OREANDA-NEWS. Fitch Ratings has affirmed Portuguese toll road operator Brisa Concessao Rodoviaria's (BCR) long- and short-term secured ratings at 'BBB' and 'F3', respectively. The Outlook is Stable.

The affirmation considers BCR's strong operating and financial performance in 2015. Traffic materially increased and leveraged remained substantially stable. The improvement of the company's liquidity position allowed BCR to prefund its bullet debt maturities until mid-2017. Under the rating case, the asset will progressively deleverage over the concession period.

BCR's credit profile is supported by a creditor-protective debt structure where an extensive set of financial covenants requires a progressive deleveraging of the asset over the concession period. In case of underperformance, distributions will mechanically adjust downwards due to the kick-in of lock-up triggers. The non-amortising debt structure, however, prevents a "stronger" assessment of debt attributes.

BCR is rated two notches above Portugal (BB+/Positive). This two notch gap considers the lack of exposure to the Portuguese banking system as well as BCR's volume-based revenue stream, which is fully independent from sovereign counterparty risk. The performance of assets during the past economic downturn, however, shows that Portugal's economic weakness had a knock-on effect on BCR's traffic. The company's exposure to the domestic economy prevents BCR's 'BBB' rating to be higher than two notches above the sovereign. Should Portugal be upgraded, Fitch may reassess BCR's credit rating.

KEY RATING DRIVERS
Volume Risk - Midrange
Traffic on BCR's network has significantly rebounded since 4Q13 following the sharp fall of around 25% from 2008 to 2013. The peak-to-trough volume change is one of the largest seen among European peers in Fitch's portfolio. BCR has now posted growth for eight consecutive quarters with 9M15 volumes increasing by 7.2%. This growth, which is largely above its European peers, has a base effect component but also reflects the stabilisation of country economic performances and domestic consumption. Under Fitch's revised rating case, traffic will increase in line with a 1.6% increase in GDP in 2016 and stabilise at 1.5% thereafter. Fitch considers BCR's toll rates as moderate relative to European peers at an average of 8.5euro cents per kilometre for light vehicles (VAT included) and demand is moderately elastic to toll increases.

Price Risk - Midrange
The expected traffic growth on BCR's network should be the primary source of revenue growth in 2016-2017 given the country's low inflation. The tariff framework allows BCR to recover 91.5% of inflation when positive and not apply the indexation when it is negative. The negative indexation will be passed onto the tariff only when inflation turns positive. This mechanism smooths the negative impact of a potential deflationary scenario. The attribute on price risk is assessed as midrange.

Infrastructure Renewal - Stronger
BCR operates under a concession agreement expiring in 2035, a network of motorways that together make up around 40% of Portugal's toll road network whose capacity is substantially above its medium traffic forecasts. It is part of the Brisa Auto-estradas Group, which has been in the business of constructing, operating and maintaining Portuguese toll roads for more than 40 years. The regulatory framework does not allow BCR to recover capex through the tariff mechanism, although we note that issuer capex plan predominantly comprises maintenance expenditures. Thorough understanding of its assets and demonstrated high level of capex flexibility support a stronger assessment of this attribute.

Debt Structure - Midrange
Fitch takes comfort from BCR's protective debt structure (70% fixed rate) that comprises extensive securities and a restrictive covenant package designed to progressively deleverage over the concession period. In case of traffic underperformance, distributions will mechanically adjust downwards due to the lock-up triggers. The structure proved effective during the recent economic downturn. Despite the dramatic 25% traffic contraction from 2008 to 2013, BCR reduced its net debt position by around EUR400m from end-2011 to 2014 due to zero dividend distributions and capex downsizing. BCR restarted making distributions in 2015 with payments totalling EUR334m, calibrating them to maintain leverage safely within the lock-up covenant triggers.

BCR's creditor-protective financial structure, however, does not in itself provide senior creditors with specific protection against the refinancing risk associated with the company's bullet maturities. In Fitch's analysis, which looks at committed lines extended by banks with sufficient credit quality to support BCR's rating, liquidity and short-term facilities in place cover debt maturities until mid-2017. This is under the assumption that future distributions will be sized to BCR's free cash flow or, if higher, will be funded with additional debt in order to preserve the current liquidity position. The attribute on debt structure is midrange.

Financial metrics
Fitch expects BCR's net debt-to-EBITDA leverage ratio to remain below 5.7x until 2017 and to progressively come down thereafter. Stresses for higher interest rates or lower volumes and/or inflation do not materially alter the expected deleveraging profile of BCR as the lock-up triggers pass on the financial pressure to shareholders by reducing distributions.

Peer Group
BCR is more leveraged than most of its European peers. However, most peers, including MSMT, Sias, Atlantia and Abertis, are financed on a traditional corporate-type basis while the security package and the restrictive covenant package embedded in BCR's debt offer stronger protection to creditors and underpin BCR's credit profile. BCR underperformed its peers over 2008-2013 but traffic growth in 2014 and 9M15 was largely above European toll road operators.

RATING SENSITIVITIES
Because the current rating is premised on the company's ability to maintain adequate liquidity to cover its bullet debt maturities, failure to fully pre-fund these maturities well in advance may result in a rating downgrade. A material traffic contraction with a knock-on impact on the expected deleveraging process could also result in a negative rating action.

Although there is no strict credit-link between BCR's ratings and those of the sovereign, BCR's exposure to the domestic economy could give rise to correlated movements in the two ratings. Fitch would likely downgrade BCR if the sovereign were downgraded because of economic deterioration. A positive rating action on Portugal may prompt a reassessment of BCR's current rating.

SUMMARY OF CREDIT
BCR is the concessionaire of the Brisa Group Main Concession, which is effectively the motorway backbone of Portugal. The concession, which has been in existence since 1972, was initially developed and operated by Brisa Auto-estradas de Portugal, SA (Brisa Holding), BCR's parent. The concession was transferred to BCR in December 2010 as part of the corporate restructuring that saw Brisa Holding also transfer its debt to BCR.