Fitch Assigns Expected Ratings to ITR Concession Company LLC's Senior Debt
--Proposed \$1 billion notes, series A-D;
--Outstanding \$700 million private placement notes;
--Outstanding \$829 million acquisition term loan facility; and
--Outstanding \$329 million capex facility.
The Rating Outlook on all debt instruments is Stable.
The proposed senior notes are being issued to partially refinance ITRCC's acquisition term loan facility and fully refinance its acquisition bridge loan facility. The loan facilities, combined with the private placement notes and equity, were used to wholly acquire the remaining concession term interest of the Indiana Toll Road (ITR) concession and lease agreement (CLA).
The rating reflects a stable, monopolistic asset that serves as a vital route for both commercial and passenger traffic. Traffic has shown resilience despite toll increases and economic shocks while the tolling framework affords for considerable rate-making flexibility. The relatively stable, mature operating profile and long concession term allow for relatively high leverage compared with investment grade peers and, when coupled with debt covenants, partially mitigate potential refinance or economic stress risk. The 2.25% total revenue growth rate breakeven, reflecting Fitch's conservative refinancing assumptions, demonstrates resilience to low traffic and revenue growth scenarios.
KEY RATING DRIVERS
Critical Midwest Corridor - Volume Risk: Stronger
ITR serves as the primary route for commercial freight traffic, connecting Chicago, IL with the East Coast, forming an integral part of the country's interstate highway network. It faces no material direct competition and is contractually protected against improvements or upgrades to nearby alternatives. The road has a long, demonstrated record of traffic and revenue growth with moderate volatility.
Moderate Rate-Making Flexibility - Price Risk: Midrange
The concession agreement provides a relatively generous toll increase framework and flexibility in how increases may be applied on various sections of the road. While currently low relative to peers, Fitch expects ITRCC to take advantage of the tolling flexibility and rates to grow relative to peers over time. Recent performance has indicated moderate elasticity to increases.
Adequate Condition, Debt-Funded Plan - Infrastructure Development & Renewal: Midrange
ITR's condition is adequate for its age and comparable to similar highways within the Midwest. ITRCC's lifecycle cost approach is reasonable at \$2.77 billion (in 2014 dollars), funded by additional debt; however, future capital outlays may be larger given the condition of the asset.
Bullet Structure, Adequate Covenants - Debt Structure: Midrange
Moderate refinance risk exists with the bullet maturities. Six-month reserve and covenant package are considered adequate. A restriction on additional debt, if it would result in leverage exceeding 12.5x, provides significant comfort.
Elevated Leverage, Ample Coverage - Financial Metrics
Initial leverage is high at 13x. Fitch's rating case refinancing risk analysis yields an average coverage of 1.6x, reflecting refinancing of initial bullet maturities in to an amortizing structure assuming a stressed interest rate, and indicating that refinancing risk is not a constraint on a 'BBB'-category rating.
Peer Group
ITR's traffic and volume characteristics are generally in line with Pennsylvania Turnpike Commission (PTC, 'A+/A-'/Outlook Stable) and Ohio Turnpike and Infrastructure Commission (OTIC, 'AA/A+'/Outlook Stable). Other global peers include Autoroute Paris-Rhin-Rhone (APRR, 'BBB+'/Outlook Stable) and Atlantia SpA (Atlantia, 'A-'/Outlook Stable) both of which are privately owned concessionaires employing bullet-bond debt structures.
RATING SENSITIVITIES
Negative - Traffic Underperformance: Annual commercial traffic growth lower than 1% for a prolonged period that leads to lower revenue growth than reflected in Fitch's rating case;
Negative - High Price Elasticity: Higher-than-anticipated elasticity to toll increases could pressure the concessionaire's ability to increase future tolls;
Negative - High Capex: A significant level of deferred maintenance, or capex higher than anticipated over a sustained basis, could lead to lower-than-expected EBITDA;
Negative/Positive - High Leverage: Inability to manage net debt/EBITDA down to a stabilized level of 12x or lower over the first four to five years could put the current rating under pressure, while a demonstrated stabilization of leverage below 8x could lead to an upgrade.
TRANSACTION SUMMARY
On Sept. 4, 2014, ITRCC, a group of secured creditors and equity sponsors executed a restructuring support agreement pursuant to which the parties agreed to support confirmation of a 'pre-packaged' Chapter 11 plan contemplating a sale of ITRCC or, in the absence of such a sale, an agreed-upon recapitalization transaction. IFM Investors Pty Ltd (IFM) was selected as the preferred bidder and completed its acquisition of ITRCC upon emergence from Chapter 11 with financial close being reached on May 27, 2015. ITRCC is now issuing the proposed senior notes in order to refinance \$440 million of its \$1.27 billion acquisition term loan facility and fully refinance its \$551 million acquisition bridge loan facility. The loan facilities, combined with the private placement notes and \$3.33 billion of equity, were used to wholly acquire the remaining concession term interest of the CLA for \$5.73 billion. The CLA remains in place following the sale, and IFM, as the new operator, will be subject to the same operational standards set forth by the Indiana Finance Authority in the CLA. Commensurate with the restructuring and financial close, ITRCC's prior debt obligations were annulled, and it will now operate under a new, clean capital structure. Pricing for the senior notes is expected mid-July.
