Rating Action Commentary
ֳ Rates TJH's Notes 'BB-'; Outlook Stable
Mon 17 Feb, 2020 - 11:15 PM ET
ֳ - Mexico City - 17 Feb 2020: ֳ has assigned a final 'BB-' rating to TransJamaica Highway Limited's (TJH) senior secured notes with a Stable Outlook.
Final pricing for the USD225 million notes was a coupon of 5.75%, lower than what ֳ assumed in its cases. Financial metrics in ֳ's rating case show some improvement due to the lower interest rate. The notes are payable on a quarterly basis, commencing April 2020. Principal on the notes will also be payable quarterly on the same dates as interest, but beginning April 2021. The final rating is the same as the expected rating assigned to the notes on January 31, 2020.
RATING RATIONALE
The rating reflects the stability and resiliency of a commuting asset strategically located in the outskirts of Kingston, Jamaica's capital city. The rating is also supported by a satisfactory rate-setting mechanism, which allows tariffs to be adjusted annually by U.S. inflation and the variations in foreign-currency (FX) rate between the Jamaican dollar (JMD) and the U.S. dollar (USD). Debt is senior secured, with typical project finance features that include limitations on additional indebtedness. Rating case minimum and average debt service coverage ratio (DSCR) are at 1.7x and 2.1x, respectively, which are viewed as strong for the rating category according to applicable criteria. The transaction presents robust break-even values for its most important variables and no dependency on traffic growth in order to repay the rated debt. Furthermore, it withstands domestic economic shocks beyond those observed between 2008-2014 when the Jamaican economy deeply deteriorated, supporting a rating above that of the Jamaican sovereign (B+/Positive), but constrained by Jamaica's Country Ceiling of 'BB-'.
The rating incorporates the expectation that the current concessionaire, the National Road Operating Constructing Company Limited (NROCC), which is a limited liability public company directly owned by the government of Jamaica, will make an IPO for up to 80% of TJH's shares shortly after the note issuance. According to the transaction documents, if the IPO is not successful and the collateral is not properly pledged in favor of the noteholders, an unwinding of the notes will be triggered. This is why the transaction was not rated under the Government-Related Entities Rating Criteria. We expect the IPO to be executed after the notes are issued, therefore the project's ultimate shareholders will not be known until that time. However, ֳ believes noteholder exposure to a potentially weak controlling shareholder is mitigated by: 1) the limited liability nature of the company, with all assets pledged to the trust. This should protect against potential consolidation in a sponsor insolvency scenario; 2) the transaction's debt structure, which limits future indebtedness and distributions, preventing a potentially weak sponsor from negatively affecting project operations or financial performance for its own benefit; and 3) the project's O&M contract signed with an experienced operator, which should ensure its satisfactory operation with costs at historical levels
KEY RATING DRIVERS
Strategically Located Essential Asset [Revenue Risk - Volume: Midrange]:
The toll road is the main link between the capital city of Jamaica, Kingston, and other populated urban and industrial centers including the cities of Portmore and May Pen. The asset is currently the only high-speed roadway serving the western part of Kingston's metropolitan area, with an estimated population of 1.4 million people along the corridor. The project has fully recovered from the 2009 crisis and the austerity program implemented by the International Monetary Fund (IMF) in the country, and has shown a traffic CAGR of 3.8% in 2013-2019. An important section of the road was slightly negatively affected by improvements in a competing route, but growth prospects in the long term are underpinned by its position as a strategic asset for the country, along with the fact that motorization rates in Jamaica are still low and expected to increase by 3.5% per annum until 2028.
Adequate Rate Adjustment Mechanism [Revenue Risk - Price: Midrange]:
Toll rates are adjusted annually using an escalation formula based on the U.S. CPI and the FX rate (USD/JMD) evolution, plus an additional 1% until the foreign debt is repaid in full, in accordance with the maximum capped toll level of that period, with additional increases if USD/JMD exchange rate depreciates by more than 10% intra-period. TJH is allowed to annually increase toll rates, but any change needs to be authorized by the roll regulator. If the toll regulator does not authorize such toll rates, the concessionaire would need to be compensated for the lost revenue. ֳ believes it is unlikely that the regulator would choose to cut prices given the toll rates' updated track record since 2009.
Fully Operational Asset [Infrastructure Development & renewal: Midrange]:
The toll road has been fully operational, with its four toll plazas, since 2012. It benefits from oversight from an independent engineer who provides financial annual reviews of the budget and the O&M plan and a commentary of the six succeeding semesters. The structure holds a three-month operations and maintenance reserve account, as well as a major maintenance reserve account funded with 100% of the costs to be carried out in the next 12 months, 50% in the next 13 to 24 months and 25% in the next 25 to 36 months. The assessment on this attribute is somewhat limited by the hand back requirements as included in the concession, which oblige the concessionaire to return the project to the grantor in a good and operable condition.
TJH has executed an amendment to the concession agreement in which the tenor could be renewed, at any time during 2034, at TJH's request for an additional 35 years. With this updated agreement, the hand back requirements will fall after the maturity of the notes. Nonetheless, ֳ's financial projections assume such expenses will be made in 2035-2036, given the concession currently ends in 2036.
