U.S. and Canadian Not- For-Profit Transportation Infrastructure Enterprises

Transcription

1 U.S. and Canadian Not- For-Profit Transportation Infrastructure Enterprises Request for Comment on Proposed Criteria Joe Pezzimenti Director Robert Dobbins Director Tom Connell Managing Director Kurt Forsgren Managing Director July 27, 2017 Copyright 2017 by S&P Global. All rights reserved.

2 Agenda Objectives & Scope Proposed Criteria Overview Analytical Framework Enterprise Profile Analytical Framework Financial Profile Example Applying Criteria Commenting on the Proposed Criteria 7 Questions 2

3 1 Objectives & Scope

4 Criteria Objectives CONSOLIDATE CRITERIA INCREASE TRANSPARENCY IMPROVE CONSISTENCY ENHANCE GLOBAL COMPARABILITY for airport, port, toll road, parking system, airport special facility project, and standalone passenger facility charge revenue bond transactions. of our methodology and assumptions to the marketplace and forward-looking nature of our ratings of ratings to other sectors and asset classes 4

5 Scope WHAT IT COVERS Issuer Credit Ratings (ICRs), Stand- Alone Credit Profiles (SACPs), and issue credit ratings for not-for-profit transportation infrastructure enterprises in the U.S. and Canada (i.e. airports, ports, toll roads and bridges, parking) Bonds supported by general obligation revenue pledges or by specific revenue streams (i.e. passenger facility charge revenues or airport special facility project revenues) WHAT IT DOES NOT COVER Mass Transit Agencies For-profit transportation infrastructure enterprises Bonds supported by sales tax revenues or a pledge of federal grants (like GARVEE bonds) Investor-owned transportation enterprises Projects we assess under our project finance criteria 5

6 Impact on Ratings About 55% will not change About 30% could About 15% could Most rating changes will be modest, only one notch, assuming credit fundamentals for particular transportation infrastructure enterprises do not change between now and implementation of the criteria 6

7 2 Proposed Criteria Overview

8 Analytical Framework Chart 1 U.S./Canada Non-For-Profit Transportation Infrastructure Enterprise Criteria Framework Economic Fundamentals 10% Industry Risk 20% Market Position 60% Management and Governance 10% Financial Performance 55% Debt and Liabilities 35% Liquidity and Financial Flexibility 10% Enterprise Profile Initial Indicative Rating Financial Profile 8

9 Unified Approach with Asset Class Differentiation ASSET CLASS DIFFERENTIATION APPLICABLE TO ALL ENTERPRISE PROFILE Primary Credit Factors Economic Fundamentals Industry Risk Market Position A Management and Governance FINANCIAL PROFILE Primary Credit Factors Financial Performance B Debt and Liabilities C Liquidity and Financial Flexibility D A Unique Market Position Assessments By Asset Class B C D Primary Financial Metrics Airports (GARBs, Stand-Alone PFC debt) Airport Special Facility Projects Parking Facilities Ports Toll Roads & Bridges (B) Coverage (airports, parking, ports, toll roads, special facility projects); Maximum Annual Debt Service Coverage (stand-alone PFC debt) (C) Debt to Net Revenues (airports, parking, ports, toll roads, special facility projects); Stand-alone PFC debt to Annual PFC revenues (stand-alone PFC debt) (D) Unrestricted Days Cash on Hand (airports, parking, ports, toll roads); Unrestricted Reserves to Debt (special facility projects, stand-alone PFC debt) 9

