Rating Methodology December 2006

Rating Methodology

Contact

London

Monica Merli

Andrew Blease

Stuart Lawton

New York

Chee Mee Hu

Aaron Freedman

Fred Zelaya

Larry Hess

Toronto

Catherine Deluz

Andrew Kriegler

Sydney

Clement Chong

Brian Cahill

Hong Kong

Elizabeth Allen

Operational Toll Roads

December 2006

Phone

44.20.7772.5454

1.212.553.1653

416.214.1635

61.2.9270.8100

852.2916.1121

Overview

This Rating Methodology provides detailed guidance regarding Moody’s global approach to rating operational toll roads that are privately financed.

1

In particular, this document outlines the key analytical factors that underpin ratings in this toll roads universe and provides guidance as to how Moody’s combines each of these factors to arrive at a final rating outcome.

Toll roads are an increasingly diverse universe, both in terms of types of assets (ranging from single-asset roads to large networks of major trunk routes) and as regards their financing (ranging from ring-fenced project financing relying on bank loans or monoline insurers’ guarantees to more standard “corporate” financing through the public bond markets). Innovative financing structures, combined with increasing privatisation of toll road assets, have also led to different operating models – in Europe, for example, large toll road network operators are increasingly limited liability companies.

Although financing a toll road asset can encompass both the construction phase and the funding of ongoing operations, this rating methodology solely covers rating considerations for toll roads that are already fully operational . While a number of the factors outlined in this report also apply to the rating of toll roads in the construction phase, specific credit considerations during construction are sufficiently different to warrant a separate methodological approach.

In this rating methodology, we discuss the six key rating factors that constitute Moody’s analytical framework for rating operational toll road operators. These considerations are outlined below. In light of the variety of financing and strategic alternatives available to toll road operators, we also outline a number of additional factors (including any existing construction risk remaining in the business model, as well as rating implications of protective clauses in credit documentation) that are applied in addition to the six key rating factors.

The six key factors are as follows:

1. Asset Type

2. Fundamentals of the Service Area

3. Traffic Profile

4. Concession and Regulatory Framework

5. Stability of Business Model and Financial Structure

6. Key Credit Metrics

1.

This methodology does not apply to toll roads financed under the US public finance model, for which Moody’s has published a separate Rating Methodology: Moody’s

Rating Methodology for State and Local Government-Owned Toll Facilities in the United States, March 2006.

Each of these rating factors encompasses a number of sub-factors as well as quantitative measures, which we discuss in detail in this report. In an effort to promote transparency, we have also provided a detailed rating grid that maps each of the factors above, including sub-factors and financial metrics, to broad letter-rating categories.

The purpose of this rating grid is to provide investors, issuers and intermediaries with a detailed reference tool to gauge a company’s rating within two notches. While the rating grid aims to offer robust guidelines as to how we rate operational toll roads, we would nonetheless caution that no company will match exactly every factor outlined for a given rating category; the rating outcome is rather a balance of all the factors we have identified.

Certain more generic factors (including corporate governance, management strength and financial disclosure) remain important inputs into our ratings. Importantly, given continued government involvement and ownership in many toll road operators, we also apply our rating methodology for Government-Related Issuers (“GRIs”), as appropriate, to the toll road sector.

2

However, all these considerations apply to all sectors within the corporate finance franchise; as a result, we have chosen not to cover these issues in depth within this rating methodology.

Industry Definition

For the purposes of this methodology, we define operational toll roads as follows:

• Issuers whose principal line of business is the operation and maintenance of road or bridge assets, typically under a concession agreement with the relevant governmental authority.

• Principal sources of revenues are from tolls directly extracted from traffic flows on the road asset. As a result, the model of “shadow toll” roads used in the UK and other European jurisdictions is not directly covered in this rating methodology, although many rating factors covered in this report would also apply to shadow toll road operators.

• Toll roads are operational, i.e. they have exited the construction phase on their core assets with no contractual overhangs from the construction phase, and are able to demonstrate a track record of existing tolled traffic on their core road asset.

• This methodology encompasses different types of financing for toll road assets, e.g. project finance or public debt funding. For further discussions on specific rating implications of financing sources, please refer to the sections entitled “Evaluating Construction and Ramp-Up Risk” and “Structural Considerations and Sources of Rating Uplift from Creditor Protection” below.

Industry Overview

By and large, operational toll roads can exhibit significantly lower business risk than other sectors within corporate finance. As a rule of thumb, we have publicly stated that business risk profiles of large toll road operators (rated European operators are a case in point) can often be commensurate with a “Aa” rating category,

3

largely as a result of:

• Monopoly-type activities, supported by long-term concession agreements.

• Typically strong visibility in revenues and profit generation, due to (i) low demand elasticity and general resilience to economic fluctuations, and (ii) generally clear and predictable mechanisms for tariff increases, which will sustain revenues over the long term.

• Straightforward business models, characterised by high profit and cash flow conversion, often with upside for cost efficiencies, and limited scope for cash calls resulting from off-balance sheet liabilities.

• Typically well-established competition trends, including a track record of multi-modal (e.g. air, rail, fluvial) competitive dynamics, and visibility in future national or regional infrastructure developments, which may yield added competition going forward.

The high and sustainable levels of cash flows afforded by these characteristics can also translate into a significant capacity to sustain high debt levels over the long term. Additionally, the high level of future visibility typically associated with a toll road business can make very long-term debt financing an attractive proposition to leverage shareholder returns. In other words, the toll road business model can often generate significant debt capacity.

2.

See Moody’s Rating Methodology: The Application of Joint Default Analysis to Government Related Issuers, April 2005, Special Comment: The Incorporation of Joint-

Default Analysis into Moody’s Corporate, Financial and Government Rating Methodologies, February 2005, and Special Comment: Rating Government-Related Issu-

ers in European Corporate Finance, June 2005.

3.

See Moody’s Special Comment entitled European Toll Road Network Operators: Very Low Business Risk, But Ultimate Debt Capacity Usage Remains Key, October

2004.

2 Moody’s Rating Methodology

By virtue of their stable and cash generative business profiles, toll roads have a number of characteristics suggestive of other sectors that we would characterise as having low business risk, such as regulated network utilities. However, we highlight a number of key distinctions between toll roads and such sectors that have specific rating implications. Such differences include the following:

• Toll road regimes are generally concession-based. These concessions are in turn often negotiated on a caseby-case basis, and are subject to amendments (Rating Factor #4: Concession and Regulatory Framework addresses these points). Conversely, utilities tend to be based more on legislation or jurisdiction-wide regulation and are less subject to negotiation.

• Toll road assets are generally less complex than utilities and, given strong cash flow generation ability, may provide significant return potential to investors compared to utilities. Moreover, certain utilities (e.g. the

UK water sector) may be required to re-balance business and financial costs and distribute away any overperformance. On the other hand, re-balancing mechanisms in utility regulation (e.g. periodic reviews) may also protect against negative factors impacting business performance (e.g. loss of customers or higher costs) or funding costs, a protection typically not available to toll road operators under the concession framework.

This is a relevant credit consideration in comparing regulated network utilities with concession-based toll road network operators, although the relative weakness of toll roads is mitigated by their lower operational leverage.

4

• The typical investment cycle for a toll road is for a large investment upfront to either construct the infrastructure assets or purchase the concession rights over existing assets and a moderate degree of maintenance capital expenditure (“capex”) during the concession life to maintain assets to the required operating and hand-back conditions.

5

In contrast, utilities are often privatised at values that are lower than the replacement cost of the regulated assets but need to incur generally larger amounts of maintenance capex on an ongoing basis to restore and preserve asset serviceability than toll roads. However, a toll road’s potential higher degree of free cash flow generation during the operational phase may be absorbed by the need to repay debt as the concession life runs out. A regulated utility, typically an asset owner, can often roll over debt and maintain its capital structure in a “perpetual” asset model. The different investment dynamics also imply that a toll road typically has no ability to pass on higher interest costs to its customers through tariff increases, a type of protection sometimes available to utilities under their tariff regime.

• Toll roads are likely to be less supervised by the government than regulated utilities. Whilst certain mature regulated utility sectors are subject to sophisticated regulatory ring-fencing provisions, these are typically not well developed in concession agreements. Ring-fencing in the toll road sector is more likely to be achieved contractually through the financing arrangements.

• In sum, operational toll roads are likely to have more leeway than utilities in which to prosper or fail. As a result, the potential for rating migration for toll road assets may in fact be more than for utilities. Of course, the extent of any such risk depends in part on management’s strategic and financial decisions. Rating Factor

#5: Stability of Business Model and Financial Structure covers these points in detail.

As previously stated in Moody’s research, a toll road operator’s usage of debt capacity is critical in determining the ultimate credit profile of the issuer. Event risk can be material (e.g. debt-funded acquisitions, changes in shareholder structures and objectives) and can rapidly impact an operator’s creditworthiness. Two operators with similar business fundamentals and similar metrics at day one may therefore be rated differently, depending on future strategy and event risk. While these considerations are present across all sectors in corporate finance, the longer-term funding horizon of most toll road network operators can make these considerations a more important factor for this sector in particular.

For example, a toll road operator may exhibit negative free cash flows resulting from a large capital expenditures programme. However, if the operator’s strategy focuses exclusively on the core concession and the provision of the public toll road service and if the financing terms and conditions restrict its ability to re-leverage, pay out cash ahead of bondholders or erode its liquidity reserves, then the rating impact of the cash flow deficit could be mitigated (assuming we believe that existing and future liquidity remains adequate to meet operating needs and service debt).

4.

In certain jurisdictions, a toll road concession may include provisions that guarantee a minimum level of revenues to the concessionaire, thus mitigating or removing traffic risk. For example, in Chile the government has provided differing levels of minimum revenue guarantees on certain roads as an integral enhancement to the concession agreement. This protection may provide material credit support when assessing the credit profile of a start-up toll road. It remains a positive feature for operational toll roads whose revenues are materially higher than the minimum guaranteed level. This is captured under Rating Factor #4: Concession and Regulatory

Framework.

5.

Maintenance capex is likely to be higher towards the later part of a typical 30-year concession for a single-asset company. For large network operators, the portfolio effect of many different motorway stretches built several years apart tends to smooth maintenance capex.

Moody’s Rating Methodology 3

Conversely, all things being equal, a strategic focus on opportunistic investments and short-term returns to shareholders adds significant volatility to the operator’s credit profile. If this perceived volatility is coupled with a lack of restrictions on corporate behaviour (e.g. M&A activities, dividends, additional indebtedness), then the capital structure and cash flow levels of the company could well be subject to significant change over the tenor of bondholders’ investment, thereby reducing visibility and, ultimately, credit quality.

As a result of these considerations, even with a business risk profile commensurate with the “Aa” rating categories for large, mature toll road operators in developed countries and in investment-grade categories for most toll roads that

Moody’s has reviewed, final credit ratings often end up in the single-A or Baa range. Non-investment grade ratings are also possible if leverage is pushed to extreme levels and debt repayment becomes highly dependent on traffic growing materially and constantly over the very long term.

Moody’s notes that financial structures for toll road operators have become increasingly leveraged as competition has intensified for the ownership of infrastructure assets, which given their stable cash flows are now regarded by many investors as a separate and desirable asset class, particularly suitable to match long-term liabilities. Albeit based on limited data points due to the recent rating history of this sector, rating trends for the corporate issuers rated by Moody’s, as shown in

Figure 1, are illustrative, in our opinion, of a wider deterioration in credit quality across the whole industry.

Figure 1 – Toll Road Sector: Rating History

Average Corporate Toll Road Rating History

Aa3

A1

A2

A3

Baa1

Baa2

Ap r-2

00

1

Aug-

20

01

Dec

-2

00

1

Ap r-2

002

Aug-

200

2

De c-2

00

2

Ap r-2

00

3

Au g-2

00

3

Dec

-2

00

3

Ap r-2

004

Aug-

200

4

De c-2

00

4

Ap r-2

00

5

Au g-2

00

5

Dec

-2

00

5

Ap r-2

006

Aug-

20

06


About the Rated Universe

Moody’s currently rates 24 toll road operators that we regard as fully operational, accounting for about US$18.7 billion of total debt instruments rated. Figure 2 contains a list of all rated operational toll roads, showing their ratings, location and amount of rated debt.

6

Figure 2 - Rated Operational Toll Roads (excl. shadow toll and availability roads and roads under construction/ramp-up)

Current Rating Outlook

Rated Debt

(in US$ millions) Toll Roads

Asia

Chinese Future Corporation

Road King Infrastructure Limited

Ba2

Ba1 stable stable

225.0

200.0

Australia

Airport Motorway Trust

Interlink Roads Pty Ltd

Transurban Finance Company Pty Ltd

Europe

Alis Finace, A.R.L.

Autopistas de Leon, S.A.C.E. (Aulesa)

Autostrade S.p.A.

Brisa Auto-Estradas de Portugal S.A.

