Infrastructure Financing and Ratings - The Commission...2012/05/09 · Demand-based –...

Infrastructure Financing and Ratings

Cherian George

Florida Transportation Commission

Cape Canaveral

May 9th, 2012

5/14/2012

2

www.fitchratings.com

Agenda

Introduction to Ratings

The Macro Environment

Toll Road Criteria/Performance/Credit Themes

Evaluating Managed Lanes

All Electronic Tolling

Public Private Partnerships

Public or Private – Is One Model Better?

Infrastructure Financing – Summary

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Agenda

Introduction to Ratings

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What is a Credit Rating?

Assesses ability and willingness to pay debts on a full and timely basis

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What is a Credit Rating?

Provides an opinion on the relative ability of an entity to meet financial commitments.

Used by investors as indications of the likelihood of receiving their money back in accordance with the terms on which they invested.

Covers the global spectrum of corporate, sovereign, financial, bank, insurance, municipal and other public finance entities, structured finance securities.

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What’s a Credit Rating?

Rating Definition

Investment

Grade

AAA Highest Credit Quality

AA Very High Credit Quality

A High Credit Quality

BBB Good Credit Quality

Speculative

Grade

BB Speculative

B Highly Speculative

CCC, CC, C High Default Risk

RD Entity has failed to make due payments on some

but not all material financial obligations

DDD, DD, D Default

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Agenda

The Macro Environment

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U.S. Economic Outlook:

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2012 Real GDP 2012 Consumption 2012 Unemployment 2012 Inflation

US Macro Economic Forecasts

Dec 2010 Forecast

Dec 2011 Forecast

Mar 2012 Forecast

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2007 2008 2009 2010 2011

EMEA - All North America Total

Source: Fitch

A

A-

BBB+

BBB

BBB-

BB+

Rating Migration for Infrastructure

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U.S. Project Finance Overview – Transportation

Sector

2010 Outlook 2011 Outlook 2012 Outlook

Airports Negative Stable/Negative Stable/Negative

Toll Roads Stable/Negative Stable Stable

Seaports Stable/Negative Stable Stable

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The State of the Market

Tax-Exempt (Muni) – Public Authorities

Massive defaults/bankruptcies have not occurred; small local governments now the issue

Monoline support and “guaranteed” market access a thing of the past

Credit is “King” again (but for how long)

Infrastructure needs/deferred maintenance grow; muni market has tremendous capacity, but economy/environment a constraint

President’s budget proposes capping tax-exemption benefit

Unlike many markets, the muni market is open for business; debt still cheap but spreads are wider; supply the issue given government retrenchment

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The State of the Market

Taxable – Project Finance/PPP

Two components – commercial bank market and public bond market

Commercial bank market the global behemoth in project finance

Public project finance bond market small (but deepest in the US)

Commercial bank capital constraints and retrenchment reducing their ability to hold long-term project finance debt

Issues – Euro sovereign and bank crisis, Basel III higher reserve requirements, domestic regulatory requirements, focus on core markets and relationships

Net result – increasing focus on private placement market (life insurance companies) and public bond markets

Project finance requires specialized skills so a challenge; US still in best position (relatively)

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Agenda

Toll Road Criteria/Performance/Credit Themes

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Key Rating Drivers –Toll Roads, Bridges, and Tunnels

Source: Fitch

1. Revenue Risk-Volume: Nature of the transportation link provided, traffic composition

of the asset, the economic and demographic fundamentals of the service area; the

exposure, if any, to competing alternatives; and the historical and/or projected traffic

profile.

2. Revenue Risk-Price: Legal and economic toll rate-raising ability and toll rate relative

to any cap, to peers, or the revenue maximization point.

3. Infrastructure Development/Renewal: Approach to the capital program and

maintenance including planning, funding, and management.

4. Debt Structure: Overall debt structure and key structural features/composition of

capital structure.

5. Debt Service: Leverage, liquidity, and level of dependence on sustained traffic and

revenue growth to meet financial obligations..