10 ENTERPRISE RISK PROFILE Combining The Enterprise And Financial Risk Profiles To Determine The Initial Indicative Rating Table 1 FINANCIAL RISK PROFILE Extremely strong Very strong Strong Adequate Vulnerable Highly vulnerable 1 Extremely strong aaa aa+ aa- a bbb+/bbb bb+bb 2 Very strong aa+ aa/aa- a+ a- bbb/bbb- bb/bb- 3 Strong aa- a+ a bbb+/bbb bbb-/bb+ bb- 4 Adequate a a/a- a-/bbb+ bbb/bbb- bb b+ 5 Vulnerable bbb+ bbb/bbb- bbb-/bb+ bb bb- b 6 Highly vulnerable bbb- bb bb- b+ b b- If an assessment falls at or near a midpoint when scoring the enterprise or financial profile assessments, or at or near a cut-off for any component thereof, we generally assign a stronger assessment if trends are improving or we believe future performance will improve. A weaker assessment generally is assigned if trends are weakening or we believe future performance will be weaker. 10

11 Overriding Factors, Caps, and Holistic Analysis Chart 1 (continued ) Enterprise Profile Initial Indicative Rating Financial Profile Positive Overriding Factors Negative Overriding Factors Rating Caps Holistic Analysis (limited by applicable caps) Indicative Rating 11

12 Overriding Factors, Caps, and Holistic Analysis Continued Adjustments cannot exceed a cap. Caps are absolute and final. Adjustments are generally 1 notch unless additional comments note otherwise If multiple overriding conditions exist, which we expect to be rare, we would generally adjust the initial indicative rating by the net effect of those conditions. On an exceptional basis, there may be additional situations we haven t yet observed that could also result in rating overrides or caps 12

13 Getting to the Final Issue Rating Chart 1 (continued ) Indicative Rating Application of Government-Related Entities (GRE), Group Rating Methodology (GRM), Ratings Above the Sovereign (ROS) criteria, when applicable Final Issuer Credit Rating Legal Structure / Pledge Final Issue Credit Rating 13

14 3 Enterprise Profile

15 Analytical Framework for Enterprise Profile (EP) Chart 2 Enterprise Profile Assessment Economic Fundamentals (10%) Industry Risk (20%) Market Position (60%) Management and Governance (10%) GDP per capita Economic cyclicality Role and importance Strategic positioning Service area population size and growth rate Service area unemployment rate Competitive risk and growth Activity level trends Rate-setting flexibility Risk management Organizational effectiveness Assesses operating environment and incorporates broad industry factors and organization-specific factors. Factors initial scores range from 1 (best) to 6 (worst) based on data metrics and qualitative aspects. In general, we assess each factor by examining the variety of factors cited and use a preponderance of factors to determine the initial assessment. Additional considerations may be taken into account, resulting in assessments stronger or weaker than the initial assessments with adjustments of one or two assessment levels more common than adjustments of three or more. 15

16 Economic Fundamentals [10% of the enterprise profile assessment] We assess the transportation infrastructure enterprise s service area s ability to provide sustainable demand for its services. ECONOMIC FUNDAMENTALS To derive the assessment, we use either local or national GDP per capita data. Based on where the transportation infrastructure enterprise s assets are located. Based on local or national GDP We expect most US and Canadian credits to score between a 1 and 2. 16

17 Industry Risk [20% of the enterprise profile assessment] ALL ASSET CLASSES HAVE LOW INDUSTRY RISK ECONOMIC CYCLICALITY (assessed as very strong ) Low cyclicality relative to other industries in terms of revenues and profitability. Demand fluctuates with economic and population growth, employment levels, and trade flows. COMPETITIVE RISK AND GROWTH (assessed as very strong ) Effectiveness of barriers to entry A Level and trend of industry profit margins B Risk of secular change or substitution of service, products, and technologies C Risk in growth trends D A B C D (A) Effective barriers to entry exist (B) Low risk Assessments for all asset classes (C) Low risk for airports and ports; and medium risk for toll roads and parking systems (D) Medium risk for airports and ports; and low risk for toll roads and parking systems We believe the transportation infrastructure enterprise industry is "low risk" compared with other industries and sectors, equating to 'very strong' or '2' on our six-point scale. Our industry risk assessment is consistent with the principles outlined in "Methodology: Industry Risk", published Nov. 19, 2013, and "Key Credit Factors For The Transportation Infrastructure Industry", published Nov. 19,