Societe Marseillaise du Tunnel Prado-Carenage

Latin America

Autopista del Mayab

Autopista del Sol

Autopista Monterrey-Cadereyta

BG Trust, Inc. (Corredor Sur - ICA Panama)

Carretera de Cuota Constit. Y Ref. La Venta (MexTol)

Libramiento de Matehuala Toll Road Mexico

Ruta 5 Tramo Talca Chillan, S.A.

Rutas del Pacifico

Sociedad Conces. Autopista Vespucio Sur S.A.

Sociedad Concesionaria Costanera Norte S.A.

Sociedad Concesionaria Vespucio Norte Express S.A.

Talca Chillan Sociedad Concessionaria

North America

Skyway Concession Company LLC

Toll Road Investors Partnership II, L.P. (Dulles Greenway)

A3

A2

A3

Aaa

Aaa

A3

A3

Aaa

Ba1

Aaa (Baa2*)

Aaa (Baa3*)

Baa2

Aaa (Baa3*)

Aaa (Baa3*)

Aaa

Baa2

Aaa

Baa2

Baa3

Aaa (Baa2*)

Aaa

Aaa (Baa3*) stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable stable stable stable stable stable stable

Total

387.2

406.0

2,592.3

457.9

51.2

8,213.3

1,391.6

93.5

116.5

166.9

210.0

150.0

374.5

49.3

136.3

270.9

148.0

218.5

432.0

170.0

1,400.0

839.0

18,699.7

* Underlying Rating

For six of these operational toll roads highlighted in Figure 2, Moody’s only publishes Aaa ratings assigned to their debt instruments solely based on the financial guarantees provided by monoline insurers. These six issuers, which account for approximately US$2.3 billion of rated debt, are thus excluded from the tables below that show the outcome of the application of this rating methodology to the rated universe.

6.

Sociedad Concesionaria Autopista Central, the Chilean toll road operator located along Route 5 (the Pan-American Highway), has not been included in our rated universe of operational toll roads as the construction phase has only recently been completed and toll collection is not yet fully implemented.


About this Rating Methodology

Moody’s rating methodology for operational toll roads reflects the following steps.

IDENTIFYING KEY RATING FACTORS

We have identified the following six key factors that determine our ratings for operational toll roads:

1.

Asset Type

2.

Fundamentals of the Service Area

3.

Traffic Profile

4.

Concession and Regulatory Framework

5. Stability of Business Model and Financial Structure

6.

Key Credit Metrics

The first four factors relate to the fundamental business characteristics of a toll road operator.

The fifth factor aims to capture the dimension of credit risk associated with potential changes to an issuer’s business or capital structure, which may result from its strategy on corporate activity, diversification and/or financial policies.

The sixth rating factor comprises five key financial metrics which we most commonly employ when examining toll road operators.

In addition, the methodology also discusses how the rating of a toll road operator can incorporate uplift from a number of so-called structural enhancements, i.e. protective clauses in credit documentation, which feature typically in project financing executed to finance new toll road concessions but are also increasingly used to strengthen the credit quality of corporate issuers, particularly in situations of high leverage. We have classified the sources of rating uplift from creditor protection as falling into three categories: i.

Event Risk Protection ii. Debt Structure and Liquidity Protection iii. Control Afforded to Creditors

Although the rating factors described in this methodology cover the principal drivers of our ratings analysis, the analytical process also includes a number of important considerations that are consistently examined for corporate finance issuers in general. Such factors include, among others, issues pertaining to the company’s corporate or financial structure, liquidity arrangements, management quality and corporate governance, financial disclosure, and the extent of likely government support.

Note that, in cases where Moody’s rating methodology for GRIs is applied to operational toll roads, the methodology presented in this report serves to assess the baseline credit risk of the issuer, over which our assessments of government support and default dependence are subsequently layered in accordance with our GRI methodology.

MEASUREMENT OF THE KEY RATING FACTORS

For each rating factor, we have aimed to identify and quantify (to the extent possible) specific features that allow us to rate operational toll road operators. The six rating factors are further divided into a total of 18 sub-factors. For each rating sub-factor, three types of assessments can be made:

• Pure qualitative assessments.

• Qualitative assessments based on rankings estimated by Moody’s, or broad quantitative measures defined by

Moody’s.

• Pure quantitative assessments that can be measured by publicly available data (such as inputs into financial metrics or macroeconomic data).

MAPPING FACTORS TO THE RATING CATEGORIES

For each of the 18 sub-factors (13 sub-factors underlying the first five factors plus five credit metrics), specific ranges of qualitative and quantitative features are defined for broad rating categories (i.e. Aaa, Aa, A, Baa, Ba, B and Caa). An issuer’s characteristics are scored for each sub-factor in the applicable category.

In respect to the first five key factors, we have determined what we consider appropriate ranges for each broad rating category. The methodology aims to capture the characteristics of all potential corporate issuers, and thus also ranks theoretical features not actually yet encountered within the rated universe. The first five factors encompass features that we associate with a very low degree of credit risk – these are classified in the “Aaa” category – as well as characteristics that, in our opinion, imply a very high degree of credit risk and could cause an issuer to default – these are classified in the “single-B” or “Caa” category.


The ranges of credit metrics that represent the sixth key factor have been mapped to broad rating categories for an issuer that presents moderate investment-grade characteristics in all other key factors (i.e. principally in the “Baa” range). Recognising the stability and predictability of an operational toll road’s cash flow generation, thresholds of credit metrics required for each broad rating category are less demanding than for many corporate issuers in other industries.

WEIGHTING FACTORS AND RATING SCORES

The following table shows the weightings applied to each key factor.

Key Factor

Asset Type

Fundamentals of Service Area

Traffic Profile

Concession & Regulatory Framework

Stability of Business Model & Financial Structure

Key Credit Metrics

Weighting

20%

10%

10%

10%

10%

40%

As credit metrics are already adjusted to reflect a generally high degree of debt capacity of an operational toll road operator, they are assigned a relatively high weighting, with the sixth factor counting for 40% of the final score. However, this is balanced by a 20% weighting of the first factor, Asset Type, recognising that the fundamental characteristics of the assets or network of assets operated by an issuer and their competitive position are of paramount importance in determining its overall business risk and thus debt capacity.

Within each key factor, individual sub-factors count equally. The following table shows the overall methodology grid and the resultant weighting attributed to each individual sub-factor.

Factors

Asset Type

Fundamentals of Service Area

Traffic Profile

Concession and Regulatory Framework

Sub-Factors

Asset Features

Competing Routes

Robustness and Diversity of Service Area

GDP / Capita in Service Area

User Profile

Track Record and Stability of Tolled Traffic

Annual Average Daily Traffic per Lane Km

Risk of Adverse Changes to Concession Terms and Conditions

Ability to Increase Tariffs

Protection against Events outside the Concessionaire's Control

Stability of Business Model and Financial Structure Ability and Willingness to Pursue Opportunistic Corporate Activity

Ability and Willingness to Increase Leverage

Key Credit Metrics (Historical & Projected)

Targeted Proportion of Revenues outside Core Concession

Cash Interest Coverage

FFO / Debt

Moody's Debt Service Coverage Ratio

RCF / Capex

Debt / PV Base Cash Flows or Concession Life Coverage Ratio

3.33%

3.33%

3.33%

3.33%

8.00%

8.00%

8.00%

8.00%

8.00%

Weighting

10.00%

10.00%

5.00%

5.00%

3.33%

3.33%

3.33%

3.33%

3.33%

A further weighting is applied by rating category as shown in the table below.

Rating Category

Weighting

Aaa

1

Aa

1

A

1

Baa

1.15

Ba

2

B

3

Caa

5

We weight lower rating scores more heavily than higher scores. The reason is twofold. In the first instance, we need to adjust for those situations were an issuer exhibits weak characteristics across the first five factors, which are not typically encountered within the rated universe and which would require more demanding thresholds for the credit metrics. Secondly, we recognise that a serious weakness in one area often cannot be completely offset by strength in another and that the lack of flexibility normally associated with high degrees of leverage can heighten risk.


DETERMINING THE FINAL RATING

The steps outlined above produce a final distribution of scores by rating category (e.g. 15% Aa, 35% A, 45% Baa and

5% B). The percentage score in each category is then multiplied by a value from 1 for Aaa to 18 for Caa in order to map to a final rating (before adjustment for creditor protection), as shown in the following table.

Rating Category

Value

Aaa

1

Aa

3

A

6

Baa

9

Ba

12

B

15

Caa

18

This weighted average score is mapped to the table below, and an overall alpha-numeric rating is assigned based on where the score falls in the range.

Indicated Rating

Aaa

Aa

A

Baa

Ba

B

Caa

Overall Score

1.49 or lower

1.5 to 4.49

4.50 to 7.49

7.50 to 10.49

10.50 to 13.49

13.50 to 16.49

16.50 to 18.00

Appendix II illustrates the calculations to map the scoring under each rating factor to a specific rating category.

Finally, we consider whether the final rating should be adjusted to incorporate uplift from structural enhancements that may be incorporated in the company's financial arrangements. The effectiveness of any such enhancements is graded to determine the appropriate uplift, as described in the section "Structural Considerations and Sources of

Rating Uplift from Creditor Protection" below. This allows us to apply the methodology to operational toll roads that are project-financed or that have adopted certain structural features typical of project or structured financings.

APPLYING THIS RATING METHODOLOGY / OUTLIER DISCUSSION

The methodology indicates ratings for most issuers that are either at the level of their actual ratings or within one notch, with the exception of Vespucio Norte, a Chilean concession only recently opened to traffic, for which the differential is two notches.

Rating Methodology Results

Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America

Toll Road Investors Partnership II, L.P. (Dulles

Greenway)

Negative Outlier

Positive Outlier

Current

Rating

Ba2

Ba1

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3

Outlook stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

Factor-Indicated

Rating

Additional

Uplift

Ba2

Ba1

0

0

A2

A2

Baa1

A3

A3

Ba3

Baa3

Baa3

Baa3

Baa3

Ba1

Baa2

Baa2

Baa2

Baa2

Ba2

0

0

0

0

0

+2

+2

+1

+1

+1

+1

+1

+1

+1

+1

+1

Final Indicated

Rating

Ba2

Ba1

A2

A2

Baa1

A3

A3

Ba1

Baa2

Baa2

Baa2

Baa2

Baa3

Baa1

Baa1

Baa1

Baa1

Baa3


For each company in our rated universe we assign a rating for each sub-factor. We also show how this rating compares to the company’s actual assigned rating. The full results of this mapping and indicated ratings are summarised in

Appendix I. The results of mapping also appear in the results section under each factor.

We recognise that any given company may perform higher or lower on a specific factor than its actual rating level.

We highlight those companies whose factor mapping is two rating categories higher or lower than its rating and offer a discussion of the general reasons for outliers within a given factor.

Rating Factor #1: Asset Type

WHY IT MATTERS

Toll roads typically provide monopoly-type, price-inelastic services that lend themselves to high levels of business visibility and revenue stability. As a result, toll road operators are likely to have a longer-term strategic and financial horizon than most other corporate sectors. Accordingly, assessing the historical and expected stability of the toll road operator’s business is a critical component of our analysis. In this context, Rating Factors #1 and #2 aim to isolate those characteristics inherent to the toll road operator’s assets that determine business stability.

Rating Factor #1 examines the broad characteristics of the toll road assets, with the aim of answering the following questions:

• Is the toll road asset a very large and mature national network?

• Is the toll road asset otherwise deemed to be an essential asset in the relevant service area?

• How well diversified is the toll road asset?

• Is the toll road asset providing transport services in a monopoly-like environment or is it exposed to significant competition?

HOW DO WE MEASURE IT?

Given the wide variety of asset types and service areas, there are no straightforward and consistent quantitative measures to answer these questions. As a result, we base our assessment on a qualitative ranking of the toll road asset features and competing routes, based on specific characteristics. The first key factor thus comprises two sub-factors equally weighted: a) Asset features b) Competing routes

a) Asset Features

The essentiality of a toll road to the service area is a qualitative judgment based on an examination of competing modes of transportation (e.g. rail), historical traffic reports and traffic trends to date. Essentiality can be linked to the size of the road or network, but there may not be a direct correlation.

For example, while the Corredor Sur Toll Road, located in Panama City, is relatively short at 19.7 kilometres, it serves as an essential transport link, benefiting from a very favourable alignment along the coastline and connecting

Tocumen International Airport at its eastern terminus to the business and commercial centre at its western terminus.

The road slices through Panama’s most densely populated areas and connects key residential, commercial, banking, government and tourism areas that are important to the regional and national economy.

