Jan 09 -
Summary analysis -- DirectRoute (Limerick) Finance Ltd. ----------- 09-Jan-2013
CREDIT RATING: None. Please see issue list. Country: Ireland
Primary SIC: Misc. business
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.
The above 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 currently 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.
The project benefits from a change of law reserve of EUR3.3 million; a three-year, forward-looking maintenance reserve account, with a current balance of EUR0.2 million; and a six-month forward-looking debt service reserve account, with a current balance of EUR6.7 million.
The senior secured debt has a recovery rating of '1', reflecting our expectation of very high (90%-100%) recovery of outstanding principal in the event of a payment default. The senior secured debt facilities benefit from a strong security package, covenants, and contractual features for compensation on termination that are comparable to U.K. private finance initiatives.
The negative outlook reflects our view that, in the near term, traffic volumes are uncertain in the context of the ongoing economic difficulties in Ireland and that the operations and maintenance element of the project's cost structure still needs to be finally confirmed. Although volatility in near-term traffic volumes would have no immediate financial impact on the project due to the terms of the existing traffic guarantee, it could lead to a weaker financial position than we currently anticipate in the longer term.
We could take a negative rating action if the projected financial profile of the project were to deteriorate further--for example, should actual tolling costs continue to be greater than anticipated through 2013. A similar outcome could result if actual traffic volumes are lower than forecast.
We could take a positive rating action if the projected financial profile of the project were to improve. This could occur, for example, if actual traffic volumes grow faster than we currently anticipate or if sizeable further cost reductions are delivered.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011
-- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
-- Recovery Ratings For Project Finance Transactions, April 8, 2005