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Toll Road X – Traffic

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

1 6 11 16 21 26 31 36 41

1993 Financing 1997 Financing 2000 Fitch Ratings Projection

2005 Fitch Ratings Projection 2007 Fitch Ratings Projection 2009 Fitch Ratings Projection

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Toll Road X – Average Toll

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

1 6 11 16 21 26 31 36 41

1993 Avg Toll 1997 Avg Toll 2007 Avg Toll 2009 Avg Toll

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Toll Road X – Revenue

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

500,000,000

1 6 11 16 21 26 31 36 41

1993 Financing 1997 Financing 2000 Fitch Ratings Projection

2005 Fitch Ratings Projection 2007 Fitch Ratings Projection 2009 Fitch RatingsProjection

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Toll Road – Typical Financial Ratios

User-Pay (amortizing structures) Fitch Ratings Base Case Fitch Ratings Stress Case

Minimum DSCR 1.30x 1.00x (incl. liquidity)

Minimum LLCR 1.50x 1.25x

Minimum PLCR 1.75x 1.50x

User-Pay (negative or non-amortizing

structures)

Minimum DSCR 1.30x 1.00x

Minimum PLCR 3.00x 2.00x

Shadow Toll and Availability Payment

(amortizing structures)

Minimum DSCR 1.20x 1.05x

Refinancing risk

Interest rate assumption + approx 200 bps + approx 400 bps

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Vehicle Miles Travelled Slows Again:

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

Oil Embargo

"The Funk"

Today

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Toll Roads – Key Credit Themes

Themes Comment Likely Impact

Soft economic

conditions

• Slow to no growth in the near term; how long is

the issue.

• Low inflation suggests more limited pricing power

for some toll roads.

• Moderately priced publicly managed roads retain

pricing flexibility.

Low/Moderate

Oil prices • Higher prices could put an additional drag on the

economy and impact toll road demand.

Low/Moderate

Traffic Performance

Will Vary by Asset Type

• Traffic volume to be flat to slightly positive .

• Urban expressway systems and urban bridge

systems have proven to be the most resilient.

• Turnpikes exposed to commercial traffic volatility.

• Standalone projects more exposed to

competition.

Low/Moderate

Source: Fitch

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Toll Roads – Key Credit Themes (Contd.)

Themes Comment Likely Impact

Pricing Power

Influenced by Toll

Rates and Political

Environment

• High toll rates will likely experience greater toll

elasticity than in the past.

• Economic environment may constrain political

willingness to raise tolls.

Low/Moderate

Debt Structure

⎯ A Tale of Two Cities

• Some escalation but MADS coverage is > 0.5x

• Heavily back-loaded and MADS coverage is

> 0.5x

Moderate/High

Infrastructure Renewal

and Development Risk

• Deferred major maintenance cannot be

prolonged

• Expansion projects need to be calibrated to

financial capacity

• Retaining flexibility for the unknown is important

Low/Moderate/High

Source: Fitch

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Agenda

Evaluating Managed Lanes

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Managed Lanes

Key strength – established congestion

Value proposition – primarily AM/PM peak periods; “inter-peak” in dense urban areas

Key risks:

Competition next door and very visible

Limited experience with performance; price is key, will vary by location, can vary exponentially as congestion levels change and based on road way configuration

Future network improvements (corridor and region)

Nature of toll policy (maximize throughput, revenue, HOV policy)

Quality of the data

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Vehicle Miles Travelled Slows Again (Contd.):

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Perc

en

t C

han

ge (

%)

Year

Year-on-Year VMT vs. Traffic

Year-on-Year VMT Year-on-Year Traffic (Fitch Portfolio)

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Managed Lanes – Expected Performance

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Managed Lanes – 10% Traffic Drop

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Managed Lanes – 10% Capture Rate Drop

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Managed Lanes – Revenue Scenarios

0

50000000

100000000

150000000

200000000

250000000

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

Base Scenario

10% Drop in Traffic

10% redution in Capture Rates

25% Reduction in Toll Rates

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Agenda


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Has benefits and costs

Revenue upside from transponder/account/violation processing fees, video toll premiums and violation penalties, and slightly lower toll elasticity

Revenue downside from increased violations (not unlike corporate bad debt)

Added costs from electronic toll systems and equipment, technology staff, processing fees, need for regular upgrades and modifications, and one-time toll plaza/roadway reconfiguration

Avoided costs from toll collector eliminations, no cash processing, no ongoing toll plaza reconstruction needs

Better user value proposition trumps as financial cost-benefit likely a wash

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Agenda


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Many models – Public (non-profit), Public/Private, Private

Demand-based – revenue-generating and profitable assets

Availability Payment based – nonrevenue-generating and revenue-generating; profitable and subsidized assets

Stipulated/regulated service provided under a long-term contract/arrangement

Strategic control over standards, quality and pricing in public control

Many global investors – looking for stable, reliable cashflow generating investments in the long run

Investment horizons differ – near, medium and long-term depending on nature of company/investor, equity/debt focus, etc.