The diversification afforded by the toll road asset is largely a function of its size, as well as the number and types of routes covered. For example, a large network of major trunk routes comprising essential international transit roads within a country provides diversification away from specific local economies and, to a certain extent, from the national economy itself. For example, Italian operator Autostrade currently manages over 3,400 km of motorways, representing

61% of Italy’s motorway network and 17% of Europe’s toll road network; according to our rating grid, Autostrade’s network is commensurate with a “Aaa” asset type for this specific sub-factor. The potential merger with Abertis would reinforce Autostrade’s score in the highest rating category.


b) Competing Routes

Assessing the extent to which changes in competing routes will impact an operator’s traffic profile is also critical to our analysis. Any existing toll road will already face competition, which is reflected in historical traffic data and user trends

(both captured under Rating Factor #3). Given the long-term business and funding horizon of toll road assets, what really matters here is the likely future impact on traffic of competing routes. This impact is a function of both the impact on the volume of traffic and the timing of such an impact – for example, the opening of a new competing route may have a sudden but lasting adverse impact on traffic, while overall national schemes to promote other modes (e.g.

rail freight traffic) may provide longer-term erosion. Competition can also adversely affect the price elasticity of demand for a toll road and therefore limit a toll road operator’s ability to increase tolls beyond any restrictions imposed by its concession agreement.

However, transport infrastructure tends to change slowly; future changes in transportation trends can therefore be anticipated a long time before they occur. The overall impact of these trends can be difficult to gauge; from a credit perspective, the furthest ahead of time they can be anticipated, and the less likely they are to adversely impact traffic, the more robust the operator’s traffic trends and credit profile. As a result, for this particular sub-factor, the lowest possible score would go to an operator whose traffic profile is already deteriorating due to competing routes, and for which further deterioration is likely to materialise rapidly.

At the other end of the continuum, an operator facing no discernible competing routes (from either other road networks or other modes of transportation) would score a “Aaa” for this rating factor. For example, a national toll road network in an emerging market may score a “Aaa” for this sub-factor – however, other factors in the grid would likely offset this high score. We have articulated this sub-factor based on the overall expected impact on traffic and by contrasting a sudden and substantial decline in traffic, on the one hand, with gradual and modest erosion, on the other. For example, an operator facing, based on Moody’s estimates, a maximum adverse traffic impact of 10% occurring gradually over the next 10 years would score a “single-A”, but an operator expected to face the risk of a material decline in traffic in the range of 10% to 20% upon the opening of a competing route would score a “Ba”. For example, a “Ba” score is appropriate for the Chinese operators, Road King and Chinese Future, to reflect their evolving competitive environment and the potential impact of significant infrastructure developments in the relevant service areas.

RATING GRID MAPPING

The following table shows the full mapping of each sub-factor to a broad rating category and the weighting of each sub-factor within Rating Factor #1.

Factor 1: Asset Type

Weighting: 20%

Asset

Features

Competing

Routes

Aaa Aa A Baa Ba B

Large network of major large trunk routes

No current or potential competing routes (multimodal or other roads)

Essential transport link; can be single or small number of large trunk or urban routes

Well-established and stable competitive environment; no changes to key modes for the foreseeable future

Essential transport link;can be essential but small trunk or urban route (e.g. tunnel or bridge)

Competition may intensify over long term; gradual expected impact on traffic, cumulatively

<10% over 10 years

Single asset or small number of roads in a small economic service area or niche market

Competition may intensify over long term; gradual expected impact on traffic, cumulatively 10-

15% over 10 years

Single asset or small number of roads;highly exposed to local economy

Changing competitive environment; new routes will likely impact traffic when opened by 10-

20%

Small single asset, non-essential in a deteriorating market

Rapidly changing competitive environment; significant (>20%) negative impact on traffic expected

Caa Sub-weighting

Factor

Small single asset in an unproven or extremely weak market

50.00%

Competitive environment is eroding current traffic trends; expected to deteriorate rapidly

50.00%


RESULTS OF MAPPING

Factor 1: Asset Type

Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America




Current Rating

Ba2

Ba1

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Outlook stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable

Asset Features

Baa

Baa

A

A

Aa

Aaa

Aa

A

A

Aa

A

A

Aa

A

Aa

A

Aa

Competing Routes

Ba

Ba

Aa

Aa

Aa

Aa

Aa

A

A

Aa

A

A

Aa

Aa

Aa

Aa

Aa

Baa3 stable Baa Aa

OUTLIERS AND OBSERVATIONS

The results of mapping show either good correlation or positive outliers, reflecting generally strong asset quality across the rated toll road universe. Most of the rated toll roads are either large mature networks (in Europe) or substantial and essential facilities exposed to limited competition (in Australia, North and Latin America). The Chinese operators have the overall lowest scores, a result, in part, of the weak score on the sub-factor Competing Routes mentioned above.

Rating Factor #2: Fundamentals of Service Area

WHY IT MATTERS

Rating Factor #1 captures those elements inherent to the type of toll road asset that are likely to determine future traffic stability. However, the asset’s performance hinges on the performance of its immediate economic environment, i.e.

the toll road’s relevant service area. The service area’s general economic track record, its economic diversity and the extent to which roads are the dominant mode of transport in the area will either enhance or detract from the business stability provided by the asset itself. This rating factor thus aims to isolate those factors within the toll road’s service area that are most likely to influence future traffic and revenue stability.



In assessing the fundamentals of an operator’s service area, we use two specific sub-factors, outlined below. The first sub-factor is a qualitative assessment by Moody’s, based on available data; the second factor is a quantitative measure based on publicly available information (however, where public information may be limited, Moody’s will base its assessment on discussions with management as well as on its own estimates): a) Robustness and diversity of service area b) GDP/capita in service area

a) Robustness and Diversity of Service Area

The economic base provided by the service area is a critical driver of future revenue trends. Specifically, we examine the economic diversification of the service area, its track record of economic growth and historical vulnerability to negative shocks, and overall demographic trends. Due to the complexity of such factors, as well as difficulties in obtaining fully comparable data (e.g. a large regional network versus small municipality in a less-developed market), we assess this sub-factor as a rank-ordering of different service areas based on available quantitative and qualitative information.

This information is obtained through the public domain, discussions with management and interaction with Moody’s sovereign, sub-sovereign and US public finance regional analytical teams.

As a general rule of thumb, we anticipate that service areas that effectively comprise large developed national economies would score within the “Aaa” to “single-A” range. However, if the service area is limited to an isolated region or city with different economic fundamentals, we may well assign a lower rating score on this particular sub-factor. As such, this sub-factor is not explicitly calibrated to reflect specific geographies. For example, the “Ba” category, defined as “evolving economic base, growing from a low base; demographics remain in transition, albeit positive”, could apply to specific economic areas (e.g. a single municipality) within a well-developed national market.

Note that the definition of the service area needs to take into account the function of the toll road asset and not simply its location. For example, in the Americas, toll roads that are designed to serve NAFTA

7

-related traffic are less dependent on the macroeconomic characteristics of the service area within their alignment. The Libramiento de

Matehuela Toll Road in Mexico is an example of a highway primarily designed to serve NAFTA traffic connecting

Mexico City with Laredo, Texas and beyond. Fundamentally, the toll road is important to long-distance commercial

(and, to a lesser degree, long-distance recreational) traffic between Mexico and the United States. As such, the viability of the road is more closely tied to NAFTA and GDP growth in Mexico and the United States overall than to the dynamics of the local service area. The traffic profile on the Libramiento de Matehuala is: autos 50%, trucks 45% and buses 5%. This high level of commercial usage reflects the impact of NAFTA.

The next factor is a quantitative measure used to support our assessment of service area economics.

b) GDP/Capita in Service Area

Moody’s employs publicly available GDP/capita figures for the relevant service area. As a measure of domestic output,

GDP/capita itself is not directly a measure of a region’s credit strength. However, experience has indicated that GDP/ capita serves as a generally robust predictor of macroeconomic performance and credit quality, which impact the toll road operator’s economic environment. Low GDP/capita signals higher potential economic volatility and would also typically reflect other areas of instability that could impact the economic fundamentals of the service area. Where public information is unavailable, we utilise Moody’s best estimate based on discussions with our sovereign or sub-sovereign teams, as well as discussions with management. Moreover, where possible, we would aim to adjust any key differences in terms of measurement that may arise between regions or countries. GDP/capita is also typically highly correlated with the motorisation rate, which is often an indicator of the extent to which the population of the service area relies on road traffic and of the relative elasticity of demand for the toll road services.

7.

North American Free Trade Agreement.




8

Factor 2: Fundamentals of Service Area

Weighting 10%

Robustness and

Diversity of

Service Area

GDP / Capita in

Service Area

Aaa

Very strong, highly diversified.>20 years solid and predictable growth track record;no history of negative shocks;improvi ng and predictable demographics

<$20,000

Aa

Strong and welldiversified economic base;favourable, stable and wellproven demographics

A

Highly developed and diversified economic base;strong but evolving demographics

(uncertain over long term);

$15,000-

20,000

$10,000-

15,000

Baa

Strong economic base, but lacks diversification;d emographics can deteriorate over long term

Ba

Evolving economic base; growing from a low base; demographics remain in transition, albeit positive

B

Weak or deteriorating economic base; no diversification; unfavourable demographic trends

Caa

Poor economic base with little recovery prospects; no diversification; highly unfavourable demographics

Sub-weighting

Factor

50.00%

$5,000-10,000 $3,500-5,000 $2,000-3,5000 <$2,000 50.00%


Factor 2: Fundamentals of Service Area

Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America


A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3



Current Rating

Ba2

Ba1

A3

A2

A3

Outlook stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

Robustness &

Diversity

Baa

A

GDP / Capita

B

Caa

Aa

Aa

A

Aaa

Aaa

Aa

Aa

A

Baa

A

Baa

A

Baa

Baa

A

A

A

A

Aaa

Aaa

Aa

Baa

A

Baa

Baa

Baa

Baa

A

A

A

A

Aaa

8.

All figures to be converted to US dollars at the then current spot rates.



For Rating Factor #2, we have good correlation between current ratings and the results of mapping. We also have a few positive outliers, reflecting the strength of service area fundamentals for the Australian operators Airport Motorway and Interlink, the Italian concessionaire Autostrade and the US issuer Toll Road Investors Partership II, the operator of the Dulles Greenway concession, whose ratings are constrained by their financial profiles. Chinese operators are the only negative outlier for sub-factor GDP/capita, which score in the “single-B” or “Caa” areas, whilst benefiting from robustness and diversity of the service area, which supports, in our opinion, a score in the investment grade territory for this sub-factor, a positive outlier.

Rating Factor #3: Traffic Profile

WHY IT MATTERS

As noted above, toll road operators typically exhibit very high profit margins and high cash flow conversion. As a result, revenues are the principal determinant of operating cash flows for a toll road operator. The examination of revenue trends is therefore critical to our rating assessment.

The previous rating factor focused on the economic environment available to support revenues, i.e. the extent to which the type of asset and its location were conducive to supporting the toll road operator’s business. In this rating factor, we turn to the actual mechanics of revenue generation for the toll road operator.

Revenues are driven by traffic trends and tariff levels. By and large, tariff-setting mechanisms are structured to limit possible volatility in tariffs and tend to be highly predictable (driven by either fixed formulae or more fluid systems entailing periodic reviews and discussions with the governments). We discuss tariff-setting mechanisms in more detail in Rating Factor #4, in the context of the operator’s concession and regulatory framework.

As a result of the above, Rating Factor #3 focuses on the operator’s traffic profile as a driver of potential volatility and uncertainty in future revenues.


We use three different sub-factors to assess a toll road operator’s traffic profile.

a) User profile b) Track record and stability of tolled traffic c) Annual average daily traffic per lane kilometre

a) User Profile

With this factor, we examine who actually uses the road assets in question, and how the user profile may add potential volatility to traffic flows. We define three categories of users: commuter, freight, and leisure. As a general rule, we believe that commuter traffic tends to be the least volatile (i.e. subject to economic fluctuations), followed by freight, and then leisure. Due to higher toll rates, freight traffic can often account for a disproportionate share of revenues. Therefore, a relatively small decline in freight traffic can have a rather significant impact on toll revenues. Leisure traffic is likely to be highly seasonal, and more exposed to economic variations. As a result, we deem the most creditworthy user profile to consist of over 80% commuter traffic, and the least creditworthy to consist of over 90% leisure traffic. We have then placed different gradations of user profiles on a continuum matched to different rating categories in our rating grid.

Toll road operators may make this type of detailed data publicly available. If specific data has not been made public, vehicle statistics typically have been and can provide a proxy for a split between freight and other types of traffic.

Otherwise, we would also rely on reports from traffic consultants, typically engaged by the operator at the time of a financing exercise. These traffic consultants’ reports may not be in the public domain, but would be made available to prospective lenders.


b) Track Record and Stability of Tolled Traffic

Naturally, when assessing the likely future stability of traffic trends, our analysis focuses heavily on the toll road operator’s experience to date. A very long and stable track record of traffic may be correlated to a number of factors, including the road’s essentiality, the stability of the service area, the continued lack of competing traffic routes (whether by road or other modes of transportation) and the resilience of the user profile. Importantly, we do not focus only on overall traffic trends, but also on the operator’s track record of tolled traffic, i.e. its ability to demonstrate long-term acceptance of tariff levels and tariff changes.

