June 25 -
Summary analysis -- CountyRoute (A130) PLC ------------------------ 25-Jun-2012
CREDIT RATING: None. Please see issue list. Country: United Kingdom
Primary SIC: Special Purpose
The long-term ‘BB-’ rating on the GBP88 million senior secured bank loan and the long-term ‘B-’ rating on the GBP5.5 million subordinated secured mezzanine loan, both due 2026, issued by U.K.-based concessionaire CountyRoute (A130) PLC (ProjectCo) reflect a combination of factors outlined below.
The ratings reflect the following risks:
-- The project faces continuing uncertainty regarding future major maintenance costs that we predict will likely exceed those forecast at financial close. ProjectCo currently forecasts an increase in maintenance costs of over 70% for pavement works, to improve the reported low residual life of the road. However, the final timing and amount are not yet known as they are in part dependent upon the actual rate of deterioration. Our own base-case projection forecasts weak senior annual debt service cover ratios (ADSCRs) in 2020-2025 and tight levels of liquidity from the resulting reduction in cash flows.
-- One-half of the project’s revenue is exposed to traffic risk through a shadow toll payment mechanism, under which the council makes payments to ProjectCo based on the number of vehicles using the road. The actual level of road use in financial 2012 (period ended March 31, 2012) was again lower than ProjectCo forecast at financial close. ProjectCo continues to forecast that traffic volumes through to financial 2016 will show a strong recovery. We think this is increasingly unlikely though note that, to date, the road has tended to outperform national trends for similar routes.
-- ProjectCo assumes the risks of availability and potential cost increases related to subcontracting routine operations and management to contractors, which are currently appointed every five years.
-- ProjectCo’s financial structure is aggressive, in our view. The leverage ratio is 85% senior debt to 15% mezzanine subordinated debt and equity, and ProjectCo’s own forecast minimum and average ADSCRs, calculated in line with the project’s financial documentation, are 1.13x and 1.28x, respectively.
These risks are offset by the following credit strengths:
-- About 50% of the project’s revenue is availability-based and hence immune from traffic performance, thus making the project relatively resilient to lower vehicle numbers.
-- To date, the road has operated successfully, with no penalty points or unavailability deductions.
-- The council and ProjectCo have a positive relationship, which underlines the timeliness and efficiency of the payment process.
-- John Laing Investments is an experienced sponsor that has significant involvement in road projects and managing major maintenance expenditure.
In our view, the project’s liquidity has recovered somewhat from a relatively constrained position during financial 2012. The project benefits from a fully funded senior debt service reserve account, mezzanine debt service reserve account, and major maintenance reserve account, together with an accumulated free cash balance.
The senior secured bank loan has a recovery rating of ‘3’, reflecting our expectation of a meaningful (50%-70%) recovery of principal in the event of a default.
The subordinated secured mezzanine loan has a recovery rating of ‘6’, reflecting our expectation of a negligible (0%-10%) recovery of principal.
To date, however, there has been limited experience of default or loss in the U.K. private finance initiative sector.
The stable outlook reflects our view that the project’s financial profile is stabilizing and the level of major maintenance expenditure for the next 3-5 years will not change again significantly.
We could take a negative rating action if the amount of major maintenance expenditure forecast over the medium term were higher than ProjectCo currently projects, resulting in a further decline in the project’s forecast ADSCRs and liquidity. A similar outcome could result if the future development of traffic volumes is worse than we anticipate, with a similar impact on the project’s forecast ADSCRs and liquidity.
We could take a positive rating action if the forecast financial profile of the project were to improve. This could occur, for example, if the original construction contractor were to accept partial or full responsibility for the rectification of the underlying pavement defects, or if traffic volumes were to grow faster than we forecast. We currently view such a situation as less likely, however.