OREANDA-NEWS. Fitch Ratings has downgraded the Indiana Finance Authority's private activity bonds (PABs) issued on behalf of I-69 Development Partners LLC (I-69 DP) for the I-69 Section 5 project to 'BBB-'. Fitch has also placed the bonds on Rating Watch Negative.

The downgrade reflects the deteriorating credit quality of Isolux Corsan SA (Isolux), parent of the construction contractor, Corsan-Corviam Construccion SA, whose rating was revised to 'B-'/Rating Watch Negative on Feb. 12, 2016. This followed an earlier downgrade of Isolux on Dec. 7, 2015 to 'B'/Rating Watch Negative.

The downgrade further reflects a projected eight month delay to substantial completion, initially expected in October 2016, which was disclosed in the most recent construction update published in March 2016. In Fitch's opinion the material delay in substantial completion implies a greater exposure to the credit quality of the construction guarantor. The Rating Watch Negative on the PABs reflects the Rating Watch Negative on the construction guarantor's ratings. Fitch believes, based on all information it has received, that the revised substantial completion date of June 28, 2017 is achievable given that all material permits have now been approved.

KEY RATING DRIVERS
Deteriorating Guarantor Credit Quality Mitigated (Completion Risk: Midrange): The credit quality of the Design Build Contractor (Isolux Corsan LLC)'s guarantor, Corsan-Corviam Construccion S.A. (Corsan Corviam), an experienced Spanish construction firm with an 80-year track-record, and main subsidiary of Isolux ('B-'/Rating Watch Negative) has deteriorated significantly in recent months. Nevertheless, the project's robust performance security package combined with the remaining four month tail from the revised substantial completion date to the longstop date (after realized delays have been taken into account) should be adequate to ensure the project is completed, even in adverse scenarios including one involving a contractor replacement. Fitch understands that the primary causes of delays have now been addressed and that progress is in line with the revised schedule.

Strong Counterparty, Clear Payment Mechanism (Revenue Risk: Stronger): Milestone and availability payments during the project are made by Indiana Finance Authority (IFA, or the grantor), and Fitch currently rates such counterparty obligations 'AA'/Outlook Stable. Indexation of 20% of periodic availability payments to the Consumer Price Index (CPI), with remaining 80% escalated at 2.5% per annum, hedges inflationary operating and lifecycle costs. The payment mechanism is in line with peers - the lender's technical adviser (LTA) has opined that non-compliance event cure periods should ensure minimal deductions.

Straightforward Operations, Handback Risk Well Managed (Cost Risk: Midrange): The project company will self-perform most operation and maintenance (O&M) activities, exposing it to O&M and lifecycle cost risk over the project life. O&M works are generally considered relatively straightforward given the limited scope of the project. The major maintenance reserve account (MMRA) and handback requirements reserve account (HBRA) are both designed such that major works should be anticipated from a funding perspective several years ahead of incurrence. The project's cost profile is significantly backended, with a large part of lifecycle works anticipated during the handback period; however, since final debt maturity is five years prior to concession maturity, bondholders are not exposed to handback risk.

Conservative Debt Structure (Debt Structure - Midrange): Structural features, including the fixed interest rate payable, full amortization, 1.15x dividend lock-up and debt service reserve account (DSRA), provide bondholders with protection against adverse developments over the project life. The DSRA is sized at six-month's debt service, which is at the tighter end of projects in Fitch's rated portfolio, constraining the risk factor assessment.

Metrics Indicate Financial Resilience: Fitch base and rating cases reflect debt service coverage ratio (DSCR) profiles consistent with a 'BBB' rating post construction, averaging above 1.50x and falling no lower than 1.22x. The prolonged period of low coverage during the middle of the concession term is mitigated by the fixed nature of principal amortization, which largely drives low coverage during that period, as supported by breakeven analysis.

Peer Analysis: The project's closest peer is WVB Partners, which also features IFA as grantor/issuer and a similar contractual framework; while WVB Partners features a stronger construction JV, works are considered materially more complicated and, furthermore, I-69 features a stronger performance security package. Delays have been experienced on both projects, although issues during construction appear to be more acute for I-69. Minimum DSCRs between the two projects are comparable, while I-69 demonstrates stronger average.

RATING SENSITIVITIES
Negative - Contractor Credit Quality Deterioration: A default of the DB contractor or further deterioration of the credit quality of the construction guarantor, resulting in substantial cost increases or delays being experienced by the project, or construction delays beyond scheduled substantial completion and anticipated final acceptance dates would also result in further downgrade.

Negative - Further delays: Additional delays experienced that jeopardize the likelihood of meeting the revised substantial completion date of June 28, 2017 would result in a further downgrade.

Negative - Operational Underperformance: Significant sustained payment deductions being levied against the project company, or materially higher costs during the operating period than currently forecast, either of which reducing coverage levels well below current projections, would also place the rating under some pressure.

Positive - Unlikely During Construction Period: Positive rating migration during construction is highly unlikely given completion risk issues facing the project. If the project is successfully completed, positive rating migration back to its previous level will likely occur assuming no material change to the project's operating profile.

SUMMARY OF CREDIT
Since Fitch's last review, I-69 DP has disclosed significant construction delays. In the January 2016 construction update published March 3, 2016, it was stated that it will not be realistically possible to meet the current substantial completion date of Oct. 31, 2016 and that I-69 DP, IFA and design-build contractor had agreed to a revised substantial completion date of June 28, 2017, reflecting an eight-month delay to the original substantial completion date and just four months ahead of the project's longstop completion date.

Reasons for the construction delays primarily relate to obtaining necessary rail road permits as well as the updating and modification of 404 other permits required for works at multiple locations. Such permitting issues have held up construction start as well as the flow of the work. Fitch understands that all material permits relating to the project have now been received and that construction is progressing in accordance with the revised schedule. They also reflect geotechnical issues faced by the project at two sites as a result of the discovery of unexpected karst features, for which Fitch understands the project company has requested a relief event.

According to the project company, construction is progressing in line with the revised schedule, and it was possible for some works to be progressed during the winter. Assuming the schedule is met, at the start of 2016/17 winter, remaining works will primarily relate to paving, striping and signage work - while such works can't progress during winter months, Fitch views such works as being relatively straightforward and would not expect them to be the source of any additional delays during 2017. Importantly, remaining earthworks and most remaining structural work should be completed before the start of winter 2016/17.

On Feb. 12, 2016, Fitch revised Isolux's Issuer Default Rating to 'B-', maintaining the Rating Watch Negative since the prior downgrade from 'B+'/ Outlook Negative to 'B' / Rating Watch Negative on Dec. 7, 2015. Isolux is the parent of Corsan Corviam Construccion, SA, which provides a parent guarantee to the project's design-build contractor, Isolux-Corsan LLC. Whereas, with respect to the I-69 DP rating, to Fitch took the view that the limited remaining term to substantial completion in October 2016 (which it understood was still achievable) implied limited exposure to the construction guarantor's deteriorating credit quality. However, in light of delays, Fitch considers exposure to the construction guarantor to have materially increased.

Fitch will closely monitor further progress on the project, as well as developments relating to the credit quality of Isolux.