While past performance may not necessarily be a strong indicator of future traffic trends (see additional sub-factors below), the longer the track record of stable/predictable tolled traffic, the more comfort we may derive from traffic projections that remain in line with this track record. Conversely, a toll road with no track record of tolled traffic remains effectively an untested business plan for its specific road asset. We would take a more conservative view in our assessment of future traffic trends.

Based on the universe of rated toll roads globally, the highest-scoring operator for this type of sub-factor would demonstrate over 15 years of predictable tolled traffic, without significant adverse shocks.

9

c) Annual Average Daily Traffic per Lane Kilometre

This measure is available from data published by toll road operators. If not explicitly provided, it can be reconstructed from annual average daily traffic (“ADT” or “AADT”) statistics, average numbers of lanes, and the length of the network. Note that published statistics may differ depending on whether an operator uses distance-based tolling, one-way tolling or other tolling mechanisms. Appendix III shows alternative calculation methods for this measure. We use lane kilometre as this measure harmonises statistics pertaining to assets with different numbers of lanes.

10

ADT per lane kilometre is a measure of traffic flow on the network, and is therefore effectively a measure of the

“scale” of a toll road’s traffic. When comparing different toll road operators, a higher ADT per lane kilometre does not necessarily signal better credit quality – however, larger “scale” does serve as an indirect indicator of relative traffic resilience. Intuitively, a road network supporting very large traffic flows (e.g. national road network) is probably less subject to future volatility and adverse shocks than a small single asset (e.g. local bridge) serving local and limited traffic. We therefore score roads with higher ADT per lane kilometre as having a credit advantage on roads with lower

ADT per lane kilometre, all things being equal. A “Aaa” score corresponds to a statistic of over 20,000 vehicles per day; conversely a road with an ADT per lane kilometre of under 1,000 vehicles per day scores in the “single-B to Caa” category.

11

9.

In assessing traffic stability, we focus on the lack of volatility and not on the maintenance of a constant level: a steady growth pattern shows a high degree of stability.

10. Reported ADT figures generally apply to both directions of a motorway, i.e. ADT of 20,000 on a motorway stretch between A and B means that on average every day of the year 10,000 vehicles used the motorway to go from A to B and 10,000 vehicles used the motorway to go from B to A. This is the definition we use; ADT per lane is calculated accordingly (i.e. a 2x2 lane motorway counts for two lanes and not four).

11. Moody’s believes that traffic consultants generally agree that on average the daily capacity of a lane of motorway is around 20,000 vehicles, assuming a long-distance road, normal engineering conditions, percentages of heavy vehicles in the range of 10-20% of total traffic, and no dramatic peak/off-peak variation.




Factor 3: Traffic Profile

Weighting 10%

User Profile

Track Record and Stability of

Tolled Traffic

Annual Average

Daily Traffic per

Lane Km

Aaa

>80% commuter traffic;

Remainder mostly freight

Demonstrable very long and stable track record of tolled traffic (>15 years)

>20,000

Aa

60-80% commuter traffic, remainder mostly freight

Demonstrable long and stable track record of tolled traffic

(10-15 years)

13,000-20,000

A

40-60% commuter traffic, remainder equally split between freight and leisure

Demonstrable stable track record of tolled traffic (5-10 years)

7,000-13,000

Baa

25-40% commuter, freight and leisure equally split

Limited track record of tolled traffic (0-5 years); performance to date in line with or above expectations

3,000-7,000

<25% commuter, freight and leisure equally split

Ba

Track record of tolled traffic is volatile and below expectations; performance may be difficult to measure or lacking in history

1,000-3,000

B

Minimal commuter traffic, more leisure than freight

Little track record of tolled traffic, or track record highly volatile, or data of questionable quality

>90% leisure traffic

Caa

Sub-weighting

Factor

33.33%

No track record or data of tolled traffic

33.33%

<1,000 33.33%


Factor 3: Traffic Profile



Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America


Current Rating

Ba2

Ba1

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Outlook stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable

User

Profile

Baa

Baa

Aa

Aa

Aa

A

Baa

A

Baa

Aa

A

Aa

Baa

Baa

Aaa

Baa

Baa

Track

Record

Baa

A

A

Aa

A

Aaa

Aa

A

A

Aa

A

Aa

Baa

A

Baa

Baa

A

AADT per

Lane km

Ba

Ba

Aa

Aa

Aa

Aa

A

A

Baa

Aa

Baa

A

Baa

Baa

Baa

Baa

Ba

Baa3 stable Aaa A Aa


The results of mapping show only a few outliers, all positive, for issuers that exhibit strong features for this Rating Factor #3, but whose ratings are weighed down by weak financial profiles.


Rating Factor #4: Concession and Regulatory Framework

WHY IT MATTERS

The first three rating factors outlined above focused principally on variables that can affect the stability of tolled traffic. However, revenues and cash flows are also a function of tariff levels and tariff-setting mechanisms. Tariffs are embedded into the broader framework of an operator’s concession agreement and the applicable regulatory environment, which we examine here.

In essence, the concession and regulatory environment determine the rights granted to the toll road operator to allow it to adapt to changes in its business environment. From a creditor perspective, several dimensions are key: (i) the extent to which creditors can maintain control over changes to the terms and conditions of the concession or to which any such changes entail a right to compensation for the concessionaire, (ii) the extent to which the operator is free to adapt its tariffs to offset changes in business conditions, and (iii) the extent to which the concession and regulatory framework provide protection against events that are outside the concessionaire’s control and can impact the economics of its operations. These considerations are particularly relevant for toll road operators as changes to concession agreements very often require negotiations between the concessionaire and the government.

Note that, while this Rating Factor examines the extent to which mechanisms are in place to protect the operator’s cash flows in the event of changes to business conditions, the question of whether the operator makes strategic decisions that may change its business conditions to the detriment of creditors is covered later in this methodology, in Rating Factor #5.


We examine three sub-factors to assess the operator’s concession and regulatory framework, all of which are qualitative rank-orderings of risk based on Moody’s examination of the relevant documentation and precedents: a) Risk of adverse changes to concession terms and conditions b) Ability to increase tariffs c) Protection against events outside the concessionaire’s control

a) Risk of Adverse Changes to Concession Terms and Conditions

Specific terms and conditions of a toll road concession agreement are typically determined on a case-by-case basis, and vary based on the type of asset and the relevant jurisdiction, among other factors. In general, concessions are also capable of amendment by the government or the concessionaire, depending on certain conditions. In other words, toll road concessions are negotiated relationships between the government and the concessionaire; in cases where the government or the concessionaire may change the terms and conditions of the agreement, the question of whether or not such changes are detrimental to creditors will depend on the specifics of agreement entered into for a particular concession.

In this sub-factor, we aim to capture the extent to which any changes to the concession initiated by the government or the concessionaire require compensation or equivalent adjustments in a form that is protective of creditors’ interests.

While there is no failsafe measure of “fair” compensation, the terms and conditions of the concession agreement ultimately translate into metrics used by creditors. As a result, we estimate whether or not compensation set by the concession agreement has a negative impact on metrics.

Consequently, the lowest possible score will be assigned in a case where the jurisdiction of the issuer has a track record of unilateral changes being made to the terms and conditions of the concession or of other concessions in the toll road or similar sectors that are relevant precedents, without any compensation being made to the concessionaire.

At the other end of the risk spectrum, the highest possible score for this sub-factor corresponds to a case where the concession agreement requires the full consent of creditors for any amendment. Varying degrees of compensation are charted across the rating scale for this sub-factor. For example, we would score as a “Baa” an agreement that requires compensation, but without clear guidelines in the concession or the wider legal framework; the compensation mechanism could leave room for a significant adverse impact on metrics, but a precedent of adequate compensation would provide some comfort. Note that we score more favourably concession provisions that require the maintenance of suitable credit metrics and thus effectively limit the discretion of the government and the concessionaire to agree changes to the concession that may be advantageous from a shareholder perspective (e.g. a generous extension of the concession life) but that could significantly reduce an operator’s financial flexibility.


b) Ability to Increase Tariffs

Overall, tariff increases are the most straightforward tool available to operators to adjust long-term cash flow levels.

Other options to bolster cash flows include cost reductions (for example, the use of electronic tolling systems), but such cost reductions tend to be more reflective of a broader strategic initiative; we cover such strategic considerations later in this rating methodology.

Moreover, over the life of a concession, given the long-term nature of the business and the need to adjust the real value of tariffs, we would not typically expect to see any decreases in tariffs. When considering tariff adjustments, the question then arises of how quickly and how easily the toll road operator may increase tariffs. In other words, to what extent does the toll road operator have discretion in raising tariffs in order to maintain a favourable economic profile for the business? The greater the extent to which the decision lies with the operator, the higher the potential financial flexibility afforded by the concession agreement.

Because concession agreements are typically negotiated on a case-by-case basis, there is no single mechanism to adjust tariffs. In general, there are three types of tariff adjustment mechanisms: (i) formula-driven adjustments (e.g.

entirely inflation-based), (ii) adjustments based entirely on periodic reviews with the government, and (iii) a hybrid of the two previous types, which entails a periodic review of the different parameters entered into the formula (this type of approach is utilised in France, for example).

In this context, the most flexible arrangement is one where the operator is free to adjust its tariffs as required, without any approvals or reviews by the government. As a result, this type of arrangement scores a “Aaa” for this subfactor. At the other end of the spectrum, we place mechanisms that imply significant government interference and that are characterised by a history of blocked tariff increases. For most large toll road operators, however, we would expect established and transparent frameworks, with some scope for government intervention. As a result, we would most likely score a large toll road operator in the “Aa” to “Baa” rating categories for this sub-factor.

12

c) Protection against Events Outside the Concessionaire’s Control

The two sub-factors above focused on the ability of the operator and the government to change terms and conditions of the concession, or to change tariff levels. The rating grid scores this ability based on the perceived benefit or detriment to creditors.

This third sub-factor examines the extent to which creditors are protected by compensation mechanisms designed to cover unforeseen events outside the concessionaire’s (or the government’s) control, e.g. certain new legal requirements or force majeure events.

13

As with the first two sub-factors, we examine the extent to which the concession agreement is flexible enough to grant creditors adequate and timely protection.

Importantly, this consideration differs from the levels of creditor protection embedded in credit documentation.

The latter reflects the level of creditor protection associated with a particular financing structure, while this sub-factor captures the level of creditor protection inherent to the concession agreement and regulatory framework under which the concessionaire operates. The rating impact of protection afforded by credit documentation is covered later in this rating methodology.

12. It is worth explaining why we have not assigned a higher weighting to this sub-factor, as this may appear counter-intuitive given that the tariff regime is clearly very important in defining a toll road operator’s risk profile. As mentioned, toll adjustment mechanisms applying to many operators present similar characteristics. Even when an operator is entitled to adjust tolls freely, for which we would assign the highest score, its ability to impose significant tariff increases may be limited in practice by the potential impact on traffic volumes, as typically such a complete discretion on tolls is only granted to assets for which there is a free alternative available to users. We thus find that the tariff regime is not a major differentiating factor for ratings, except in situations when we encounter inability to increase tolls, which is a definite credit negative. The higher weighting assigned to scores in the lower rating categories effectively captures the additional impact that an inflexible or unpredictable tariff regime has on an operator’s credit profile.

13. We also include in the protection for specific changes in law or force majeure events the so-called “non-compete” clauses, which require counter-balancing compensation or adjustment to the concession agreement if the government promotes the development of a competing facility. Non-compete clauses typically feature in the concessions for privatised US roads.




Factor 4: Concession and Regulatory Framework

Weighting: 10%

Risk of Adverse

Changes to

Concession

Terms and

Conditions

Ability to

Increase Tariffs

Protection against Events outside the

Concessionaire's

Control

Aaa

Terms and conditions cannot be amended without full consent of creditors

Operator free to adjust tariffs as required; no approvals or reviews required"

Aa

Any changes entail full and automatic compensation; provisions at least maintain actual and projected financial metrics

Full and immediate compensation guaranteed for all type of events including changes in business circumstances

Compensation expected for many events including changes in business circumstances, subject to administrative procedures

A

Requirement for

"fair" compensation, albeit not fully defined; small possible unfavourable impact on financial metrics

Established and transparent tariff formula for entire concession life, exclusively inflation-linked.