Typical Debt Structure [Debt Structure: Midrange]:
The notes are senior, fully amortizing, fixed-rate and with typical project finance covenants. There is a six-month debt service reserve account and a lock-up trigger at a 1.25x backward- and forward-looking DSCR. No FX risk is anticipated given the formula for toll rates increase captures movements in the JMD/USD exchange rate.
Financial Profile
Under ֳ's Rating Case, the project yields a minimum and average DSCR of 1.7x and 2.1x, respectively, which is strong for the rating category under the indicative ranges of the applicable ֳ criteria, but ultimately constrained by Jamaica's Country Ceiling.
PEER GROUP
Comparable projects in the region include Autopistas del Sol, S.A. (AdS; B+/Negative) in Costa Rica, and Autopistas del Nordeste (Cayman) Limited (AdN; BB-/Stable) in The Dominican Republic. AdS and TJH are similar, as both are strong commuting assets within their respective country's capital cities. They also share all attributes at the Midrange level, but the difference in ratings comes from AdS's lower metrics (average DSCR of 1.2x versus 2.1x under ֳ's rating case).
AdN has a Weaker assessment on Volume Risk given it has mostly leisure traffic that has historically underperformed, but Stronger Debt Structure as targeted principal amortization on the notes is deferrable and stockholders have contributed with additional liquidity to support operations. Debt service payments are dependent upon a minimum revenue guarantee (MRG) provided by the Minister of Public Works and Communications. DSCR averages 1.3x, but the rating is constrained by ֳ's assessment of the credit quality of the MRG grantor obligation, which is commensurate with that of the sovereign.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Negative Rating Action:
- negative rating action on Jamaica's Country Ceiling;
- nil or negative traffic growth rate for a sustained period;
- an IPO outcome that is not supportive of ֳ's expectation with respect to the transaction's insulation from the risk presented by a financially weak or unexperienced sponsor.
Developments that May, Individually or Collectively, Lead to Positive Rating Action:
- Positive rating action on Jamaica's Country Ceiling.
TRANSACTION SUMMARY
TJH issued senior secured debt for USD225 million through a fully amortizing bond maturing in 2036 with a fixed 5.75% coupon rate.
In addition, the issuance contemplates a 1.25x backward and forward looking distribution test, along with a six-month debt service reserve account. There are limitations for the project incurring on additional debt. The proceeds will be used to pay existing debt, pay transaction fees and for general corporate purposes.
The toll road is the largest infrastructure project in Jamaica. Between 2006-2007, TJH experienced an increase in traffic levels due to the opening of the Portmore toll plaza in July 2006. Traffic levels declined from 2008 to 2010 due to the Jamaican recession, and the removal of a subsidy on toll rates in the Portmore toll plaza. Current toll rates for all toll plazas represent, on average, 85% of the annual capped toll rate.
In 2018, TJH experienced higher levels of traffic flow of (i.e. +8.3%) due to a partial shutdown of the Nelson Mandela Highway (a toll-free competing road) caused by the construction works related to its expansion from a two lane to a three lane road. However, when the construction works were finalized in 2019, traffic grew at a lower rate (i.e. +1.2%).
FINANCIAL ANALYSIS
ֳ Cases
The base case reflects ֳ's view of long-term sustainable performance. The base case includes a CAGR for traffic between 2020 and 2036 of 2.4%. The cost profile assumed is in line with the sponsor's original assumptions with a 5% increase. Macroeconomic assumptions are in line with ֳ's expectations. Under this scenario, the minimum and average DSCR are 1.9x and 2.4x, respectively.
ֳ's rating case reflects a reasonable likely scenario of stress that could occur in this project. Assumptions in relation to traffic are reduced to a CAGR of 1.4%. Operating, general and administrative, and maintenance expenses are increased by 7.5% throughout the tenor of the debt. Rating case metrics are slightly weaker than that of the base case, with minimum and average DSCR of 1.7x and 2.1x, respectively.
ֳ tested debt-structure resiliency by assessing the financial impact on individual stress factors. The breakeven scenarios include base case assumptions for the rest of the variables not being tested. Results demonstrate that the project can withstand a -1.0% traffic decrease every year. In addition, it tolerates toll rates as low as 49% of the capped toll level instead of the current weighted average of 85%. The project also remains able to service its debt with coverages above 1.0x when the agency replicates the same traffic growth rates as the ones experienced between 2009 and 2014.
SECURITY
The collateral includes, among other things: (i) certain reserve accounts; (ii) rights under certain project documents; (iii) tangible movable property; (iv) leasehold rights; and (v) an agreement to assign TJH's interest in the concession agreement.
Asset Description
TJH stretches for 49.9km, connecting Kingston with May Pen, and is divided in two corridors: T1 and T2.
The T1 corridor stretches between Kingston and May Pen (with a connection through to Spanish Town), and has three toll plazas located at Spanish Town, Vineyards and May Pen.
The T2 corridor, also called the Portmore Causeway, begins on Marcus Garvey Drive in Kingston and ends on Dyke Road in Portmore.
TJH acts as a major connector between business and key customers in the Island's southern parishes.
Date of Relevant Committee
22 January 2020
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.
For more information on ֳ's ESG Relevance Scores, visit
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.