18 Market Position Airports [60% of the enterprise profile assessment] Assessment includes both characteristics that are unique to each asset class and general characteristics 18

19 Market Position Airport Special Facility Projects [60% of the enterprise profile assessment]. Assessment includes both characteristics that are unique to each asset class and general characteristics 19

20 Market Position Parking Facilities [60% of the enterprise profile assessment] Assessment includes both characteristics that are unique to each asset class and general characteristics 20

21 Market Position Ports [60% of the enterprise profile assessment] Assessment includes both characteristics that are unique to each asset class and general characteristics 21

22 Market Position Toll Roads & Bridges [60% of the enterprise profile assessment] Assessment includes both characteristics that are unique to each asset class and general characteristics 22

23 Market Position General Characteristics of Infrastructure Enterprises Assessment includes both characteristics that are unique to each asset class and general characteristics 23

24 Management & Governance [10% of the enterprise profile assessment] Aligned with general S&P criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers MANAGEMENT & GOVERNANCE Strategic Positioning Risk Management & Financial Management Organizational Effectiveness Score 1-6 Governance (typically credit neutral) Overall assessment may be capped at 5 or vulnerable if any one factor presents sufficient risk to the enterprise s credit profile 24

25 4 Financial Profile

26 Analytical Framework for Financial Profile (FP) Chart 3 Financial Profile Assessment Financial performance (55%) Debt and Liabilities (35%) Liquidity and Financial Flexibility (10%) Coverage Debt to net revenues Unrestricted days cash on hand Unrestricted reserves to debt Assesses the financial strength of the transportation infrastructure enterprise. Factors initial scores range from 1 (best) to 6 (worst) based on data metrics In general, we assess each factor using its corresponding table (table 5, 6, or 7) to determine the initial assessment. Additional considerations may be taken into account, resulting in assessments stronger or weaker than the initial assessments with adjustments of one or two assessment levels more common than adjustments of three or more. 26

27 Financial Profile Financial Performance Assesses financial performance Measured through coverage Debt and Liabilities Assesses debt and liabilities levels Measured through debt to net revenues Liquidity and Financial Flexibility Assesses liquidity and financial flexibility Measured through unrestricted days cash on hand and unrestricted reserves to debt Financial Policies Measures quality of policies and practices and affect on the financial profile Overall financial profile adjusted if we view financial policies negatively 27

28 Financial Performance [55% of the financial profile assessment] Table 5 POSITIVE CONSIDERATIONS Break-even enterprise Rate-setting flexibility NEGATIVE CONSIDERATIONS Narrow or volatile revenue stream Limited rate-setting flexibility Debt service coverage covenant violation Materially increase in pension or OPEB costs Overstated coverage due to bullet amortization 28

29 Debt and Liabilities [35% of the financial profile assessment] Table 6 POSITIVE CONSIDERATIONS Break-even enterprise Limited or no additional debt needs Facilities are relatively new and require minimal capital investment Debt per enplanement is low, if applicable NEGATIVE CONSIDERATIONS Single asset or narrow revenue stream Significant additional debt needs More than 50% of debt is exposed to interest-rate changes Sizeable, unfunded defined-benefit pension plan or OPEB obligations Debt per enplanement is very high, if applicable 29

30 Liquidity and Financial Flexibility [10% of the financial profile assessment] Table 7 POSITIVE CONSIDERATIONS Break-even enterprise NEGATIVE CONSIDERATIONS Contingent liquidity risks Reliance on lines of credit 30

31 Financial Policies Table 8 Table 9 31

32 5 Example - Airport

33 Enterprise Profile (EP) AIRPORT EXAMPLE Industry Risk Economic Fundamentals Market Position Management and Governance Very strong, standard score Extremely strong Strong, see next slide for detail Strong 2 x 20% = x 10% = x 60% = x 10% = 0.3 Preliminary EP Score Final Score No Adjustments 33

