-- We are revising our outlook on Chinook Roads Partnership to negative from stable.
-- We are affirming our 'A' rating on Chinook's C$156.7 million senior secured bond due March 31, 2043.
-- The negative outlook reflects Chinook's dependency on SNC-Lavalin Group Inc. (BBB+/Negative/--) as the construction and operating counterparty.
Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services revised its outlook on Chinook Roads Partnership (Chinook) to negative from stable. At the same time, Standard & Poor's affirmed its 'A' rating on Chinook's C$156.7 million senior secured bond due March 31, 2043.
The outlook revision reflects our view of the project's dependency on SNC-Lavalin Group Inc. (SNC; BBB+/Negative/--) as the counterparty in the construction and operating periods. Standard & Poor's revised its outlook on SNC to negative from stable on April 20, 2012 (see "SNC-Lavalin Group Inc. Outlook Revised To Negative From Stable On Concerns About Competitive Position" published April 20, 2012, on RatingsDirect on the Global Credit Portal).
The rating on Chinook's C$156.7 million senior secured bond due March 31, 2043, broadly reflects Standard & Poor's assessment of the following positive factors:
-- A strong rationale for the project, as the new infrastructure will almost complete Calgary's ring road;
-- A very experienced project team, including a highly capable design-build joint venture (DBJV) in SNC-Lavalin Constructors (Pacific) Inc. and Acciona Infrastructures Canada Inc.; Acciona S.A. (Acciona) and highly rated SNC as equity sponsors; and highly capable operators in SNC-Lavalin Operations and Maintenance Inc. (SNCO) and Acciona Concessions Canada (2008) Inc. (ACC);
-- Well-defined project agreement (PA) that clearly defines roles for the public- and private-sector participants. The PA features an appropriate risk-sharing framework for key risks for a project of this scope, and a clearly defined and manageable deduction regime;
-- A highly rated government off-taker in the government of Alberta (AAA/Stable/A-1+);
-- A straightforward greenfield construction project of very low complexity, entailing the designing, building, operating, maintaining, and rehabilitation of 25 kilometers of a new six-lane divided freeway as well as operating and maintaining, but not rehabilitating, existing infrastructure. The project is currently on schedule to achieve the traffic availability target date;
-- A robust construction security package, featuring a parental guarantee from SNC and Acciona that is joint and several, equal to 35% of the design-build (DB) contract value, and features sufficient on-demand liquidity to remedy construction challenges. An unconditional letter of credit (LOC) equal to 8% of the DB contract value posted at financial close provides liquidity during construction. The maximum liability cap is equal to 35% of the DB value;
-- Strong cost- and time-to-complete provisions, allowing for monthly independent engineer certification of completed work and Chinook's ability to hold back monthly remittances to the DBJV should work not be completed to project specifications;
-- Operational services for the 30-year operating period that are quite standard and of very low complexity, coupled with a payment mechanism that provides for a fixed capital payment; and inflation-indexed operations, maintenance, and major rehabilitation payments. What we view as a benign deduction regime during the operational phase matches these payments;
-- Experienced operators in SNCO and ACC to manage the operations and maintenance services (OM) during the concession. Standard & Poor's understands that the security package features a parental guarantee equal to 100% of the annual OM fee pre-termination and 200% post-termination. In addition, there's an LOC equal to six months of the annual OM fee;
-- A fully amortizing senior debt profile, providing what we believe is robust minimum and average senior debt service coverage (DSCR) of 1.22x and 1.27x, respectively, during the concession's life. Project cash flows remain resilient under a variety of stress tests, with an average decline of about 19% in cash flow available for debt service required to reach break-even for the project.
The following factors constrain our ratings:
-- The consortium's robust life-cycle costing, which reduces the likelihood that the contract will become uneconomical. Although Chinook assumes life-cycle risk, a major maintenance reserve for critical life-cycle work two years in advance and a five-year, look-forward regime with ability to trap cash if a deficiency in funding emerges mitigate this risk;
-- A highly geared capital structure, with senior debt to total capital equal to 82.9%. We believe this leverage, however, is more moderate than other Canadian public-private partnership (P3) availability road projects that we rate;
-- A distribution lock-up at 1.15x, which provides adequate protection for senior bondholders compared to the 1.22x minimum DSCR;
-- Risk factors typically associated with large-scale construction projects, including the potential for escalation of labor and material costs, labor disruptions, and delays and risks associated with potential contractor default. However, an experienced DBJV lowers many of these risks, given its built-in contingency budget and in-depth knowledge of the local labor and construction market. The DBJV's strong track record on other Canadian P3 road projects and the fixed-price, date-certain nature of the design-build contract, which transfers the risk of cost overruns to the DBJV, further mitigate the risk;
-- A six-month senior debt service reserve fund that is standard for a project of this size and rating; and
-- A senior debt tail at six months that is comparable with that of other rated Canadian P3 projects.
The negative outlook reflects the project's dependency on SNC as the counterparty in the construction and operating periods. We could lower the rating if we were to lower the rating on SNC or a material delay in construction develops that could lead to a delay in achieving the traffic availability target date. We could revise the outlook back to stable if we were to revise the outlook on SNC to stable. We believe a positive rating action is unlikely before construction is completed.
Related Criteria And Research Project Finance Construction and Operations Counterparty Methodology, Dec. 20, 2011
Ratings List Ratings Affirmed, Outlook Revised Chinook Roads Partnership To From Senior Secured A/Negative A/Stable
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. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)