Established formula for entire concession life, inflation-linked but also with incentive-based parameters requiring or allowing for periodic reviews and adjustments based on concessionaire's

ROI

Economic consequences of many events including changes in business circumstances addressed at periodic or extraordinary tariff reviews; negative impact on credit metrics likely to be small and/or limited in time

Baa

Compensation required by concession agreement, lacks clarity or guidelines; can have significant impact on metrics; some precedent of adequate compensation

Tariff formula not set for the life of the concession, but periodically re-negotiated under generic reference to concessionaire's financial equilibrium; limited precedents and/ or transparency

Compensation only available for specific changes in law or force majeure events

(if uninsurable), subject to negotiation

Ba

Some entitlement to compensation, but very little or no clarity on amounts; no precedents within the relevant concession or legal framework

Tariff increases subject to government approval or negotiation; history of delays or interference

No specific provisions and no protection under general law; possible compensation only subject to negotiation

B Caa

History of unilateral change to terms and conditions without compensation

Subweighting

Factor

33.33%

Tariff increases subject to negotiation; little or no track record of increases to date; very uncertain ability to increase tariffs

Significant government interference in setting tariffs; tariff increases blocked to date; expected to remain highly inflexible"

33.33%

No protection in concession agreement or legal framework; compensation unlikely

33.33%


Factor 4: Concession and Regulatory Framework



Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America


Current Rating Outlook

Ba2

Ba1 stable stable

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3 stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

Risk of

Adverse changes

Ba

Ba

A

A

A

Baa

A

Aa

A

A

A

A

A

A

A

A

A

A

Ability to

Increase

Tariffs

Ba

Ba

Aa

Aa

Aa

A

Aa

Aa

Baa

Aa

Baa

Aa

A

Baa

Baa

Baa

Baa

Baa

Protection againt

Events outside


Control

Ba

Ba

Baa

Baa

Baa

Baa

Baa

Ba

A

A

Aa

Ba

Baa

A

A

A

A

Baa



For Rating Factor #4, the correlation between actual ratings and the results of mapping is also generally good, with a number of positive outliers among the Latin American operators, whose ratings are generally in the “Baa” category, but whose concessions may exhibit low-risk characteristics. The weakest rating scores are those of the Chinese operators in “Ba”, reflecting an immature concession and regulatory framework.

Rating Factor #5: Stability of Business Model and Financial Structure

WHY IT MATTERS

The generally stable and highly cash flow generative business model of a toll road operator creates significant capacity to incur debt financing and potentially to invest in new concessions or other business activities. While we firmly believe that debt financing is essential to an efficient capital structure, the way in which an operator chooses to use this debt capacity, and the actual contractual limitations to leverage and pursue other activities, are key to its ultimate creditworthiness. As the toll road business model does not naturally lend itself to rapid value creation, a desire to enhance shareholder returns may make higher leverage more attractive, either directly or through opportunistic investments.

The limited life of a concession can create pressure on management to diversify into new business ventures to perpetuate a company’s existence. This can, more or less gradually, undermine the quality of the cash flows generated by the core toll road concession activities. Hence the constraints, either contractual or self-imposed, are an important determinant of future credit quality. Typically a company with no contractual limitation, but with a conservative policy, would score as a “Baa” while contractual limitations may lift the company into higher scores.

As a result, what we aim to identify with this rating factor is the likelihood that event risk could add uncertainty to future cash flow levels and divert resources away from creditors. Such decisions are a function of the ability and willingness of management and shareholders to change the business focus and the financial structure of the company. We believe risk-taking is an essential part of a balanced strategy; however, the ways in which an operator will choose to address the needs of its different investors (e.g. shareholders and creditors) does have a material impact on its overall credit quality.


Our assessment of shareholder and company strategy hinges on three sub-factors: a) Ability and willingness to pursue opportunistic corporate activity (M&A, disposals and investments) b) Ability and willingness to increase leverage c) Targeted proportion of revenues outside core concession

14

a) Ability and Willingness to Pursue Opportunistic Corporate Activity

This sub-factor allows us to score the degree of risk that corporate activity, in the form of mergers and acquisitions, major disposals and investments, will impact future credit quality. We consider whether restrictions exist on management’s discretion to exploit an operator’s cash generation to pursue opportunistic investments, business combinations and other significant corporate initiatives that would alter the issuer’s credit profile. In the absence of formal restrictions, we then consider management’s and shareholders’ track record and objectives to gauge the future likelihood and potential impact of corporate activity. In essence, we assess how future cash flows are likely to be applied, and what the balance will be between cash flows applied to repay creditors and those applied to make investments in order to bolster shareholder returns.

15

Based on the above, the highest possible score for this sub-factor (which we deem commensurate with the “Aaa” category) entails a prohibition on the operator from engaging in any form of corporate activity, either because of the specific mandate incorporated in the concession, the company’s bylaws or other binding agreements (e.g. a contract with the state), or because of express covenant restrictions in financing agreements. At the other end of the spectrum, we score instances of reckless behaviour.

14. Note that we do not discuss the scope for operational cost savings as a separate sub-factor. Such cost savings can constitute an important part of a toll road operator’s financial strategy, and can significantly enhance operating margins and cash flows with minimal investment (for example, through electronic toll collection, or

“ETC”, systems). We already capture the scope for operational cost savings in this rating methodology, through our calculation of forward-looking financial metrics detailed in Rating Factor #6, as discussed below. We have thus omitted cost savings from the rest of the sub-factors in order to avoid duplication.

15. The nature of the toll road operator’s shareholders does not have a direct impact on credit quality, except in situations where GRI or other similar considerations apply.

Rather, the intentions and priorities of shareholders are what may affect how we score this particular sub-factor. This sub-factor can be particularly important in situations where shareholder structures are in flux. For example, a shift towards private ownership may also entail a shift towards more rapid shareholder returns. Note, however, that a government-owned toll road operator may also be subject to high event risk if the government is seeking to extract dividends from the operator to apply to national budget considerations (e.g. investments in other types of infrastructure).


b) Ability and Willingness to Increase Leverage

The first sub-factor considers management’s and shareholders’ ability and willingness to change a company’s credit risk profile by engaging in corporate activities. This sub-factor specifically addresses the likelihood that a company may change its capital structure, based, again, on the degree of discretion left to management and shareholders, their strategy and their track record.

For example, a toll road operator with a conservative financial strategy that, in incurring additional indebtedness, would not compromise minimum financial parameters would score as a “Baa” for this sub-factor.

Note that there is a distinction between the risk characteristics captured under this Rating Factor #5 and those considered in Rating Factor #6: Key Credit Metrics. Under Rating Factor #6, we assess an issuer’s prospective financial profile based on its stated business plan and financial policies and on our views of the main variables affecting future cash flow generation (e.g. revenues, costs, capital expenditure). Any specific transaction that an issuer is committed or very likely to execute would be factored in our financial projections. Conversely, under Rating Factor #5, we assess the risk that future corporate activity, not identifiable yet, may alter an operator’s current business and financial risk profile and the risk that current financial policies will be abandoned in pursuit of higher financial leverage.

c) Targeted Proportion of Revenues Outside the Core Concession

Shareholder returns may be enhanced by investing in businesses outside the core concession, with higher return expectations (e.g. a telecom business utilising the toll road network’s geographic coverage). As such, investments typically entail higher risk than the core toll road concession and we generally view substantial investments outside the core concession area as a credit negative. This sub-factor is designed to adjust for the influence that contributions from higher-risk non-concession businesses may have on an operator’s financial performance and credit metrics.

Within the rating grid, the lowest possible score is attributed to an operator targeting over 20% of revenues originating outside its core concession. If the operator targets more than 20% of revenues originating outside the core concession, the actual credit analysis tied to the operator may require a “blended” approach of the different businesses to adequately assess the company’s consolidated credit profile.

It is important to appropriately define what constitutes the “core” concession. For example, where a toll road company operates two different concessions, we would view these concessions as being a single core concession for the purposes of this rating grid.

A NOTE ON APPLYING RATING FACTOR #5 TO PROJECT FINANCING STRUCTURES

As noted in the introductory remarks to this report, this rating methodology is applicable to any operational toll road, regardless of its chosen financing strategy. The comments above on management’s and shareholders’ discretion apply typically to a standard “corporate” financing structure, and do not apply directly to project financing: under project finance structures, the extent of creditor protection and the behavioural limitations placed on the company by credit documentation are such that management’s and shareholders’ discretion is restricted and objectives are aligned to those of the creditors.

Because the terms and conditions of credit documentation add a layer of creditor protection, we discuss the credit benefits of project financing structures separately, in the section entitled “Sources of Rating Uplift from Creditor Protection” below. Our discussion of creditor protection hinges on three types of protection: event risk protection, liquidity and debt structure protection, and control afforded to creditors.

As discussed in further detail later in this report, where we deem that event risk protection (as determined by credit documentation) is exceptionally strong (as can be the case in a tightly structured project financing transaction), we would automatically score all the sub-factors in Rating Factor #5 in the “Aaa” category, with the expectation that this scoring would automatically add a one-notch uplift to the final rating outcome. In other words, the rating uplift generated by event risk protection, which can be up to one notch, is achieved through the scoring of sub-factors in Rating

Factor #5.




Factor 5: Stability of Business Model and Financial Structure

Weighting: 10%

Aaa Aa A Baa

Ability and willingness to pursue opportunistic corporate activity

(M&A, disposals & investments)

Covenants prohibit all corporate activity OR

Corporate activity is outside of management mandate

Ability and willingness to increase leverage

Targeted proportion of revenues outside core concessions

No additional indebtedness allowed

0% (Exclusive focus on core concession and provision of public services) OR

Covenants prohibit all other businesses

Covenants largely limit corporate activity, with exception of certain defined permitted investments

Additional indebtedess only allowed for concession capex

0-5% OR

Covenants largely limit nonconcession businesses, with exception of certain defined and low risk permitted businesses

Strong track record of no material corporate activity and stated intention to refrain from M&A and major investments

Financial covenants in principal debt instruments limit management ability to materially increase leverage

5-10%

Moderate, may impact credit metrics for 18-24 months only

Conservative financial strategy, unlikely to compromise minimum financial parameters

10-15%

Ba

Track record of repetitive, sizeable transactions

B Caa

Highly likely to conduct frequent and very large opportunistic investments

33.33%

Limited track record of consistent financial policies; likely to target high leverage

15-20%

Track record of aggressive financial policies and very high leverage; likely to pay out creditors' financial cushion ahead of business pressures

>20%

Subweighting

Factor

33.33%

33.33%


Factor 5: Stability of Business Model and Financial Structure



Outlook

Ability &

Willingness to

Pursue Corporate

Activity

Ability &

Willingness to

Increase

Leverage

Targeted

Revenues outside Core

Concession Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America


Current Rating

Ba2

Ba1

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3 stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

Ba

Ba

Aaa

Aaa

Baa

Baa

Baa

Aaa

Aa

Aaa

Aa

Aaa

A

Aa

Aa

A

Aa

Aaa

B

Ba

A

A

Baa

Baa

Baa

Aaa

Aaa

Aaa

Aa

Aaa

A

Aaa

Aa

Aa

Aaa

Aa

Aaa

B

Aa

Aa

Baa

A

A

Aaa

Aaa

Aaa

Aaa

Aaa

Aa

Aaa

Aa

Aa

Aaa

Aaa



The results of mapping are generally consistent with a medium score, around the central “Baa” category for investment-grade corporate issuers, such as the European network operators. The many positive outliers under this rating factor reflect the extensive use in the toll road sector of structural enhancements in credit documentation.

For Chinese operator Road King, the low scores under this Rating Factor #5, particularly for the third sub-factor, have a clear impact on the rating outcome generated by this rating methodology of Ba1. Road King’s actual rating was downgraded to Ba1 from Baa3 in November 2006, completing a review initiated in September 2006, following the announcement of the acquisition of further property interests in China, which, in Moody’s view, points to the ongoing shift in Road King’s strategy towards investments that will raise its overall business risk profile and cash flow volatility.

While this rating methodology will remain a key guidance in assessing Road King’s rating in the future, Moody’s will also consider other rating factors such as development risk exposure and industry cyclicality in view of its increasing investment in property business.

Transurban Finance Company scores lower than its Australian peers under this factor due to its exposure to the merger and acquisition activities of the wider Transurban Group. Management has so far exercised reasonable discipline in respect of its investment activities. This, together with partial protection provided by covenants in debt documents, has placed Transurban Finance Company in the “Baa” category under this rating factor. In comparison, Airport

Motorway Trust and Interlink Roads are single-purpose, project-finance vehicles which are prohibited – under the concession or debt documents – from carrying out non-concession activities.

Rating Factor #6: Key Credit Metrics

WHY IT MATTERS

The first five rating factors aim to capture the credit strengths and weaknesses afforded by the toll road operator’s fundamental business and its financial policies. However, a company’s ultimate credit profile must also incorporate its financial metrics. Two identical toll road operators in terms of business and financial policies may exhibit radically different credit profiles due to different financial metrics.

When examining credit metrics, there is no single measure that invariably predicts the likelihood of default. We utilise metrics that measure both the absolute capacity of the issuer to service its debt, and the size of its debt burden relative to those of its peers. Leverage ratios aim to capture different measures of how easily an issuer can repay its debt; coverage ratios focus more on the ability to service the debt prior to repayment but also need to take into account the remaining length of a toll road concession.

