Nov 19 -
Summary analysis -- Highway Management (City) Finance PLC --------- 19-Nov-2012
CREDIT RATING: None. Please see issue list. Country: United Kingdom
Primary SIC: Special Purpose
Standard & Poor's Ratings Services' insured 'AA-' rating on the debt issued by Northern
Ireland-registered special-purpose vehicle (SPV) Highway Management (City) Finance PLC, reflects
the unconditional and irrevocable payment guarantee of scheduled interest and principal provided
by Assured Guaranty (Europe) Ltd. (AGE; AA-/Stable/--). Standard & Poor's underlying rating
(SPUR) on the debt is 'BBB'.
According to our criteria, a long-term rating on a monoline-insured debt issue reflects the
higher of the rating on the monoline and the SPUR. Therefore, the long-term ratings on the above
issues reflect the rating on the monoline, which is higher than the SPUR.
Highway Management (City) Finance has lent the proceeds of the debt issue to Highway
Management (City) Ltd. (ProjectCo), an SPV and the key contracting entity.
The 'BBB' SPUR takes into account the following credit strengths:
-- Successful operation of the road network, with a minimal level of penalty points received
-- A revenue stream linked to the retail prices index and based on road availability, with
no exposure to traffic volume and, in our view, a relatively benign payment mechanism and
-- The experience and track record of the sponsors; and
-- The credit quality and project commitment of the Northern Ireland Department for Regional
Development (DRD)--the concession grantor--and the strong rationale for the project.
These strengths are offset by the following credit risks:
-- An aggressive financial structure, although this is typical of private finance initiative
(PFI) projects. Senior debt represents 87% of the required funds, and base-case senior debt
service coverage ratios (DSCRs) are a minimum of 1.17x and 1.31x on average;
-- The project's higher-than-usual operational gearing, with relatively weak operational
-- A medium-term routine operation and maintenance (O&M) contract (10 years) compared with a
long-term concession agreement (30 years), with no benchmarking or market testing until the
tenth anniversary of the O&M contract; and
-- The untested nature of design, build, finance, and operate (DBFO) road concessions in
Northern Ireland, this being the first highway concession of its type in the province.
Operationally the project continues to perform well, with only two penalty points, both
concerning minor procedural issues, issued over 2012 thus far. The latest update of the
project's financial model (September 2012) incorporates some minor increases to lifecycle
expenditure assumptions for 2015 and 2016. This, together with updated working capital
movements, has contributed to a marginal change in the minimum and average forecast DSCRs.
The project benefits from a three-year, forward-looking maintenance reserve account and a
six-month forward-looking debt service reserve account, both of which are fully funded.
The stable outlook on the SPUR reflects our view that routine operations and maintenance
will continue to be delivered at a satisfactory level and that major maintenance works will be
managed in such a way that the financial risk profile of the project will remain consistent with
the current one.
At the current rating level, we see limited room for financial underperformance as reflected
by, for example, the reported DSCR. We could take a negative rating action if forecast major
maintenance expenditure were reprofiled or increased materially following, for example, further
deflectograph surveys; or if the financial risk profile of the project were otherwise to
deteriorate. Similar action could result if the relationship between ProjectCo and DRD were to
deteriorate. Evidence of such deterioration could be a material increase in the level of penalty
points awarded or the issuance of warning notices as a result of failures in the provision of
routine operations, for example.
It is unlikely, in our view, that any positive rating action would be taken in the
foreseeable future without a significant improvement in the project's forecast DSCRs.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless
-- Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007