MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned Inversiones Alsacia's US$464 million senior secured bonds a 'BB' rating with a Stable Outlook. The bonds were issued in accordance with Rule 144A of the Securities Act in the U.S. and pursuant to Regulation S outside the U.S. For issuing this final rating, Fitch has been provided with final legal documents that confirm the validity and accuracy of the information previously received and employed in the analytical process.
The bonds are secured by a first lien interest of total revenues and contract rights, as well as all assets owned by Inversiones Alsacia, S.A. (Alsacia) and Express de Santiago Uno, S.A. (Express) - excluding the Huachuraba bus terminal. Both companies are bus concessionaires of the Transantiago System, which provides mass urban bus/metro transportation services to the city of Santiago in Chile.
The transaction consists of the acquisition of shares of Express, not currently owned by GPS Group (Alsacia's owner), and the refinancing of all the existing debt of both Alsacia and Express. In the past, GPS Group owned 47% of Express and was willing to acquire the remaining 53% of the shares with part of the proceeds from the bond offering The greater portion of the proceeds is to prepay outstanding loans (including fees and penalties) of both companies.
Express is a guarantor and co-obligor of Alsacia's issuance. Aggregate cash flows are controlled by an onshore administrative trust and an offshore collateral trust created by Banco Santander Chile and The Bank of New York Mellon (BoNY), respectively. The onshore trust is the recipient of all revenues, and in charge of making payments according to a semi-annual budget. Since actual disbursements may deviate up to 10% from budgeted amounts, such deviation was contained in Fitch stress scenarios.
The acquisition is to be completed almost simultaneously with the bond's issuance. Upon completion, both concessionaires will become an affiliated group of entities under the control of GPS Group. The two companies, Alsacia and Express, intend to have a common executive management team; in addition, Alsacia may enter into a contract to manage Express' business. With the acquisition, the two aim to become the largest Transantiago bus operator in Santiago, and to obtain cost savings derived from synergies.
Since it began operations, the Transantiago System has had revenue shortfalls. Hence, in 2009 the National Subsidy for Public Passengers Transport Law was enacted, establishing an annual subsidy with two components. One component is permanent for a fixed amount of up to CLP$115 billion, but is insufficient to fully cover the annual deficit; while the other one is temporary for an additional amount of CLP$393 billion, and valid until 2014. Fitch believes that although termination of the temporary subsidy is a credit concern, the system is a top priority project for the Government, so continuity of both subsidies is likely to occur.
Bus concessionaires are compensated by the level of service offered in relation to an operating plan negotiated with Transantiago for each month. Revenues respond to changes in the number of traveled kilometers, passenger demand variation, key drivers of operational costs (inflation, exchange rate, fuel, labor, etc.), and the passenger capacity of the fleet. Therefore, the contractual revenue formula protects operators' financial margins, and reduces the fluctuation of profitability.
Revenues are not tied to passengers' paid fee, but to service availability. Concession agreements limit demand risk and eliminate the effect of passenger tariff fluctuations; thus, revenues are largely dependent on the timeliness, frequency and quality of the services provided by the concessionaires.
The bonds are issued with a 7.5-year tenor at 8.0% interest rate, maturing in August 2018, two months before both concessions' expiration date. Interest and principal payments are semi-annual due in February and August, and follow a predefined amortizing schedule. Foreign exchange risk is mitigated by a CLP/USD participating swap contracted with an affiliate Bank of America Merrill Lynch (BAML) with a prefixed protection range.
There is a reserve fund for overhaul expenses equivalent to six months worth of expenses, and a US$8 million initial cash contribution set up to strengthen liquidity in the first payment dates. A contingency reserve account also supports debt service payments, funded with US$22 million in upfront cash and maintained with an amount equivalent to six months of debt service. This reserve fund, in turn, is partially funded with a US$12.5 million bank loan from Banco Internacional. Principal amortization of this loan is subordinate to the bond, but interest payments are senior to debt service. However, interest payments of this bank loan are not material for the bond's cash flows.
Distributions and additional senior debt are possible provided specific covenants are met, such as a minimum backward- and forward-looking coverage ratios, at levels that are consistent with Fitch's applicable criteria.
KEY RATING DRIVERS:
Rating sustainability will mainly depend on Alsacia's ability to maintain its operational efficiency while thoroughly sharing its know-how with Express, in order to transform Express into a more efficient concessionaire. Currently, Express' operation is larger than Alsacia's, whose fleet represents about 56% of Express'. Finally, the rating might be affected by the level of synergies expected to be realized by the technical (not formal) merger.
CREDIT SUMMARY:
Although demand levels were practically stable in 2009 and 2010, with around 330 million passengers, the past year closed with gross revenues of over CLP$162 billion (approximately US$335 million). Revenues increased by 12.8% versus 2009, for the two concessionaires jointly. The increased revenue combined with expense reduction efforts resulted in stronger operating profit margins.
Looking forward, Fitch created different scenarios to calculate future cash flows. Such scenarios include stresses to specific variables such as: passenger demand, service fulfillment ratio level, inflation rate, achievement of expected synergies, diesel price, expenses, and exchange rate. The structure showed certain sensitivity to negative performance from variables that depend on management operations (expenses control, service fulfillment index, and synergy achievement, in that order). In addition, the structure demonstrated resilience to significant changes in variables entailed in the concession's revenue indexation.
KEY CREDIT STRENGHTS:
--The system is strategic for Santiago, since it offers an essential service to the city.
--It has the support of a strong legal framework in a country rated 'A+', with a Stable Outlook by Fitch, with experience in public service concessions, specifically in the transportation sector.
--There is no refinancing risk.
--Concessionaires hold a combined market share of over 40% of Transantiago's main-line bus operations.
--Limited, yet strong track record of service performance, as reflected in the historical operating statistics.
--Sponsor has experience in operating bus rapid transit systems in other Latin American countries.
--Limited exposure to demand risk.
--Predictable cash flows with an indexed availability payment structure, with about 40% of fixed revenues.
--There will be a cross-currency swap with a highly rated institution in order to reduce exchange rate risk.
--The debt structure has tight covenants for equity distributions and additional debt; protecting the rated bonds from potential deterioration in expected coverage levels.
--Fixed interest rate will be paid, eliminating rate volatility risk.
--The US$8 million liquidity fund created in order to strengthen cash flows during the initial years of debt amortization.
KEY CREDIT CONCERNS:
--The temporary portion of the government subsidy expires in 2014, thus subject to political risk that subsidy may be reduced from current levels.
--Although synergies are likely to occur with the acquisition of EXPRESS, several operational risks may arise. As such, some synergies may occur at lower than expected levels, or may be subject to delays or not occur at all. This is particularly a risk considering the acquirer company's operation is smaller than those of the acquired enterprise.
--Labor union ability to hamper activities and operations.
--New competition from metro expansion, potentially affecting concessionaires' level of service in 2011.
--Although concession renovation is likely to occur in 2018, a two-month tail of cash flow is available to repay debt before handover of project.
Additional information is available at www.fitchratings.com.
Applicable criteria and Related Research:
--'Rating Criteria for Availability-Based Infrastructure Projects' dated March 29 2010;
--'Rating Criteria for Infrastructure and Project Finance' dated Aug. 16, 2010.
Applicable Criteria and Related Research:
Rating Criteria for Availability-Based Infrastructure Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=507009
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
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