Crucially, given the very long-term funding horizon generally available for toll road operators, we use a combination of “point in time” metrics (such as traditional leverage ratios) and forward-looking metrics that aim to measure the creditworthiness of the operator over the remaining life of the concession (these types of metrics are more traditionally used in project financing structures). These metrics are discussed in detail below.


We use five key credit metrics when examining a toll road operator. Importantly, when examining credit metrics, our ratings also incorporate our “expected case”, i.e. how we believe the metrics will evolve over the foreseeable future.

Two of the credit metrics outlined below are inherently forward-looking in that they attempt to incorporate an additional dimension: the remaining life of the concession. The five credit metrics are the following: a) Cash Interest Coverage b) FFO / Debt c) Debt Service Coverage Ratio d) RCF / Capex e) Debt / PV Base Cash Flows Available For Debt Service, or Concession Life Cover Ratio (“CLCR”)

These credit metrics also incorporate all of the standard adjustments applied by Moody’s when examining financial statements,

16

including adjustments for certain types of off-balance sheet financings and certain other re-classifications in the income statement and cash flow statement. Specific accounting considerations applying to the toll road sector are discussed below.


a) Cash Interest Coverage

The formula for this interest coverage ratio is a variation on the FFO Interest Coverage used by Moody’s for many corporate sectors. The variation is the add-back of non-cash interest to interest expense for those toll road operators that have a material portion of their debt funding in the form of non-conventional instruments, such as zero-coupon, capital accretion or index-linked bonds (or have achieved a similar position through swap arrangements). Such nonconventional financing structure have been principally used by US toll road operators, such Toll Road Investors Partnership II, whose very long concessions may allow the raising of debt with back-ended repayment profiles.

The calculation of the Cash Interest Coverage makes a distinction between current and accruing interest as this ratio is designed to capture the basic financial flexibility that an operator has in meeting interest payments due on its debt. Other key credit metrics provide a comparable measure of an operator’s leverage and intrinsic ability to repay debt and are not affected, as explained below, by the use of non-conventional financing structures. If Moody’s believes that the use of non-conventional debt instruments is beneficial in terms of higher liquidity or lower refinancing risk in the context of the specific risk profile of the toll road operator, a rating uplift may result from the structural considerations discussed below.

The formula for this ratio is as follows:

FFO + Interest Expense

Interest Expense – Non-Cash Interest

The numerator in the formula is Funds From Operations (“FFO”), which reflects Cash Flows From Operations

(“CFO”) excluding working capital movements, plus interest expense. FFO is a relevant measure of cash flows for toll roads, since working capital movements for a mature toll road are typically not material; any unusual movements in working capital tend to be small one-off movements tied more to normal operating activities than to any strategic decisions. For a toll road operator, we believe that using FFO therefore allows us to “normalise” CFO.

The denominator in the formula is interest expense, based on the issuer’s reported figures, and incorporating our standard adjustments to interest expense (for example, re-classifying the interest component of operating lease rental expense). Interest expense is gross of interest income, which is included in FFO. Where relevant, non-cash interest is added back to the denominator.

Note that FFO is net of the interest expense from the income statement, whether or not such interest expense translates fully into a cash payment, with adjustments made to issuers’ financial statements as necessary if non-cash interest is material.

b) FFO / Debt

The numerator in this ratio is FFO as defined above. The denominator is Moody’s calculation of debt, i.e. reported debt plus Moody’s adjustments (e.g. pensions, operating leases and other off-balance sheet adjustments). We prefer to use a measure of gross debt for this sector, as operational toll roads do not typically carry large amounts of cash balances. Furthermore, given the cash nature of a portion of a toll road operator’s transactions with road users, a minimum level of cash funds needs to be retained within the business for a smooth running of operations. We therefore assume that cash balances are not really available to repay debt. However, in situations where this assumption may be incorrect or where the gross debt position of the company may be overstated, in our opinion, by the debt figures as reported in the financial statements, we make the appropriate adjustments.

17

We highlight that this ratio would not be affected by the use of non-conventional financing structures: where relevant, we make adjustments to FFO to achieve a “normalised” measure that reflects both cash interest paid and accrued interest.

16. See Moody’s Rating Methodology: Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations – Part

II Standardized Adjustments to Enable Global Consistency for Issuers Reporting under International Financial Reporting Standards (‘IFRS’), February 2006, and Rating Methodology: Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations – Part I Standardized

Adjustments to Enable Global Consistency for US and Canadian GAAP Issuers, February 2006.

17. The most common instances where the need for this type of debt adjustments may arise are linked to derivative transactions or to cash balances earmarked for the funding of capex in subsequent financial years. For project financings, cash-funded debt service reserves are also deducted from gross debt, if material. Companyspecific circumstances may also require an adjustment to gross debt. For example, Autostrade reported approximately

€

905 million of current and non-current financial assets at 31 December 2005, related to the proceeds of loans by two Italian financial institutions, namely Sanpaolo IMI and Crediop, corresponding to the amounts of grants to be paid by the Italian government towards the cost of the investment programme agreed under Autostrade’s concession. These proceeds were paid into deposit accounts with the same banks and are only gradually released to Autostrade as construction works are completed. Moody’s nets off the amount of these financial assets from Autostrade’s debt.


c) Debt Service Coverage Ratio

This ratio is a coverage ratio that aims to measure the amount of “headroom” afforded by the company’s cash flows in servicing its debt burden. However, the Debt Service Coverage Ratio (“DSCR”) is a ratio more specifically applicable to toll road operators, in that it captures maintenance capital expenditures in the numerator, as well the limited life of an operator’s cash-generating concession activities.

This ratio is forward-looking in the sense that the numerator does not capture the actual debt service (interest plus principal) reported by the company, but translates debt service as an annuity – as such, this ratio aims to capture the company’s ability to service more normalised debt obligations, as they would manifest themselves on average over the life of the concession and assuming outstanding debt is fully repaid prior to expiry.

For corporate toll road issuers, Moody’s calculates a notional amount of interest and principal payment for each year equal to the annuity instalment the company would have to pay in each year in order to repay the debt outstanding at the end of the financial year by the end of the concession.

One of the key advantages of this ratio is that it enables us to differentiate two operators with identical cash flows and debt outstanding, but with different concession lives. Under this formula, a shorter concession life yields a higher effective debt service requirement over the life of the concession.

Also, given the long-term funding horizon of a toll road concessionaire, this ratio allows us to pre-empt the need for future refinancing or differing amortisation profiles; as such, we can better compare a concessionaire with bullet maturities in its capital structure and a concessionaire with amortising debt.

There are four key components to this ratio:

• FFO , as defined above.

• Interest expense , as defined above.

• Maintenance capital expenditure , i.e. the ongoing maintenance expenditure required to operate the road/network. Maintenance capital expenditure can be an actual figure provided or reported by the company, or can be Moody’s estimate on the basis of expected ranges of maintenance capital expenditure per kilometre for a given type of road or network (see the section “Assumptions for Financial Ratio Calculations” below). Capital expenditure to upgrade or expand the road/network should be excluded (e.g. building additional lanes when ADT reaches a certain threshold), as these expenditures are normally linked to additional traffic revenues or tariff increases.

• Debt service annuity , i.e. the annuity-type payment of interest and principal required to repay outstanding debt over the life of the concession. Debt service is calculated using a standard formula for the present value

(“PV”) of an annuity payment. In other words, we assume that: (i) annual debt service is a constant figure,

(ii) interest rates (the discount rate used in the formula) are constant, and (iii) the full amount of debt outstanding at the end of the financial year (i.e. the PV of future payments today) is paid down to zero over the life of the concession.

The formula for the Debt Service Coverage Ratio is as follows:

FFO + Interest Expense – Maintenance Capex

Debt Service Annuity

As already mentioned, the formula above is applicable for toll road operators financed under a standard “corporate” borrowing scheme. Project financing transactions employ the same concept, but it is typically expressed differently given the structural enhancements provided in project financing. For single-asset project-financed toll roads that exhibit a mortgage-style principal repayment schedule, Moody’s would typically use the DSCR as calculated in the financial model agreed by the company with its lenders (assuming the model’s ratio calculations are standard).

The comparable ratio for project finance is as follows:

Cash Available For Debt Service (“CAFDS”)

Interest and Principal


• CAFDS equals Cash Flows From Operations (i.e. after tax) plus/minus transfers from/to maintenance reserves and other timing reserves, if relevant, less capex as appropriate.

18

Interest income received from the reserves is also included in CAFDS. One difference from the “corporate” ratio above is that working capital is typically included in CAFDS.

19

• Interest and principal equals cash interest and principal paid or scheduled for payment in the relevant period. Cash interest and actual principal paid are as reported in the cash flow statement. Interest paid is gross of interest income (as the latter is included in the numerator). However, if the project financing does not provide for a mortgage-style principal repayment schedule, we use as the denominator for the ratio the debt service annuity defined above.

d) RCF / Capex

This ratio shows whether a toll road operator is able to fund capital expenditure internally. Moody’s does not regard capital expenditure undertaken by an operator to upgrade its network as a negative rating factor in itself, as additional investments may be remunerated through tariff increases or may generate additional traffic flows. However, we view positively the financial flexibility enjoyed by a toll road operator that faces only limited capex requirements easily funded by internally generated cash flows. Such a company would not need to access the markets to raise additional finance and may have a wider range of options to react to changing economic circumstances. We would caution, however, that a company that generates large financial surpluses that are paid out to shareholders may not actually retain a high degree of flexibility in downturns if management is unwilling to cut distributions.

The formula for the RCF/Capex ratio is the following:

FFO – Dividends Paid

Capex where capex comprises additions to both tangible and intangible fixed assets.

Note that, for project-financed roads, this ratio would typically be just above 1 over the life of the concession. The standard calculation of this ratio, which is used for many corporate sectors, may not reflect adequately the operation of maintenance and other timing reserves. We would therefore expect to score this credit metric in the “Baa” category for most project financings.

e) Debt / PV Base Cash Flows Available for Debt Service, or CLCR

This ratio is designed to provide a scaleable and comparable measure of leverage for comparisons among toll road operators with different financing structure, different tariff regimes, different concession lives and different growth potentials. The debt quantum of an operator is assessed in relation to the net present value of what we define as “base cash flows” expected to become available to service debt over the life of the concession.

The denominator of the ratio – the present value of base cash flows available for debt service – does not represent a valuation of the enterprise value of the toll road operator. The discount rate used for the calculation, which is discussed below, is based on the cost of the company’s debt and not on the cost of capital. The ratio looks at the coverage provided to the debt by the current level of cash flows, which for many toll roads represent a stable base. The only growth in cash flows that is taken into account reflects (i) expected tariff growth without new investments, which for many operators can be based on an inflation assumption, as tariff changes are often a percentage of inflation specified in the concession agreement, and (ii) a conservative estimate of incremental traffic volumes. The traffic growth rates that we use tend to be in the range of 1% to 2% for mature toll road assets, but can also be 0%. In general, this is a company-specific assumption made by Moody’s and discussed in the relevant company research.

The formula for this ratio is:

Debt

(1 / (DR - GR)) x CCF x (1 - ((1 + GR) / (1 + DR))

Y

) where:

• DR (discount rate) is either (i) the company’s actual cost of debt if largely fixed over the life of the concession, or (ii) an assumption for the long-term average cost of debt based on the company’s rating.

18. CAFDS is a post-capex measure; however, capex spending may be smoothed by the operation of capex reserves.

19. We regard this as appropriate for highly leveraged single assets; in any case, working capital movements are generally not material (except, sometimes, for VATrelated flows in the initial years).


• GR (growth rate) is the annual rate at which current cash flows are assumed to be growing every year during the life of the concession (e.g. inflation rate combined with traffic growth rate).

• CCF (current cash flows) is defined as: FFO + Interest Expense – Maintenance Capex.

• Y is equal to the number of years remaining to the end of the concession.

20

For project-financed toll roads, the equivalent measure is expressed by the Concession Life Cover Ratio

(“CLCR”), typically calculated in the financial model agreed by the company with its lenders. The CLCR can be used or its reverse. The CLCR is typically calculated as the ratio of the present value of CAFDS (using the cost of the rated debt as the discount rate) to debt outstanding.

21

Note that our mapping of the CLCR to broad rating categories takes into account the following considerations that, in our opinion, warrant prudent thresholds for investment-grade categories:

• The growth rate is compounded in the formula that calculates base cash flows for potentially many years: relatively minor discrepancies in actual growth from the assumed level, particularly in the earlier years, can make a significant difference. We have observed depressed and even negative traffic growth in very recent years for certain large European networks. It will also take some time to observe whether and to what extent record high fuel prices will affect historical relationships observed between traffic growth rates and economic performance. Future traffic patterns could also be affected by government actions in response to climate change concerns designed to alter the economics of road usage relative to other means of transport.

• The discount rate is the cost of debt and not the cost of capital. The CLCR assumes that future base cash flows can be used to pay down debt: in reality, toll road operators are expected to make substantial distributions to shareholders.