34 Market Position Detail AIRPORT EXAMPLE Enplanement characteristics, proximity to other airports, role within industry, airline carrier diversity, health of service area economy, rate setting ability, airline cost structure, capital needs, etc. TABLE 3 3 STRONG 34

35 Financial Profile (FP) AIRPORT EXAMPLE Financial Policies All sub-factors = neutral NEUTRAL Financial Performance Debt & Liabilities Liquidity and Financial Flexibility Coverage = 1.1 = 5 initial score Adjust initial score -1 because airport is Fully Residual Debt to Net Revenues = 15x = 4 initial score Debt per enplanement is $100, no adjustment Adjust initial score -1 because Fully Residual Unrestricted days cash on hand = 250 Unrestricted reserves to debt = 20% 4 initial score Adjust initial score -1 because Fully Residual 4.0 x 55% = x 35% = x 10% = 0.3 Preliminary FP Score Final Score Positive adjustments for trend 35

36 ENTERPRISE RISK PROFILE Determining the Initial Indicative Rating AIRPORT EXAMPLE Combining The Enterprise And Financial Risk Profiles To Determine The Initial Indicative Rating FINANCIAL RISK PROFILE Extremely strong Very strong Strong Adequate Vulnerable Highly vulnerable 1 Extremely strong aaa aa+ aa- a bbb+/bbb bb+bb 2 Very strong aa+ aa/aa- a+ a- bbb/bbb- bb/bb- 3 Strong aa- a+ a bbb+/bbb bbb-/bb+ bb- 4 Adequate a a/a- a-/bbb+ bbb/bbb- bb b+ 5 Vulnerable bbb+ bbb/bbb- bbb-/bb+ bb bb- b 6 Highly vulnerable bbb- bb bb- b+ b b- 36

37 Steps to Arriving at Final Rating AIRPORT EXAMPLE Industry Risk 2.0 Economic Fundamentals 1.0 Market Position 3.0 Management and Governance 3.0 Enterprise Profile MATRIX a Financial Policies Neutral Financial Performance 4.0 Debt and Liabilities 3.0 Liquidity and Financial Flexibility 3.0 Financial Profile 3 3 Initial Indicative Rating NO OVERRIDING FACTORS HOLISTIC ANALYSIS a+ Indicative Rating Includes favorable adjustment GRE, GRM, & ROS CRITERIA NOT APPLICABLE HERE A+ Final Issuer Credit Rating LEGAL STRUCTURE/PLEDGE A+ Final Issue Rating 37

38 6 Commenting on the Proposed Criteria

39 Requesting Market Feedback SUBMIT COMMENTS TO: Our S&P criteria are always available for free at DEADLINE September 1,

40 Additional Resources FOR MORE INFORMATION, PLEASE VISIT: Request for comment and credit FAQ ADDITIONAL RELEVANT CRITERIA PIECES: Group Rating Methodology Industry Risk Management & Governance 40

41 7 Questions?

42 Thank You Joe Pezzimenti (212) Robert Dobbins (415) Tom Connell (416) Kurt Forsgren

43 Appendix

44 Key Term: Break-even enterprise Break-even enterprise. Under these criteria, break-even enterprise has multiple meanings: (1) An enterprise or project whereby fees, charges, and rents, which make up the bulk of the entity's operating revenues, are paid by key tenants or users of the entity's facilities on a fully residual basis. For airports, this would refer to landing fees and terminal rents paid by the airlines. Some examples of enterprises we would not consider fully residual are airports that employ a hybrid or compensatory rate setting methodology. (2) A contractual framework whereby revenues securing the debt under consideration are produced on a residual cost recovery basis, including an unlimited step-up provision for the sharing of capital and operating expenses among key users of the enterprise or facility. (3) An enterprise or project where all excess revenues available, after meeting all required funding requirements of the enterprise or project, are transferred out to a city, county, state, province, or other party. 44

45 Core Financial Performance Metric: Coverage Table 11 45

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