Infrastructure Financing and Ratings - The Commission...2012/05/09 · Demand-based –...
Transcript of 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
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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
All Electronic Tolling
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All Electronic Tolling
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
Public Private Partnerships
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Public Private Partnerships
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
Public or Private – Is One Model Better?
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Public or Private – Is One Model Better?
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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