What Are Availability-Based Projects?

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

What Are Availability-Based Projects? Procurement Method for Public Sector Design-Build-Finance-Operate-Maintain (DBFOM) Main Risks Transferred: Construction Risk Operation / Maintenance / Renewal Risks Financing Risk Notable Risks Not Transferred: Demand Risk (Volume or Price) 3

Availability Payment Model Partnership Structure Public Sector Grantor Private Sector Concessionaire Ownership and strategic control of assets leased to concessionaire Designs output specification and payment/ penalty regime Makes regularly scheduled payments for performance Ongoing monitoring of compliance with Concession Agreement Concession Agreement Holder of Concession Agreement in a special purpose vehicle Raises capital against performance based payment system Designs, builds, operatesand maintains facilities through competitively tendered subcontracts Equity Debt Partnership Cost Distribution over Time Private Sector Construction Costs Long-term maintenance and operation costs Publilc Sector Milestone Payments, if any Performance-Based Payments Year Construction Period 5 Operating Concession period 40 4/3/14 4

Project Structure - Key Takeaways Concession Agreement: Lays out roles and responsibilities of both the public and private sector through the term of the concession, including payment mechanics. Project Company: Private sector entity established by project sponsors solely responsible for the design, building, financing, operation, and maintenance (DBFOM) of the asset. Public Sector Payments: Typically in two forms (1) Availability Payment (AP) paid during the operating phase of the project based on performance; and (2) Milestone Payment (MP) paid based on achievement of phases of completion during construction. Used for repayment of debt after waterfall. Pass through to 3 rd Parties: Project company will enter into contracts with 3 rd party entities for the construction and O&M (sometimes) requirements under the concession agreement. 5

What Are Availability-Based Projects? Availability-Based Projects that have Reached Financial Close, Select Countries Transportation Healthcare Education Other Total Projects Data Year Canada 49 83 11 78 221 (2014) UK 62 118 166 371 717 (2012) Australia 23 25 15 69 132 (2014) USA 8 0 0 1 9 (2014) Source: CCPPP, HM Treasury (UK), Infrastructure Australia, Fitch 6

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

Fitch Approach 8

Fitch Approach 1. Completion Risk 2. Revenue Risk Contractors Cost Structure Delay Risk Contractual Terms Project Counterparty Risk Termination Provisions Deductions Mechanism Price Indexation Project Analysis 3. Operation Risk 4. Infrastructure/Renewal Cost / Risk Isolation Visibility of Costs Market Testing of Contract Contractor Quality Provisioning Mechanism Visibility of Cost / Timing Project Hand Back 9

Global Infrastructure & Project Finance Attributes Structure: Financial Analysis 1. Debt Structure Debt Characteristics/Terms Structural Features Use of Derivatives Security Package Refinancing Risk Financial Analysis 2. Debt Service & Counterparty Risk Modelling Rating Scenarios Metrics Financial Counterparty Peer Analysis Fitch Credit Academy Availability Based Infrastructure Projects 10

What Are Availability-Based Projects? Project cost High Rail OFTOs Schools Roads Hospitals Low Lower Courts/Libraries Complexity Prisons Higher 11

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

Completion Risk 1. Completion Risk Contractors Cost Structure Delay Risk Contractual Terms Impact: Costs, Timing of Operational Commencement, Concession Termination Differentiator: Contractor Experience, Certainty of Cost Structure, Adequacy of Liquidity Provisions, Clarity of Dispute Resolution Mechanism Benchmarks Contractor/Guarantor Financial Strength, Size of Guarantees /Liquidated Damages/Performance Bonding, Backstop Delay Buffer Stronger Mid-range Weaker Experienced IG Contractor Fixed Price, Date Certain, Turnkey Creditworthy Completion Guarantee Ample Liquidity to Cover LDs, DS Generous Schedule Experienced Non-IG Contractor, also a Sponsor Strong Budget/Contingencies, Creditworthy Parent Guarantees Liquidity Covers LDs, DS Adequate Schedule for Completion Multiple Weak Contractors Tight Budget, Inadequate Contingency, Weak Parent Guarantees Optimistic Schedule, Delays Quickly Lead to Concession Termination Relatively Complex Construction 13

Completion Risk 14

Completion Risk Determination of Rating Cap No Constraint Stronger, Midrange Attributes Stronger Attributes Stronger Attributes Stronger Attributes + 2 Categories Midrange Attributes Supports Project in Worst Case Contractor Default Scenario + 1 Category Midrange Attributes Midrange Attributes Supports Project in Moderate Case Contractor Default Scenario Contractor Rating Weaker Attributes Doesn t Support Project in Moderate Case Contractor Default Scenario Below Investment Grade Contractor Credit Quality Weaker Attributes Project Complexity and Scale Weaker Attributes Contractor Expertise Contractor Replacement Weaker Attributes Contract Terms Performance Security 15

