S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Transportationenues. Specifically, tests with projected rather thanhistorical revenues serving as the basis for calculatingfuture debt service coverage significantly reducethe value of such a test, but are relatively common.In these cases the relative conservativeness of management—andtheir projections—will be a factor inhow a prospective test is viewed.A debt service reserve, fully funded at the equivalentof one year’s debt service requirement, can providesignificant liquidity to bondholders,particularly given a potential for delays in implementingrequired rate increases.Additionally in some cases, states have enhancedthe security for toll revenue bonds by pledgingstate-levied highway user tax receipts, or a straightGO backup.Financial Projections/Debt Structure/Sensitivity AnalysesOne traditional measure of financial strength fortoll revenue-backed facilities and project bonds isdebt service coverage. Typical coverage for manyexisting U.S. operating toll facility is in the 1.5x-2xrange for debt service from net revenues, as manyprovide for significant pay-as-you-go capital costsafter operations and debt service. Standard &Poor’s believes that investment grade start-up facilitiesshould reach or exceed these coverage levels tooffset many of the risks indicated above. Toll roadtransactions structured under a corporate modelwhere senior unsecured debt is offered should providesolid interest coverage ratios and should have along enough concession term to allow for re-financingand ultimate debt repayment.For start-up facilities, the amount of debt that aproject must support establishes the hurdle, in theform of debt service, for which the project mustexceed. The existence of equity or subordinateddebt positions or contributions from privateinvestors, local, state, or federal governments canserve to lower the bar, making the project moreaffordable, and hence more creditworthy. A debtservice schedule that is relatively level over timealso allows more flexibility than an upwardlyincreasing schedule that keeps the pressure on constantgrowth through traffic or rate increases.Sensitivity analyses are also typically requested tosimulate normal or historic changes in economicconditions, traffic declines, operating and capitalcost increases, and tariff adjustments to help gaugethe project’s ability to withstand change. Whereprojections are critical to future financial condition,Standard & Poor’s will typically also request low,no-growth and break-even sensitivity cases.Public Private Partnerships:Revenue/Debt and Equity ConsiderationsThe recent multi-billion dollar privatizations of theIndiana Toll Road and the Chicago Skyway representnot only an enormous change in US toll roadfinancing, but also in global toll road financings.These two financings mark a departure from thetypical 25-35 year project finance model and hasled to significantly different debt structures. Thebasic analytical considerations in evaluating thesetransactions remains the same with regard todemand, competition, management, and operationsand our analysis still follows a combination ofexisting toll road criteria and project finance criteria.However, the debt levels tend to be significantlyhigher and debt repayment tends to extend significantlybeyond the traditional 20-30 year period.Furthermore, the debt associated with thesetransactions tend to use defer pay structures andrely on refinancing. To date, these transactions haveoccurred with respect to existing toll facilities withdemonstrated strong cash flow generation, whichhas enabled them to support the higher debt levels.In addition, the longer amortization periods areaided by concession terms that are considerablylonger (75-99 years) than in the typical concessionfinancing. Debt levels would have to moderate significantlyin a privatization of a start-up facilityeven with a very long-term concession period.The challenge of long-term concession periods isin evaluating the traffic and revenue forecasts andfeasibility studies. Planning or macro-economicforecasts, which are key inputs into most trafficmodels, themselves, only stretch as far as 10-20years into the future. Additionally, demand modelsgenerally remain incapable of capturing structuraladjustments to travel markets—such as the longertermimpacts of changes to preferences, relativepricing, technology and so forth. To address thisconcern, Standard & Poor’s takes a conservativeapproach to longer-term traffic forecasts, reducinggrowth-rate expectations over time to reflectincreasing uncertainty and unforeseen events thatcould result in real declines. While the approach totoll rate setting under a private operator model willfocus more on revenue maximization, price elasticityis nonlinear. Mid-to far-term growth ratesexceeding 1% per year are unlikely to be consideredin our analysis and, depending on the assetscharacteristics, this could be capped at zero.Similarly, in evaluating projected tariff increases,revenue projections will be adjusted only for reasonableinflationary corrections. It is under thistraffic and revenue profile, that Standard & Poor’s148 Standard & Poor’s Public Finance Criteria 2007