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

Mass Transit Bonds Secured By Farebox Revenueslooks to see that all debt can be re-paid prior to theend of the concession term. While high growthrates may be achievable and the potential for strongrevenue generation over the long-term may exist,this becomes more speculative in the far-term andinconsistent with the certainty required for investment-graderatings.The revenue generation profiles of toll roadsmore naturally fit amortizing debt structures.However, current financing trends has seen debtstructures with a blend of multi-tranche debt withdifferent amortizing profiles including bullet maturitiesand other nonamortizing debt instruments.One key aspect of our analysis is to determinewhether or not the project cash flows can supportthe peak debt service levels that such instrumentscan introduce later in the concession term.To date, Standard & Poor’s has evaluated a limiteduniverse of such credits and our views are stillevolving. However, at present it is envisioned thatfor such very strong mature assets, is that peakaccreted debt would occur in the first 15-20 years ofthe concession (depending on the concession term);50% of the maximum accreted debt would berepaid within 30-40 years; and all of the debt wouldbe repaid by the 45th to 50th year of the concessionterm, leaving an ample refinancing tail should trafficand revenues not meet expectations. These areguidelines and each long-term highly leveraged tollroad concession would be evaluated on their ownmerits but the concept of limiting debt accretion andrequiring debt to be paid down well before the endof the concession term remain the same.Transactions with bullet maturities introduce refinancingrisk. An investment grade rating might bedifficult to achieve if more than 20% of total debtis due to be retired in any two consecutive years.Refinancing risk is manageable in long-dated concessionswith a sufficient refinancing tail of about10-30 years. Financial models, however, will beexamined to understand the assumptions beingmade about refinancing such as the interest rateemployed and stress tests will be used to evaluatethe sensitivities of the transactions to less favorableinterest rate assumptions. Investment grade structureswill typically have secured appropriate hedgingarrangements in this regard.With private ownership of toll facilities, equityconsiderations are introduced into the legal structure.As deferred pay structures are introduced, it alsomeans that early year coverage ratios are over inflated,giving a misleading indication of project performance.Furthermore, deferred pay structures can resultin leaving free cash flow available for equity distributionsprior to any substantial debt repayment.Standard & Poor’s views projects as having less riskwhere dividends are to be distributed only whenproject performance is in-line with or exceed expectations,and is likely to continue to do so.In this context, Standard & Poor’s analyzes theissuer’s proposed dividend distribution lock-upcovenants. These lock-ups are generally set at levelsjust below the financial model’s base case minimumdebt service coverage ratio for investment grade credits.The closer the permitted dividend distribution testis to the minimum coverage ratio, the better the subordinationrelationship between equity and debt.Dividend lock-up tests also focus on the number ofconsecutive years that must pass (following dividend)lock-up before dividend outflows recommence.Forward-looking tests provide for a stronger structure.Finally, the issuance of additional debt for shareholderdistributions require that the additionalbonds test for such purposes be set at a higherratio than for leveraging for other reasons, such ascapital expenditures. ■Mass Transit BondsSecured By Farebox RevenuesOperators of mass transit systems often look toleverage a variety of available revenues streamsto finance both long-term capital investments aswell as facilities less critical to the system. Whiletypically a recipient of federal, state and local moneysin the form of grants, taxes, toll revenues, andother proceeds, some operators look to revenuesderived from the farebox or operations of the systemas a pledge of security. While the farebox canbe a reliable and a relatively stable revenue source, itis obviously dependent on the viability and continuedoperations of the public transportation providerand is exposed to events or circumstances that candisrupt ridership or fare collection. The transitindustry’s history of deficit operations, laboractions, dependence on revenue transfers for capitalinvestment, as well as operating subsidies along witha general lack of fare raising flexibility are creditconcerns. Consequently, Standard & Poor’s RatingsServices rates few bonds backed solely by transitwww.standardandpoors.com149