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

Revenue Risk 2. Revenue Risk Project Counterparty Risk Termination Provisions Deductions Mechanism Price Indexation Impact: Project revenue stream used for Milestone and Availability Payments Differentiator: Credit quality of revenue off-taker, contractual provisions for grantor performance, clarity of deduction regime, and indexation for inflation exposure Benchmarks Credit opinion of grantor payment obligations, payment priority within grantor s budget, quality of relationship between project parties, size of deduction cap Stronger Mid-range Weaker Strong public sector counterparty Contractual provisions establish grantor incentives to perform Unambiguous penalty deduction mechanism Indexation of variable cost Midrange private or public grantor Adequate provisions for grantor incentives to perform Somewhat unclear penalty deduction mechanism Limited exposure to inflation Weaker grantor counterparty Mismatch between variable costs and related revenues Ambiguous incentives for grantor to perform Open-ended penalty deduction regime 17

Revenue Risk- Grantor Payment Considerations Legal framework for payment Source of fund for payment Budgetary process for payment Flow of funds Essentiality of project Area(s) of government involvement Political support or opposition (current or future) Government s treatment of obligation (e.g. disclosure) 18

Revenue Risk- Credit Quality Stronger Clear senior lien on specified revenues Grantor recognition of obligation as debt Midrange Prioritization that makes obligation more than just a contract Limited political risk surrounding the project Weaker No clear prioritization for payment No special recognition of obligation 19

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

Operation and Lifecycle Risk 3. Operation Risk Cost / Risk Isolation Visibility of Costs Market Testing of Contract Contractor Quality Impact: Project s exposure to O&M and lifecycle cost increases above projections Differentiator: Project s ability to pass through costs to creditworthy third party, reasonableness of sponsor s cost projections, reserve levels to mitigate future costs Benchmarks Costs on a per unit basis, project s ability to withstand probable level of cost increases, break-evens for O&M, lifecycle, and all in costs Stronger Mid-range Weaker Pass through of all O&M High visibility of cost projections Contracts subject to periodic market testing Long-term contracts coterminous with debt Midrange private or public grantor Adequate provisions for grantor incentives to perform Somewhat unclear penalty deduction mechanism Limited exposure to inflation Cost retained by SPV and costs forecast dependent Limited pool of replacement contractors 21

PPP Availability Transactions Subject to Cost Risks 22

Agenda What are Availability-Based Projects? Overview of Fitch s Analytical Approach Completion Risk Revenue Risk Operations and Life Cycle Risk Case Studies

Availability-Based Project Ratings - Case Studies NYNJ Link LLC (Goethals Bridge Replacement) I-69 Development Project, LLP Desarrollo y Operación de Infraestructura Hospitalaria de Ixtapaluca, S.A.P.I. de C.V. Rating (Outlook) BBB- (Stable) BBB (Stable) AA+(mex) Date of Issuance / Maturity October 2013 / 2051 July 2014 / 2046 June 2013/ 2034 Transaction Type Bridge Replacement Highway Road Concession Hospital Status Pre-Construction Pre-Construction Operating since February 2012 Location (Country) New York / New Jersey (U.S.) South-west Indiana (U.S.) Estado de Mexico (Mexico) Completion Guarantor Kiewit Infrastructure Group Corsan-Corviam Construccion, S.A. Not applicable Concession Granting Authority Rated Debt Terms Amortization Profile Port Authority of NY/NJ (Fitch Rating: AA-) $461m PABs Amortizing with Debt Service Reserve Funds Indiana Finance Authority (IFA) (Fitch: AAA) $244m PABs, Weighted Coupon: 5.14% Amortizing with Debt Service Reserve Funds Ministry of Health (Fitch:BBB+) MXN 1.845 billion at 8.20% fixed Amortizing with Debt Service Reserve Funds Key Ratings / Risk Drivers Completion Risk Midrange Midrange Not applicable Revenue Risk Stronger Stronger Midrange Operational Risk Midrange Midrange Midrange Infra/Renewal Risk Midrange Midrange Weaker Debt Structure Midrange Midrange Midrange Rating Case DSCR min: 1.16x, ave: 1.28x min: 1.22x, ave: 1.53x min: 1.19x, ave: 1.30x Breakeven All-Cost Growth Rate CPI + 2.00% CPI + 2.41% + 32% to the budget 24

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