The long-term 'BB-' debt rating on the senior secured loans issued by Republic of Ireland-based special-purpose vehicle DirectRoute (Limerick) Finance Ltd. reflect a composite of credit factors outlined below.
The debt comprises a EUR98.9 million senior secured fixed-rate and index-linked loan due 2040; a EUR3.0 million senior secured standby loan due 2040; and a EUR97.6 million senior secured European Investment Bank (EIB; AAA/Negative/A-1+) loan due 2038.
DirectRoute (Limerick) Finance onlent the proceeds of the loans to DirectRoute (Limerick) Ltd. (ProjectCo) to finance the construction of the Limerick Tunnel and road project in the Republic of Ireland (BBB+/Negative/A-2), under a public-private partnership (PPP) agreement. The project comprises a 10-kilometer dual carriageway and a 675-meter immersed tube tunnel under the River Shannon. Following completion of the construction phase in July 2010, ProjectCo operates and maintains the tunnel under a 35-year concession from the Irish National Roads Authority (NRA).
The aforementioned debt has an unconditional and irrevocable guarantee provided by MBIA U.K. Insurance Ltd. (MBIA U.K.; B/Negative/--) of payment of scheduled interest and principal. Under Standard & Poor's Ratings Services' criteria, a rating on a monoline-insured debt issue reflects the higher of the rating on the monoline and Standard & Poor's underlying rating (SPUR). Therefore, the long-term debt ratings on the debt currently reflect the SPUR, which is higher than the rating on MBIA.
The 'BB-' debt rating takes into account the following principal project risks:
-- Although the NRA provides a traffic guarantee (that is, paying any shortfall in cash generation up to a specified level), it does not guarantee cash flow available for debt service. Sharply lower-than-anticipated traffic volumes, combined with a failure to meet asset-availability obligations or higher-than-anticipated operating costs, for example, could result in the senior annual debt service coverage ratio (ADSCR) falling below 1.0x, despite the NRA guarantee.
-- The consequential effects of exposure to traffic risk. The continuing lower-than-expected traffic volumes have weakened the project revenues compared with those anticipated at financial close.
-- Continuing weak economic conditions in Ireland. We think these conditions could lead to permanently lower traffic volumes compared with those anticipated at financial close.
-- The project has an aggressive financing structure. We now anticipate that the ADSCR may approach the project default level of 1.05x during the remaining life of the debt, with a minimum ADSCR of less than 1.0x, if performance is in line with our base-case scenario. Although the minimum ratio is not forecast to occur until close to the maturity of the debt, this leaves no room for further underperformance, in our opinion, despite the NRA guarantee.
-- ProjectCo chooses to retain various operating and maintenance risks. It is therefore exposed to the risk of greater-than-budgeted expenditure in these areas.
These risks are offset by the following credit strengths:
-- The project receives material support from the NRA in the form of the traffic guarantee and sharing of some operating cost risks.
-- The contracts for maintenance and toll operations, in general, successfully transfer risk from ProjectCo. In addition, the contracts include flexibility to allow ProjectCo to adapt operations where, for example, the traffic volume is lower than anticipated, as is currently the case.
-- The project rationale is strong because the tunnel enables long-distance drivers to bypass the city of Limerick, which should save them a significant amount of time.
Average daily traffic levels are still underperforming compared to expectations at financial close and remain well below the NRA guarantee level. The trend of the data appears to be similar to 2011 and there are no obvious signs that this is likely to improve significantly in the short term. Relationships between the counterparties and ProjectCo are cordial. The few snags present from construction still remain. The number of incidents, such as ghost drivers (those driving in the wrong direction on the entry ramps or approach roads, for example), have significantly reduced over the first half of this year compared to the first half of last year.
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