Originally opened to traffic in 1956, ITR is a 157-mile highway that runs east-west across northern Indiana, forming an integral part of the U.S. interstate highway network, connecting the Chicago Skyway in the west to the Ohio Turnpike in the east. It serves as the critical road transportation link connecting population and industrial centers in the Midwest with the major East Coast population and production centers as well as ports. ITR consists of two major segments: the 24-mile barrier system at the extreme western end of the road and the 133-mile ticket system that runs through the rural eastern portion. The western segment adjoining the Chicago Skyway and Illinois state line operates using a barrier toll collection system and predominantly carries commuter traffic, while the eastern segment adjoining the Ohio Turnpike predominantly serves long-distance commercial traffic.
ITR benefits from a broad mix of heavy and light vehicle traffic, as well as a diverse user base of commuters, commercial drivers and other travelers. Fitch believes the macroeconomic climate in the region will favor modest growth for traffic in the Midwest to Northeast corridor over the medium term. Historically, interstate-heavy vehicle traffic closely tracked U.S. GDP growth rates, and to a lesser extent employment growth. With heavy vehicles restricted in their use of smaller alternative routes, traffic levels on ITR would benefit from growing freight movements, supporting Fitch's view of moderate growth prospects.
ITRCC has two main revenue streams: toll revenues and concession revenues. Over the past 30 years, ITR has seen revenue grow at an average rate of 1.3x U.S. GDP, or a compounded annual growth rate (CAGR) of 6%. Since the implementation of the private operation and the CLA toll mechanism in 2006, revenue has grown at a rate of 1.7x U.S. GDP, or a CAGR of 4.5%. In Fitch's view, ITR displays resilient revenue performance despite traffic stresses, as demonstrated by this recent revenue growth through the recession as well as prior-decade CAGRs of no less than 4% back to 1960.
The 75-year concession agreement, entered into in 2006, is considered by Fitch to be relatively concessionaire-friendly, with performance standards not governed by an onerous penalty regime, and with a tariff increase mechanism that allows for considerably more flexibility than similar mechanisms in other toll road concessions in Fitch's rated global toll roads portfolio. In particular, Fitch notes the relative generosity of the tariff mechanism that allows for the cost of a full-length journey to be increased by the greater of the percentage change in nominal GDP per capita, the percentage change in CPI, or 2%, with increases applied in any one section of the road not to exceed three times the lowest increase applied in any sections in any given year. ITR's toll rates are currently \$0.06/mile for autos (\$0.03/mile for auto electronic toll collection [ETC] through June 30, 2016) and \$0.25/mile for trucks, representing \$10.00 for an auto through trip (\$4.65 for auto ETC through June 30, 2016) and approximately \$39.70 for trucks. These rates, eight years into the CLA, are still at the lower range of ITR's peer group, and analysis suggests that, even considering its relative flexibility, ITR's tolls should remain generally in line with most of its peers over the next three decades. In Fitch's view, current toll rates combined with the pricing mechanism gives ITRCC considerable rate-making flexibility.
Structural features are relatively standard and are consistent with other projects within Fitch's portfolio at this rating level. The six-month reserve fund is considered adequate and the bank facility cash sweep partially mitigates its refinancing risk. Furthermore, covenants included to protect creditors, such as the 1.30x lock-up test and 1.30x additional bonds test, which includes rating reaffirmation and leverage limits, are considered reasonably restrictive and provide some benefit to the debt structure. Of particular note is the covenant within the private placement note purchase agreement restricting additional debt (excluding capital expenditure facility draws and the refinancing of such draws) if it would result in net debt/EBITDA exceeding 12.5x - in Fitch's view, this provides significant comfort with ITRCC's future leverage profile due to the 40 year tenor of the private placement notes as all pari passu debt must accede to the intercreditor agreement.
In order to assess refinancing risk and the affordability of such debt in its cases, Fitch assumes bullet maturities included in the rated structure are refinanced as 25-year amortizing notes with level debt service, incorporating an interest rate of 8%, reflective of stressed market conditions at the time of refinancing in order to assess the project's ability to repay its obligations well inside the concession term. Over a 40 year projection period, Fitch's rating case assumed 4% annual toll revenue growth (reflecting around 2.5% nominal GDP growth per capita and around 0.5% traffic growth). Fitch's long-term CPI assumption is 2% with a cost inflation assumption of CPI + 1% applied to the sponsor's opex and capex profiles. The projected average theoretical refinancing coverage ratio over this period is 1.6x, while LLCR is calculated to be approximately 1.9x. Net debt/EBITDA in the first full operating year is 13.5x before evolving down closer to 11x within the first five years. Furthermore, in order for the project to maintain at least 1.0x coverage after depleting all available reserves, ITRCC would only require a 2.25% total revenue growth rate - a scenario probably more conservative than one involving no traffic growth and allowed-for toll increases at the floor level of 2% over the entire project life - demonstrating the resilience of the debt structure.
In Fitch's view, initial leverage is high, and the assigned rating reflects the expectation of develeraging over the next 3-5 years to within 12x net debt/EBITDA, consistent with Fitch's criteria. Should the operating environment or management decisions result in such deleveraging not taking place, the assigned rating could come under some pressure.
SECURITY
The obligations of the borrower in respect to the senior loans, the interest-rate hedges, additional senior indebtedness, permitted refinancings and all other senior debt permitted to be secured will rank and be secured on a pari passu basis with each other and will be secured by a perfected first-priority lien in and over the collateral permitted by the concession agreement, including a perfected first-priority lien on the holding company's membership interest in the borrower. Each senior lender and each hedge provider will have full recourse to the borrower and to all of its assets for the liabilities of the borrower. The collateral includes the borrower's interest in the leasehold mortgage pledged to the collateral agent.
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