• Maintenance requirements may be more substantial than we assume, particularly in later years as the toll road assets age and need to be prepared for handover back to the grantor of the concession. The formula that calculates base cash flows does not take handover maintenance into account. We would expect this to be a minor issue when handover is many years into the future, but it may become more of a concern as a concession life shortens.

ASSUMPTIONS FOR FINANCIAL RATIO CALCULATIONS

We discuss in this section a number of practices and assumptions for the calculation of the five key credit metrics defined above and their use in the rating grid shown below.

• Discount rate.

If a toll road operator has largely fixed the interest payable on its debt over the life of the concession, we would use the actual cost of debt of the company. If a toll road operator refinances its debt on an ongoing basis, we use a notional cost of debt based on 10-year averages for the real risk-free rate and the corporate debt premium (i.e. the spread) for the relevant rating category, plus an assumption for inflation consistent with that which we use for the purpose of calculating the growth of base cash flows.

22

• Maintenance capex.

For a single-asset project-financed road, we would expect to review and consider its specific maintenance capex requirements, which are typically also validated by an independent technical adviser acting for the lenders. For the large corporate issuers, such as the European network operators, we use a generic assumption of maintenance capex per kilometre.

23

• Historical vs. Projected Credit Metrics.

Given that the toll road economic model has good visibility a few years into the future, financial projections often provide a reliable and useful tool to enhance credit analysis. In mapping a company’s credit metrics to broad rating categories as indicated in the grid below, we

20. The formula is simply the present value, r being the discount rate, of an annuity C that grows at the growth rate g for the number of years remaining to the end of the concession (Y):

C - ( C (1 + g)

Y

x 1 ) r-g r-g (1 + r)

Y

21. The balance outstanding on any debt service reserve account is typically added to the present value of CAFDS. These reserves are typically of limited amounts and can only be used for debt service payments.

22.For example, for companies with operations in the Euro-zone, we assume a risk-free rate of 2.2%, inflation of 2.0% and a spread based on the following table:

Rating Spead (bp)

Aa

A

15

55

Baa

Ba

125

455

B

Caa

675

1,710

Accordingly, for a single-A rated Euro-zone issuer, we use a discount rate of 4.75%. These assumptions will be updated over time.

23. For European networks, our assumption for maintenance capex is currently equal to

€

52,500/km and will be updated over time. We believe that this amount reflects current expenditure levels for repaving activities on European networks with a limited percentage of mountainous terrain, tunnels and viaducts. We recognize that for networks that have more complex characteristics the level of expenditure is likely to be higher. However, for simplicity, we use a standard assumption, unless a more accurate, ad-hoc assumption would make a material difference to credit metrics.


could focus exclusively on historical credit metrics or exclusively on projected metrics, or use a mixture of both. In actual fact, we use historical credit metrics in situations where we believe that these are representative of the financial structure pursued by management (based on a track record), or where we believe that forecast improvements are uncertain. For companies that have a history of using financial headroom to make new investments or to increase distributions to shareholders, we map using historical credit metrics, without factoring in the benefit of any reduction in leverage and associated improvement in credit metrics that may be shown in the financial projections based on current operations. Conversely, in cases where we believe that there is a high probability that a company’s credit metrics will improve (e.g. an agreement with the government) or deteriorate (e.g. a large capital programme), we map using the prospective ratios.



Factor 6: Key Credit Metrics (Historical & Projected)

Weighting: 40%

Cash Interest Coverage

FFO / Debt

Moody's Debt Service Coverage

Ratio

RCF / Capex

Debt / PV Base Cash Flows or

Concession Life Coverage Ratio

Aaa

>10.0x

>40%

>8.0x

>3.5x

<10%

Aa

7.0-10x

25-40%

5.0-8.0x

3.5-2.5x

10-20%

>10.0x

10.0-5.0x

A

4.5-7.0x

14-25%

3.0-5.0x

1.5-2.5x

20-30%

5.0-3.3x

Baa

2.5-4.5x

8-14%

1.8-3.0x

1.0-1.5x

30-40%

3.3-2.5x

Ba

1.8-2.5x

6-8%

1.3-1.8x

0.5-1.0x

40-60%

B

1.5-1.8x

4-6%

1.0-1.3x

<0.5x

60-80%

2.5-1.7x

1.7-1.25x

Caa

<1.5x

<4%

Subweighting

Factor

20.00%

20.00%

<1.0x

<0.5x

>80%

20.00%

20.00%

20.00%

<1.25x


Factor 6: Key Credit Metrics (Historical & Projected)



Current

Rating Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol





Rutas del Pacifico




North America


Ba2

Ba1

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3

Outlook

FFO

Interest

Coverage stable stable stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

B

Aa

Ba

Baa

Ba

Baa

Baa

Ba

Caa

Ba

B

B

B

B

A

Ba

Baa

A

FFO /

Debt

Moody's

DSCR

RCF /

Capex CLCR

Ba

Aa

Baa

Baa

Baa

Baa

Baa

Caa

Ba

B

Baa

B

B

Baa

Ba

Baa

Baa

Caa

B

A

Baa

Baa

Ba

Baa

Baa

Ba

B

Ba

Ba

B

Ba

Ba

Ba

Ba

B

Caa

Aaa

Ba

Baa

Baa

Baa

Ba

Ba

Ba

B

Baa

B

Baa

Baa

B

Ba

Ba

Baa

Ba

B

Aa

Aa

Baa

Ba

A

Baa

Ba

B

Ba

B

Ba

Ba

Ba

Ba

Baa

Ba

Ba



The results of mapping for the key credit metrics show, not surprisingly, a significant number of negative outliers, confirming the considerable use of debt capacity across the sector, which constrains ratings for many issuers with good rating scores for the previous rating factors. Chinese operator Road King is the exception, as a positive outlier for four of the five metrics, providing support to its ratings.

24

Accounting Considerations

A brief discussion of accounting practices among toll road operators will help explain why the definition of inputs to the key credit metrics discussed in the previous session, or the adjustments to financial statements from which those inputs are derived, may need to evolve over time to reflect accounting changes. We also explain a specific adjustment that, in certain circumstances, we find necessary to make to the cash flow statements of toll road operators in order to improve the comparability of FFO figures across the sector.

In Europe, for example, toll road operators adopted International Financial Reporting Standards (“IFRS”) for the first time in relation to the financial year ended 31 December 2005. However, IFRS adoption has not resulted in harmonised accounting policies. For example, Autostrade and Brisa use the property model in relation to their concession assets, which are reported under property, plant and equipment, whilst Vinci (Baa1/P-2, stable), the concessions and construction group, consolidating French toll road concessionaire Cofiroute, uses the intangible asset model.

In March 2005, the International Financial Reporting Interpretations Committee (“IFRIC”) published three draft interpretations (D12, D13 and D14) relating to the accounting treatment of concession contracts, in particular of assets (assets to be relinquished), liabilities (provisions for repair and replacement) and revenues and costs. These draft interpretations are still under discussion and have not been generally followed, with most companies continuing to use the approach previously used under their national GAAP.

25

Whilst the differences in presentations and valuations of toll road concessions are numerous and significant across toll road operators and can affect income statement and balance sheet statistics, it is principally the accounting differences that affect FFO that are our main concern given the key credit metrics that we have selected.

One area of concern is that there is no consistency among operators on the policies for capitalising versus expensing to the income statement maintenance expenditure. All operators would tend to expense many small items of routine, recurring maintenance (e.g. weeding), and capitalise other more costly and complex interventions (e.g. toll booth replacement). Financial statement disclosure is insufficient to fully appreciate all differences and potential sources of discrepancies.

However, one key difference in accounting policies specific to toll road operators and affecting FFO is whether the cost of repaving, the main recurring item of major maintenance, is treated as capex or as an operating expenditure.

When the cost of repaving is capitalised, it is added to the carrying value of the toll road assets and depreciated over a period typically of eight to ten years. This expenditure would not be included in cash flows from operating activities in the cash flow statement (and thus would not be included in FFO), but would appear in the section relating to cash flows from investing activities. Clearly, when the cost of resurfacing the toll roads is expensed to the income statement, it is also included in FFO. All else being equal, a company that capitalises repaving costs would show a higher level of

FFO than a company that expenses these costs, even though their actual cash flow generation is the same.

Unless specific information is available to quantify repaving costs that have been expensed, Moody’s makes an estimate of the expenditure per kilometre and adds the total amount to FFO. We also increase by the same amount the additions to property, plant and equipment (or other appropriate item under investing activities). This adjustment applies, for example, to Autostrade. This creates a more comparable basis of FFO from which maintenance capex, including repaving, is deducted for the purpose of calculating certain key credit metrics.

26

24. Due to its unusual, backloaded capital structure and heavy reliance on zero coupon bonds, Toll Road Investors Partnership II (“TRIP”) accretes substantial non-cash interest expense while at the same time repaying principal on maturing debt. To the extent that TRIP’s accrued interest continues to exceed cash debt service,

Moody’s will regard the full debt service payment as interest.

25. The IFRIC proposals identify the method of remunerating the concession operator as the criterion to determine the nature of the assets to be recognised in the balance sheet of the operator. Two accounting models are proposed: the intangible asset model and the financial asset model. The toll road asset under concession would be recognised as an intangible asset if the operator is paid directly by the users: the operator’s asset is seen as the right to receive tolls granted by the concession in consideration for financing and constructing the transport infrastructure. The toll road asset is seen as a financial asset if the operator is paid directly by the concession grantor (e.g. the government for the shadow toll concessions granted in the UK, Portugal and other European countries). In this case, the concession asset would be recognised as an interest-bearing financial receivable.

26. For European networks, our assumption for repaving capex is currently equal to

€

20,000/km and will be updated over time. We believe that this amount reflects current expenditure levels for repaving activities on European networks with a limited percentage of mountainous terrain, tunnels and viaducts. We recognize that for networks that have more complex characteristics the level of expenditure is likely to be higher. However, for simplicity, we use a standard assumption, unless a more accurate, ad-hoc assumption would make a material difference to credit metrics .


Evaluating Ramp-up and Construction Risk

A few observations are also appropriate in relation to two risk factors that are typically associated with toll road assets and that we have not separately discussed for our rating grid: ramp-up risk and construction risk.

Ramp-up risk is assumed to be largely outside the scope of this methodology, with residual ramp-up risk captured in our assessments of traffic profile and the robustness of the service area. We also considered any residual ramp-up risk in assessing the potential for traffic growth, as well as the uncertainty around traffic projections.

Construction risk is assumed to be of limited impact, as this rating methodology is only applicable to operational toll roads.

27

Nevertheless, an existing operator may still conduct significant construction activities to complete or upgrade its toll road assets. The implications that large capital programmes may have for financial flexibility are captured by Rating Factor #6 – Key Credit Metrics, as discussed above.

The risk of cost overruns and tariff/concession implications should be captured by the prospective credit metrics in our financial projections. In compiling these projections, we may adjust the company’s estimates of construction costs depending on the track record, any risk mitigation clauses under the concession regime

28

and any contractual arrangements that reduce construction risk exposure. The following table shows guidelines for adjustments to a company’s estimates under three different scenarios.

Construction Cost Adjustments

30-60%

High-risk construction (e.g. very complex);untested regime; no track record or unfavourable track record

10-30%

Construction is complex or involves numerous independent parties; regime should provide mitigation, but not well tested; track record of cost overruns within the 10-30% band

0-10%

Strong history of no overruns;protections under concession regime;favourable track record

Where construction activities relate to entirely new stretches of road that may open an operator’s existing road network to different traffic patterns, we may also reflect a higher degree of uncertainty in future traffic trends in our revenue projections.

Structural Considerations and Sources of Rating Uplift from Creditor Protection

Toll road operators are financed under different financing structures. Historically there was a traditional distinction within the toll road universe between (i) large, mature toll roads, which enjoy good investment-grade ratings, which raised debt funding on a senior unsecured basis and with no particular covenant protections, and (ii) single-asset operators with a short corporate history and high leverage, which adopted a project finance approach to concession financing. This distinction is becoming increasingly blurred. Large network operators are becoming more highly leveraged as a result of changes in ownership and other corporate activity and may have to agree to creditor protection arrangements. On the other hand, certain single-asset operators are exhibiting improving fundamentals and are transitioning to less leveraged positions, as their original business plans are successfully executed.

Moody’s believes that in the toll road sector structural enhancements may provide valuable creditor protection and be a source of rating uplift. We have classified the sources of rating uplift from creditor protection into three categories: i.

Event risk protection ii. Debt structure and liquidity protection iii. Control afforded to creditors

For each category, we look at specific concessions made to creditors and score their effectiveness on a scale of five grades: “none”, “low, “medium”, “high” and “very high”.

Legal considerations are typically important to determine the value of protective arrangements in the jurisdiction(s) that are relevant to a toll road operator’s specific financial arrangements.

27. For a discussion of Moody’s proposed approach to evaluating construction risk, please refer to the Special Comment: Construction Risk in Privately-Financed Public

Infrastructure (PFI / PPP / P3) Projects (Request for Comment), August 2006.