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Why Choose a PPP – Developing Economies?

Ability to pay the binding constraint:

High debt and tax burden, highly concentrated wealth/tax base

Economic growth and competitiveness important in the context of poverty, clean water and basic hygiene being the critical social issues

Economic growth dependent in part on improved infrastructure

Improved service quality an issue but lower on the scale of concerns

Private sector helps address the growing backlog of infrastructure needs

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Why Choose a PPP – Developing Economies?

Ability to pay the binding constraint:

High debt and tax burden, highly concentrated wealth/tax base

Economic growth and competitiveness important in the context of poverty, clean water and basic hygiene being the critical social issues

Economic growth dependent in part on improved infrastructure

Improved service quality an issue but lower on the scale of concerns

Private sector helps address the growing backlog of infrastructure needs

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Why Choose a PPP – Developed Economies?

Willingness to pay the binding constraint:

Moderate to high debt, moderate to high tax burden, less concentrated wealth/tax base

Economic growth and competitiveness important in the context of enhancing (but more importantly preserving) quality of life

Cost effectiveness and quality of government service and infrastructure delivery the issue

Private sector helps improve service quality and address the growing backlog of infrastructure needs

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What Makes a Good PPP?

Provides public value at least cost – for the life of the deal

Enhances quality, reliability – of the asset/service, and to related assets/services

Increases accountability – cost-effective/timely project delivery, efficient operations, maintenance & life cycle asset management

Better customer service – increases perceived user value

Retains flexibility – for changing needs

Makes government more efficient – lower investment/subsidy

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Global PPP Scorecard

Success is mixed world-wide

Failure usually due to unanticipated conditions, unrealistic objectives, unachievable benefits, unclear benchmarks

Success usually due to a cautious approach, development of desired objectives, understanding of benefits and disciplined monitoring

Yet problems do occur, so long-term success a function of both parties ability and willingness to adjust to changing conditions and public expectations

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Key Positive Features in PPPs

Clear objectives, identify/quantify expected benefits

Performance benchmarks, actual performance tracked

Ability to change/fine tune the deal – recognition of need for compensation if the impact is adverse to the private party

Length linked to ability to generate return – up to 30 years for operating assets; more, if necessary, for greenfield assets

Structured to limit government subsidy & provide reasonable and stable equity returns

Structured to provide public sector revenue/profit sharing

Ability/clear protocol to terminate, if public policy needs change

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Issues Associated With U.S. PPPs

Decisions based on equity considerations not transportation policy

Nature of approved rate regime

Adequacy of experience with comparable asset valuation

Solutions not tailored to meet local needs

Retaining private sector interest after equity takeout

Long-term leases can limit flexibility

Governmental liability may not be completely transferable

Perception of double-taxation remains

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Agenda


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Construction – private sector profit motive minimizes delays/cost overuns; if public sector could introduce scope/decision making discipline the results could be similar

Revenue – private sector will intend to raise rates steadily, but may in fact not be able to; public sector will try for rate stability but will be forced to raise rates to support needed investment and meet debt covenants

O&M – private sector profit motive will seek to contract out and create cost stability; public sector focus on maximizing service versus cost management introduces higher cost escalation risk

Lifecycle Asset Protection – private sector incentivized by minimum standards in concession so better maintained; public sector focus is expansion versus state of good repair as there is no risk of loss of asset

Private sector run asset will be better maintained but with higher rates; public sector run asset will be less well maintained but with lower rates; it comes down to what the public wants

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Infrastructure Financing – Summary

PPPs provide an opportunity to help address the growing backlog of infrastructure needs

Public tax/fee sources will still likely be the primary choice for infrastructure funding; if so, it needs to be funded

Financing success dependent upon an equitable sharing of benefits and risks

Self supporting and non-self-supporting assets can be candidates

Ultimately, accelerating infrastructure development will depend on a healthy, balanced environment with viable private and public sector options

Cannot fix the deficit overnight; will take decades, but the time to develop a long-term strategy and start funding it is now

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Disclaimer

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.

Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings

are inherently forward-looking, embody assumptions and predictions that by their nature cannot be

verified as facts, and can be affected by future events or conditions that were not anticipated at the

time a rating was issued or affirmed.

The information in this presentation is provided “as is” without any representation or warranty.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not

a recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE

LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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