Ruta Al Mar Behind Schedule, Fitch Rates Concession’s Senior Secured Notes BBB-, Outlook Remains Negative

Fitch Ratings has affirmed the ‘BBB-‘ and ‘AA+(col)’ ratings of the UVR-denominated senior secured notes of P.A. Concesion Ruta al Mar for up to $522 billion COP, due in 2044. The Ratings Outlook remains negative.

Ratings Rationale

The Negative Outlook continues to reflect the project’s increased exposure to volume risk. Traffic levels in 2019 have improved with respect to 2018 volumes but are still below Fitch’s base case (BC) expectations and closer to Fitch’s rating case (RC). This, and the now expected delay in the project’s full completion of approximately two years versus the original schedule, increase the project’s dependence on significant growth once the traffic benefits from existing works are mostly captured. Fitch has updated its BC and RC assumptions to assume later ramp-up period, which will culminate in 2024 and, from then on, kept its respective original traffic volumes. Macroeconomic assumptions were also updated.

Key Ratings Drivers

The ratings reflect the project’s acceptable mitigation of completion and ramp-up risks, the latter related to the expected increase in long distance and commercial traffic. They also reflect a satisfactory rate-setting mechanism that allows for toll rates to be adjusted annually by inflation rate. Fitch views the project’s debt structure as adequate despite some back-loading and a bullet-payment structure for one of the senior tranches. Fitch also views positively the presence of prepayment mechanisms in scenarios of traffic underperformance or outperformance, according to certain thresholds. The outperformance mechanism also prevents the concession from ending before the debt is repaid in full. Financial metrics for Fitch’s Rating Case show a minimum loan life coverage ratio (LLCR) at 1.4x (2021), and maximum leverage, measured as net debt to cash flow available for debt service (CFADS) at 10.2x (2022); which assume a three-year ramp-up period starting in 2021 when the majority of the toll tranches have been delivered and the road will begin its operation & maintenance phase.

Completion Risk: Midrange: “Reasonably Mitigated”

Construction works are being performed by Construcciones El Condor (A-[col]/Negative) under a fixed-price date-certain engineering, procurement and construction (EPC) contract. The works comprise the construction of short road stretches and minor bridges, and the improvement of existing roads. Fitch views the complexity of the construction works as low and without a critical path. According to the independent engineer, the EPC contractor has the experience and the ability to successfully develop the project. The budget is adequate and includes contingency levels that are in the middle range compared with similar projects. The sizes of the performance bond and the retention provision of 15.8% and 5.0% of the EPC contract price, respectively, are sufficient to cover cost overruns should the EPC contractor need to be replaced.

Volume Risk: Midrange, “Ramp-Up Risk Present”

Currently, the road is non-continuous and crosses several small cities with 65% of its traffic composed of light vehicles. It is mainly used for short and medium-distance trips. Upon completion, the traffic consultant, Steer Davies Gleave (SDG), expects long distance trips to increase substantially and a surge in heavy vehicle traffic. The project is expected to become the preferred option versus the two existing competing roads because of the time and cost savings.

Price Risk: Midrange, Toll Tariffs Adjusted by Inflation

Tariffs are legally adjusted by inflation on an annual basis according to the concession agreement. Toll rates are moderate, and differential tariffs are being applied by the government to specific vehicle categories on some of the toll stations.

Infrastructure Development/Renewal: Midrange

The project depends on a moderately developed capital and maintenance plan funded from project cash flows only. The plan is to be implemented by the EPC contractor in the construction phase and by the concessionaire in the O&M phase. The independent engineer believes the concessionaire has the experience and the ability to successfully operate the project. The O&M plan, organizational structure and budget are reasonable and in line with similar projects in Colombia. The structure includes a dynamic six-month, forward-looking O&M reserve equal to the O&M costs projected to be incurred during the next six months and a dynamic major maintenance reserve account equivalent to the maximum six-month major maintenance payment amount scheduled for the next 60 months.

Debt Structure: Midrange, Adequate Debt Structure

All debt is senior pari passu and is denominated either in UVR or COP; all of the tranches are fully amortizing but one, which has a bullet payment structure. Interest payments for all tranches are indexed to inflation. The custom amortization profile is back-loaded with over 50% of repayments for all tranches concentrated on the last four years of their respective debt tenors. Structural features include a six-month principal and interest prefunded debt service reserve account, a lock-up test for dividends distribution, and mechanisms that are triggered in scenarios in which traffic performance is either significantly higher or lower than expected.

Financial Summary

Fitch’s rating case minimum LLCR is 1.4x (in 2021), and the maximum net debt/CFADS is 10.2x (in 2022). These metrics assume a traffic recovery period once the construction work is over and the toll road operates normally.

 Peer Group

Ruta al Mar is comparable with Mexico’s Red de Carreteras de Occidente (RCO; BBB/Stable). Although both projects have a similar mix of light and heavy vehicle traffic, RCO’s characterization as a road network makes it a more diversified and stronger asset characterized by lower volume risk. Both projects share price, infrastructure development and renewal and debt risk characteristics. The absence of completion risk coupled with stronger coverage metrics and lower leverage are supportive of RCO’s higher rating.

