MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings places the 'BB' rating on Inversiones Alsacia's USD464 million senior secured bonds due in 2018 on Rating Watch Negative. The negative action reflects the impact of a combination of events occurred in 2012 that may adversely affect the company's future operational and financial performance. The rating will be reviewed within the next six months, in order to assess the progress on the concerning issues that triggered this rating action.
KEY RATING DRIVERS
--INCREASED DEPENDENCE ON DEMAND: The Operating Contract amendment of May 2012 heightened the project's risk profile by significantly increasing the linkage between passenger demand and revenue levels. In the last two years demand has performed below expectations. The contractual amendment includes a restated economic equilibrium mechanism that partially mitigates such risk by compensating to some extent, demand declines over 3%, among others. However, compensation payments are received several months after the occurrence of a negative impact in revenue, stressing the project's liquidity.
--HIGHER OPERATIONAL COMPLEXITY: Compared to other availability-based projects, bus operations are logistically complex. The incorporation of additional bus routes has heightened operational complexity. Synergies coming from Alsacia and Express' operational merger have taken longer than expected to materialize. In 2012, operational and administrative cost was largely increased mainly due to a series of one-time events. The risk of a continued cost escalation in the coming years is partially mitigated by the indexed pass-through of major cost items that is present in the formula to calculate revenues.
--ADEQUATE DEBT STRUCTURE: Tight covenants for equity distribution and additional leverage, fixed interest rate, a cross-currency swap contracted with highly-rated institutions, and a 6-month debt service reserve account.
--WEAKENING COVERAGES: Although coverage for the first three payments surpassed Fitch's base projection, the amended formula to calculate revenues paired with the cost increase during 2012 tightened financial coverage ratios to the point that the use of reserve funds is imminent. Debt coverage performance for the coming payments is highly uncertain given that new a negotiation round to discuss the contractual terms with the Government is scheduled for April 2013.
--CAPEX RESERVES ARE BELOW INDUSTRY STARDARDS: In 2012, ALSACIA made important investments in overhauling a portion of its bus fleet. However, given such investment and the fact that current fleet has a remaining life of 10 years average, Fitch does not foresee infrastructure renewal risk as material.
KEY RATING SENSITIVITIES
--New contractual terms following the April 2013 negotiations with the Chilean Ministry of Transportation and Telecommunications (MTT) that could lead to a negative impact on the company's operations and cash available for debt service.
--Liquidity reduction resulting in DSCR under 1.00 times (x), which would imply the Debt Service Reserve Account (DSRA) was not fulfilled, but used again.
--End of governmental subsidy could negatively impact the system's and the company's financial position.
SECURITY
The notes are secured by a first lien interest of total revenues and contract rights, as well as all assets owned by Alsacia and Express, excluding a bus terminal located in Huachuraba.
CREDIT UPDATE
During 2012, with information as of the third quarter, Alsacia's expenses grew higher than revenues, resulting in a 24% contraction of Ebitda. As a result, resources from the DSRA will be needed to partially fund the coming debt payment scheduled for February 2013.
Lower-than-expected revenue growth, albeit improvements to evasion control and operation indexes, came basically from the restatement of the formula as established in the Operational Agreements signed between the operators and the MTT and effective starting May 1, 2012. Revenues are now more linked and sensitive to demand performance, which has been contracting since the end of 2011. In addition, the contractual amendments also include that those transfers across the services of a single operator will now account as one passenger only. Demand for Alsacia and Express slightly recovered in the last quarter of the year, and their performance generally follows that of the whole Transantiago system.
According to Alsacia, lower demand was mainly driven by the numerous holidays in Chile during 2012, the greater competition from the Metro lines, and an increased use of automobiles.
Although the revenue volatility has potentially increased, the Operating Agreement comprises two economic equilibrium mechanisms to offset the companies for demand losses over 3%. The mechanisms include annual compensation payments and biannual adjustments to the amount the MTT pays per passenger using the operators' services. The first compensation payment is scheduled for May 2013, and the company expects to partially use its proceeds to replenish the DSRA. The annual frequency of these payments is likely to further stress the project's cash flows.
In addition to the contractual compensation mechanisms, in 2012 the MTT declared its intention to reimburse some of the Transantiago operators for the Technical-Operative Reserve they contributed with in 2005. Alsacia already received CLP 9,090 million, while Express will be able to receive CLP 29,432 million in as much as five installments between January 2014 and October 2018.
On the expense side, in 2012 the company faced a series of extraordinary one-time costs, such as: a heavy bus overhaul program that was expected in a later period, the temporary outsourcing of the recently taken over Feeder D, the external advisory services needed to restructure the operating plans, and the restructuring of the Union Agreements that were restated and extended for three and four more years.
Some of the additional and recurring expenditures are the engagement of 400 inspectors in charge of improving evasion control, and supplementary drivers and maintenance personnel to properly operate Feeder D. Since most of the deviation was due to the single-time incidents, it is Fitch's belief that costs will normalize within the few coming months.
Regarding the system's subsidy that ends in 2014, aiming to stop fares' escalation, in 2012 the Government started the process to obtain a subsidy of USD 750 million per year, to be approved until 2022. The process is at a very advanced stage, and expected to be resolved by the first semester of 2013. While the subsidy termination is a potential risk, Fitch considers it is very unlike to occur, given the fact that Transantiago is a top-priority project for the country, as has been demonstrated in the past.
Recently, the MTT announced in April 2013 there will be another round of negotiations with the operators for possibly re-adjusting the Operational Contracts. The direction and result of such discussions are still unknown but are likely to strongly determine Alsacia's financial performance.
Fitch believes that, if the current terms of the Operation Agreement continue and demand does not recover in the short term, Alsacia will have increased pressure to keep costs controlled at or under budgeted levels, in order to reach at least the 22% Ebitda averaged in 2008-2011, and still be able to face its increasing debt obligations.
Fitch Base Case assumed demand stays at current (2012) level while cost increases 3% over budget to reach 22% Ebitda average over the 2013-2018 projected horizon. DSCR results in 1.03x minimum and 1.10x average.
Fitch Stress Case considered demand contracts 5% in 2013 and then stays stable, while cost increases 5% over budget to reach 20% Ebitda average. DSCR results in 0.93x minimum and 1.02x average. Under this scenario, funds from the DSRA have to be called several times.
Alsacia and Express are two of the top bus concessionaires of the Transantiago System, which provides mass urban bus/metro transportation services to the City of Santiago, in Chile since 2005, and is regulated by the MTT. The transaction consisted of the acquisition by Alsacia of the remaining shares of Express, and the refinancing of all the existing debt of both concessionaires.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure & Project Finance' (July 11, 2012);
--'Rating Criteria for Availability-Based Infrastructure Projects' (June 19, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Availability-Based Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681351
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.