12 months is below 1.25x, or ii) there is a default event.

As of February 2015, the DSRF maintains its minimum balance required, while the balance required by the MMRF is kept through a credit facility that RCO contracted in December 2014 with Banco Santander.

At the end of 2014, weighted average annual daily traffic (WAADT) of FARAC I was 10,426 vehicles, reflecting 2.1% growth compared to 2013. However, it was slightly below Fitch's growth expectations (2.4%), mainly because traffic in the Maravatio-Zapotalenjo toll road decreased 1.2%. Security issues in the State of Michoacan was the principal reason for the deceleration.

Despite actual traffic growth that was below Fitch's expectations, income was above projections, reaching MXN4,551 million, which represents an increase of 13.5% over 2013. The growth was generally derived from a toll rate increase effective in 2014 coupled with a change in traffic mix, which benefited from an increase of heavy vehicles, which pay the highest rates.

As of February 2015, WAADT of FARAC I reached 10,583 vehicles, representing an increase of 4.9% with respect to the same period of 2014. Income amounted to MXN781 million, reflecting an increase of 12.7%.

The costs of operating and maintaining FARAC I stood at MXN937 million, up from the MXN805 million expected by Fitch. This was mainly due to a non-recurring expense relating to the termination of the operating contract with ICA.

DSCR for August 2014 and February 2015 was 1.23x and 1.57x, respectively, representing an average of 1.40x, higher than the average coverage of 1.30x expected by Fitch.

Fitch's base case assumed a traffic compounded annual growth rate (CAGR) of 2.7% from 2015 to 2037. Additionally, operating expenses were increased yearly at inflation plus 5%, while major maintenance was increased at inflation plus 5% above its respective program. Tariff lag was assumed at 5% with respect to Mexico's CPI for each year. Inflation was fixed at 4%.

The stress case assumed traffic CAGR of 1.8% from 2015 to 2037, tariff lag at 5% with respect to CPI, and 7.5% real increase to operating expenses and major maintenance.

Base case natural coverage ratios - not considering reserves or the partial guarantee - include 1.26x minimum and 1.57x average; under the stress case, the results are 1.15x minimum and 1.38x average. To avoid distortions arising from the high levels expected in the latter years of the projection, the average coverage was calculated from 2015 to 2028. The LLCR base case yields 1.78x and 1.55x under a stress 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, preserve and exploit the aforementioned toll roads. In 2007, RCO was awarded a 30-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%).