TEXT-S&P places CountyRoute (A130) rtgs on creditwatch negative

Fri Jan 11, 2013 9:34am EST

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Jan 11 -

Overview

-- We recently received further information with respect to revised timing and amounts of future major maintenance expenditure for the A130 road managed by U.K.-based concessionaire CountyRoute (A130) PLC.

-- We understand that CountyRoute's forecast major maintenance expenditure has been reprofiled and increased by GBP2 million, or approximately 7.7%. We anticipate that, even if a solution is found to address the impact of this on the project's liquidity, it may have a negative effect on the project's debt service coverage ratios.

-- We are therefore placing on CreditWatch with negative implications the long-term issue ratings on each of the senior secured and subordinated secured bank loans issued by CountyRoute.

-- We aim to resolve the CreditWatch placement on receipt of an updated financial model containing further details of CountyRoute's revised forecast major maintenance expenditure and how this will be funded.

Rating Action

On Jan. 11, 2013, Standard & Poor's Ratings Services placed on CreditWatch with negative implications its 'BB-' long-term issue rating on the GBP88 million senior secured bank loan, due 2026, and its 'B-' long-term issue rating on the GBP5.5 million subordinated secured mezzanine bank loan, also due 2026, both issued by U.K.-based concessionaire CountyRoute (A130) PLC.

Rationale

The CreditWatch negative placement follows CountyRoute's recent revision of its forecast of major maintenance expenditure requirements following analysis performed by the project's technical adviser (TA) on the condition of the current road surface and its expected deterioration rate. Although the TA has stated that the road surface is in reasonable condition after approximately 10 years in service, it believes that future performance will be poorer than envisaged. In addition, the TA has stated that reconstruction works will be required in order to achieve the specified minimum requirements at the end of the current concession in January 2030. Consequently, CountyRoute's forecast major maintenance expenditure amounts have increased by GBP2 million, or approximately 7.7%, over the remainder of the concession. A large proportion of this expenditure is now forecast to be incurred from 2021 to 2023.

We understand that the combined impact of the increased amounts and reprofiled timing on the project's liquidity is potentially significant. CountyRoute and its shareholder are currently negotiating a funding solution with the project's financiers. Although the outcome is not yet known, we believe that, even if a solution is found to address the impact on the project's liquidity, the increased major maintenance expenditure may have a negative effect on the project's debt service coverage ratios.

In addition, the trend in traffic volumes on the A130 road has been negative over the course of 2012, although its effect on project cash flows is not as significant as that of the revised forecast major maintenance expenditure. For the year to the end of December 2012, total traffic volumes were down by 2.1% for the northern section of the project road and by 3.3% for the southern section compared with the same period in 2011. At least some of this decline in traffic was caused by road works (not related to the project) adjoining the southern end of the road early in 2012. Due to some continuing traffic management measures that have affected traffic volumes on the project road, there has not been sufficient time to establish whether traffic has recovered or not since these road works ended.

CountyRoute is a special-purpose, bankruptcy-remote entity wholly owned by John Laing Infrastructure Ltd. (not rated). Under a 30-year concession granted by Essex County Council in 1999, CountyRoute operates the A130, a 15-kilometer road from Chelmsford to Basildon in southeastern England. The road's construction was completed in 2003. The present financing was executed in 2004 to refinance the original debt package after actual traffic volumes were 25% lower than the original forecast.

The ratings reflect the exposure of one-half of the project's revenues to traffic risk through the shadow toll payment mechanism; the uncertainty related to the risk that the actual major maintenance costs over the 30-year concession may exceed those forecast currently; and the project's aggressive financial structure, demonstrated by the relatively low senior annual debt service coverage ratios (ADSCRs). Certain protections available to the senior debt, such as a mezzanine lockup, increase the risk of untimely debt service of the mezzanine debt, in our view.

The ratings are supported by the successful operation of the road to date, with no penalty points or unavailability deductions; the project's positive relationship with the council as offtaker; and the positive experience of the project sponsor, John Laing Infrastructure. Furthermore, both tranches of debt benefit from typical protections such as debt service reserve accounts and distribution restrictions.

CreditWatch

The CreditWatch negative placement reflects our view of the potential impact on the project's financial profile of the revised and increased forecast major maintenance expenditure.

We aim to resolve the CreditWatch placement on receipt of an updated financial model from CountyRoute, which will contain further details of its revised forecast major maintenance expenditure and how this will be funded.

We could remove from CreditWatch and affirm the ratings if the updated forecast ADSCRs and liquidity remain substantially in line with our previous projections.

We could lower the ratings if CountyRoute's updated projected ADSCRs are materially lower than we previously forecast, or if its projected liquidity is more constrained than we previously anticipated. We would likely lower the ratings by one notch, although we could lower them by up to two notches.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011

-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List

CreditWatch/Outlook Action

To From

CountyRoute (A130) PLC

Senior Secured Debt BB-/Watch Neg BB-/Stable

Secured Subordinated Debt B-/Watch Neg B-/Stable

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