Developments That May, Individually or Collectively, Lead to Positive Rating Action:

A rating upgrade seems unlikely in the near future; however, Fitch may consider to return the ratings to a Stable Outlook if:

• The project shows a traffic growth for 2020 of 6% or higher;
• Construction work is completed ahead or at schedule allowing for an earlier-than-expected ramp-up period.
• Developments That May, Individually or Collectively, Lead to Negative Rating Action:
• Next year’s traffic growth below 6%;
• Unexpected completion difficulties leading to delays and cost overruns beyond those already contemplated in Fitch’s scenarios, which could materially affect the project’s liquidity position.

Transaction Summary

Ruta al Mar is a public-private partnership (PPP) concession based on a private initiative. The main purpose of the project is to develop a primary route with high performance specifications to ensure the Antioquia-Bolivar connection and link the center and south of the country with the northern coast. The project consists of the construction, improvement and operation of a 491km long toll road located in Antioquia, Cordoba, Sucre and Bolivar, in Colombia.

The concession has a term of 34 years, with a maximum extension of six years and nine months more depending on reaching the net present values of the revenues established in the concession agreement. The road is currently in the construction phase, and construction work is expected to be completed in 2021, with 25-30 years of O&M to follow.

Credit Update

As of August 2019, the project is behind schedule by 18.2%, with a total cumulative progress of 37.1% versus a planned progress of 55.3%. The Independent Engineer (IE) highlights that these values do not include the construction progress in Functional Unit (UF) 7.3 and the engineering, utility relocations, plot, environmental and social compensations works’ progress in UF7 due to a series of Liability Exculpatory Events (EER) around this UF. Notwithstanding the latter, the works related to UF 7.3 are already paid and the construction progress is at 59.01%.

As for each of the other project’s UFs, on Sept. 24, 2019 the Act of Termination in UF1 was signed. The IE notes that there are still some comments to be closed and right of way (RoW) liberation has not been finished. The construction progress for UF2 is 16.5%, which represents a 4.9% delay. However, no major issues have been reported for this UF, and the IE expects the construction work to be finished by the updated deadline of November 2020. In June 2019, Partial Termination Certificates for UFs 3.1, 3.2, 3.3 and 3.4 were signed, although they showed some observations yet to be addressed. Notwithstanding these observations, the concessionaire did not comply with the concession agreement end date in UF3.5 for August 2019 due to RoW problems. Yet, it subscribed a new Liability Exculpatory Event (LEE) due to RoW difficulties on Aug. 7, 2019, which was granted on Nov. 13, 2019, extending the end date of this UF.

Regarding UF 6.1, the EPC contractor is behind of schedule by 8.4% with a total cumulative progress of 6.7% versus a planned progress of 15.1%. Similarly, for UF 6.2 there is a 5% delay with a cumulative progress of 6.7% versus the expected 15.1%. The IE considers that given the early phase of the construction stage the contractor has enough time to recover the delays and to comply with the set for November 2020.

As for UF7, UF 7.1 has not complied with the required preceding conditions to begin construction due to environmental issues. For UF 7.2, the building of a bypass in Covenas was agreed upon, and, as such, the concession agreement end date for this UF has been extended to December 2022. UF 7.3 has a delay of 9.7% which a cumulative progress of 52.4% versus the expected 62.0%. The concessionaire has not met the requirements for this UF to be eligible for disbursements according to the Environmental Management Plan Approval, of the Credit Agreement. However, a six-months waiver was signed in order to be able to disburse monies for this UF. An amendment to the concession agreement was signed in Jun 2019, and the end date for the construction works was modified to July 2021. Finally, both UF 8.2 and 8.3 are ahead of schedule; while the IE opines that the delays UF 8.1 is facing could be recovered in order to deliver the entire UF on time.

Traffic performance showed a positive trend since April 2019 followed by the relocation of the El Purgatorio toll booth; capturing all the vehicles that used to avoid paying the toll rates. Up to September 2019, traffic grew 7% when compared with the same period of 2018. However, the traffic recovery came after a drop of 2.3% in 2018, which makes the project more dependent on favorable traffic performance in order to keep the same metrics related to its debt service.

The toll booths of El Purgatorio, Manguitos and La Apartada continue to represent approximately two-thirds of total traffic. The San Carlos toll booth, opened in February 2019, experienced a short ramp-up period and it is now showing more stable growth rates of around 2%-3%.

Financial Analysis

Fitch’s base case and rating case assumptions and financial metrics are as follows:

• Inflation Rate: 2019: 3.2%; 2020: 3.2%; 2021: 3.1%; 2022 onwards: 3.0%/year (BC & RC)
• Traffic CAGR 2019-2023: 8.4% (BC); 8.0% (RC)
• Opex: +5.0% (BC); +7.5% (RC)
• Major Maintenance: +5.0% (BC); +7.5% (RC)
• Construction delay reflecting the most recent expectations
• Performance Ratio: 99.0% (BC); 98.5% (RC)

Credit Metrics

• Minimum LLCR: 1.5x (BC) 1.4x (RC)
• Net debt to CFADS: 9.6x (BC) 10.2x (RC)

 Security

The notes are secured on a pari passu basis with all the other secured obligations. The collateral constitutes substantially all of the assets of the issuer, including certain reserve accounts, pledges of rights and stock, shareholder equity contributions, including stand-by letters of credit or other acceptable support instruments securing the equity contributions, assignments of revenues, the concession trust (other than certain sub-accounts of the concession trust, which are only for the benefit of ANI) and the transaction trust.

 ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.