28. For example, under the terms of Addendum IV to its Concession, Autostrade benefits from some protection in relation to construction risk in that tariff increases are linked to the actual cost of completing the capital programme set out in the Addendum and not to the initial estimates made by the company.


i) Event Risk Protection

In this category, we typically review restrictive covenants including: a.

Restrictions on permitted business outside the core concession b. Restrictions on acquisitions/disposals c.

Restrictions on investments d. Restrictions on additional indebtedness

As we have discussed above, if these and similar restrictions are fully effective to remove event risk, all the sub-factors under Rating Factor #5: Stability of Business Model & Financial Structure for Creditors will be scored in “Aaa”, thus effectively giving a one-notch uplift compared to a generic benchmark assumed to be in the mid-point “Baa” range.

Note that project and other structure financings typically incorporate bankruptcy-remoteness and other ringfencing provisions designed to insulate the credit quality of the toll road operator from that of its wider corporate family, sponsors or sub-contractors. These provisions may be crucial in order for the rating of the toll road operator to reflect exclusively its credit quality, assessed as described in this rating methodology. However, they do not enhance the operator’s stand-alone credit quality and therefore are not listed as a source of rating uplift.

ii) Debt Structure and Liquidity Protection

Structural enhancements in this category address financial risks associated with liquidity, interest rate and refinancing risk. Typical arrangements include: a.

Dedicated cash reserves to cover all costs for at least next 12 months under base case b. Timing reserves to cover future “lumpy” payments (e.g. maintenance) c.

No material refinancing risk (e.g. benefits of amortising debt) d. Covenanted hedging policies

If we regard the overall effectiveness of creditor protection for risks relating to debt structure and liquidity as very high, the rating would be raised by one notch.

We highlight that a fully amortising debt structure, typical of project financings and typically associated with adequate reserving and hedging arrangements, is generally regarded as necessary to achieve a score of “very high” in this category.

Note that different arrangements may have more or less bearing in our assessment of how effective creditor protection in this category is, depending on the specific circumstances of the company. For example, the fact that an operator is not required to maintain a forward-looking maintenance reserve may seriously undermine the overall effectiveness of this type of arrangements if maintenance requirements are lumpy and difficult to predict and access to liquidity is uncertain, whilst it may not be a material consideration for an operator with different characteristics.

iii) Control Afforded to Creditors

Among the most typical structural features, financial covenants and security arrangements are included in this category, as they provide creditors with a degree of control on company’s financial and business decisions in downturns, which are not enjoyed in respect of a typical corporate issuer. Specific arrangements that we classify in this category include: a.

Step-in rights and remedies to delay concession termination or insolvency (e.g. direct agreements, security and intercreditor agreements, warning system).

b. Restrictions on payments and distribution lock-ups (e.g. if metrics deteriorate below minimum required parameters).

c.

Frequent and regular reports of creditors’ technical advisers to sanction base case validity and compliance with contractual and financial obligations.

Again, if the overall effectiveness of arrangements falling in this category is scored as very high, a one-notch rating uplift is applied. As for the previous category, the whole package of structural enhancements is assessed to gauge the overall effectiveness. For example, independent validation of compliance with financial ratio covenants may be an important consideration for the purpose of assessing the effectiveness of such covenants.

29

Creditor step-in rights should be specifically permitted under the concession framework as well as the finance documents.

29. A test to assess the effectiveness of financial covenants, in terms of definition and threshold levels, that we often use is to run increasingly negative downside sensitivities and see (i) whether and when distribution lock-ups are activated, and (ii) whether trapped cash provides material support to the company’s credit metrics at meaningful levels.


Note that we give value to security arrangements – typically in respect of the shares in the toll road concessionaire entity – only as one element, though generally a critical element, of a wider package of concessions designed to improve creditors’ ability to detect early potential problems and rectify them if possible (in the first instance by retaining cash surpluses within the company), or, if remedial action is not possible or fails, to maximise recovery prospects.

As normally security is not allowed or is not enforceable on the concession assets, a rating uplift is not generally achievable simply by the granting of security.

In conclusion, Moody’s believes that structural enhancements can deliver up to three notches of uplift to the rating if they are very comprehensive and effective. This can be of substantial value. Given the weighting we attribute to Rating Factor #6: Key Credit Metrics in our rating grid, an improvement in an operator’s financial profile of two broad categories would be approximately necessary to achieve a three-notch improvement in the rating. Clearly, sources of creditor protection are often regarded as very costly by management and shareholders, with the consequence that in many cases protective arrangements are only moderately effective, thus resulting in a practical limit of one to two notches of rating uplift.

Other Rating Considerations

Moody’s considers many non quantifiable and qualitative factors in assigning ratings. These include management and governance, financial reporting and overall disclosure, liquidity, legal and environmental matters, and other matters that are generally common to all corporate finance issuers. While these matters are addressed in dedicated Moody’s research and are not discussed further here, the influence of such factors remains integral to the rating process. In situations where a toll road operator’s rating is materially influenced by any such factor so as to diverge from the rating resulting from the application of Moody’s industry methodology, we explain the relevant rating factors in companyspecific research.


Related Research

Special Comments:

Toll Road Privatization Trends in the U.S.: An Assessment of the Credit Benefits and Risks, September 2006 (99076)

European Toll Road Network Operators: Very Low Business Risk, But Ultimate Debt Capacity Usage Remains Key,

October 2004 (89367)

Construction Risk in Privately-Financed Public Infrastructure (PFI / PPP / P3) Projects (Request for Comment),

August 2006 (98409)

Rating Methodology:

Moody’s Rating Methodology for State and Local Government Owned Toll Facilities in the United States,

March 2006 (97053)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.


Appendix I – Indicated Ratings and Results of Mapping

Toll Roads

Toll Roads

Asia



Australia




Europe

Autostrade S.p.A.


Latin America

Autopista del Mayab

Autopista del Sol


BG Trust, Inc. (Corredor Sur - ICA

Panama)

Carretera de Cuota Constit. Y Ref. La

Venta (MexTol)

Libramiento de Matehuala Toll Road

Mexico

Rutas del Pacifico

Sociedad Concesionaria Costanera

Norte S.A.

Sociedad Concesionaria Vespucio

Norte Express S.A.

Talca Chillan Sociedad

Concessionaria

North America

Toll Road Investors Partnership II, L.P.

(Dulles Greenway)

Asset Type

Fundamentals of

Service Area

Negative

Outlier

Current

Rating

Positive

Outlier

Outlook

Factor-

Indicated

Rating

10.00%

Additional

Uplift

Final

Indicated

Rating

Asset

Features

10.00% 5.00% 5.00%

Competing

Routes

Robustness

& Diversity

GDP /

Capita

Ba2

Ba1 stable stable

Ba2

Ba1

0

0

Ba2

Ba1

Baa

Baa

Ba

Ba

Baa

A

B

Caa

A3

A2

A3

A3

A3

Ba1

Baa2

Baa3

Baa2

Baa3

Baa3

Baa2

Baa2

Baa3

Baa2

Baa3 stable stable negative stable stable stable stable stable stable stable stable stable stable stable stable stable

A2

A2

Baa1

A3

A3

Ba3

Baa3

Baa3

Baa3

Baa3

Ba1

Baa2

Baa2

Baa2

Baa2

Ba2

0

0

0

0

0

+2

+1

+1

+1

+1

+1

+1

+1

+1

+1

+2

A2

A2

Baa1

A3

A3

Ba1

Baa2

Baa2

Baa2

Baa2

Baa3

Baa1

Baa1

Baa1

Baa1

Baa3

A

A

Aa

Aaa

Aa

Aa

A

Aa

A

Aa

A

A

Aa

A

A

Baa

Aa

Aa

Aa

Aa

Aa

Aa

Aa

A

Aa

A

Aa Baa

Aa A

Aa Baa

Aa

Aa

A

A

Aa

A

A

Aa

A

Baa

Baa

A

A

A

A

Aaa

Aaa

Aaa

Aa

Aaa

Aa

Aaa

Baa

A

Baa

Baa

Baa

Baa

A

A

A

A

Aa

Aa

Aa

A

Baa

A

Baa

Aa

A

Aa

Baa

Baa

Aaa

Baa

Baa

3.33%

User

Profile

Traffic Profile

3.33%

Track

Record

3.33%

AADT per

Lane Km

Baa

Baa

Baa

A

Ba

Ba

Aaa

A

Aa

A

Aaa

Aa

A

A

Aa

A

Aa

Baa

A

Baa

Baa

A

A

Aa

Aa

Aa

Aa

A

Aa

A

Baa

Aa

Baa

A

Baa

Baa

Baa

Baa

Ba

Appendix I – Indicated Ratings and Results of Mapping (conginued)

Toll Roads

Toll Roads

Asia


Road King Infrastructure

Limited

Australia



Transurban Finance Company

Pty Ltd

Europe

Autostrade S.p.A.

Brisa Auto-Estradas de Portugal

S.A.

Concession & Regulatory Framework

3.33%

Risk of

Adverse

Changes

3.33%

Ability to

Increase

Tariffs

3.33%

Protection againt

Events outside


Control

Stability of Business Model & Financial Structure

3.33%

Ability & Willingness to Pursue

Opportunistic

Corporate Activity

3.33%

Ability &

Willingness to Increase

Leverage

3.33%

Revenue Target outside Core

Concession

Key Credit Metrics (Historical & Projected)

8.00% 8.00% 8.00% 8.00% 8.00%

Cash

Interest

Coverage

FFO /

Debt

Moody's

DSCR

RCF /

Capex CLCR

Ba

Ba

Ba

Ba

Ba

Ba

Ba

Ba

B

Ba

Aaa

B

B

Aa

Ba

Aa

B

A

Aaa

Ba

B

Aa

A

A

A

Baa

A

Aa

Aa

Aa

A

Aa

Baa

Baa

Baa

Baa

Baa

Aaa

Aaa

Baa

Baa

Baa

A

A

Baa

Baa

Baa

Aa

Aa

Baa

A

A

Ba

Baa

Ba

Baa

Baa

Baa

Baa

Baa

Baa

Baa

Baa

Baa

Ba

Baa

Baa

Baa

Baa

Baa

Ba

Ba

Aa

Baa

Ba

A

Baa

Latin America

Autopista del Mayab

Autopista del Sol


BG Trust, Inc. (Corredor Sur -

ICA Panama)

Carretera de Cuota Constit. Y

Ref. La Venta (MexTol)

Libramiento de Matehuala Toll

Road Mexico

Rutas del Pacifico

Sociedad Concesionaria

Costanera Norte S.A.

Sociedad Concesionaria

Vespucio Norte Express S.A.

Talca Chillan Sociedad

Concessionaria

North America

Toll Road Investors Partnership

II, L.P. (Dulles Greenway)

A

A

A

Aa

A

A

A

A

A

A

A

Aa

Baa

Aa

Baa

Aa

A

Baa

Baa

Baa

Baa

Baa

Ba

A

A

Aa

Ba

Baa

A

A

A

A

Baa

Aaa

Aa

Aaa

Aa

Aaa

A

Aa

Aa

A

Aa

Aaa

Aaa

Aaa

Aaa

Aa

Aaa

A

Aaa

Aa

Aa

Aaa

Aa

Aaa

Aaa

Aaa

Aaa

Aaa

Aa

Aaa

Aa

Aa

Aaa

Aaa

Caa

Ba

B

B

B

B

A

Ba

Baa

A

Ba

Caa

Ba

B

Baa

B

B

Baa

Ba

Baa

Baa

Caa

B

Ba

Ba

Ba

Ba

B

Ba

Ba

Ba

B

Caa

Ba

B

Baa

B

Baa

Baa

B

Baa

Ba

B

Ba

B

Ba

Ba

Ba

Ba

Ba Baa

Ba Ba

Ba

Ba

Appendix II – Rating Methodology Grid and Mapping

This appendix shows the calculations made by Moody’s analysts to derive an indicated rating from the methodology grid.

1. Rating Methodology Grid

The characteristics of the issuer are scored for each sub-factor in a grid and the relevant weightings are applied to generate a distribution of weighted scores across the rating scale.

ISSUER NAME

Model Rating from grid: Ba2

Aaa

ENTER VALUES OF 1 IN RELEVANT CATEGORY FOR EACH LINE

Aa A Baa Ba B

1 3 6 9 12 15

Caa

18

0 0

1

1

1

1 0 0 0

1- Asset Type a) Asset features b) Competing routes

Total

2 - Fundamentals of Service Area a) Robustness and diversity of service area b) GDP/capita in service area

Total

3 - Traffic Profile a) User profile b) Track record and stability of tolled traffic c) Annual average daily traffic per lane km

Total

4 - Concession and Regulatory Framework a) Risk of adverse changes to concession terms and conditions b) Ability to increase tariffs c) Protection against events outside the concessionaire's control

Total

5 - Shareholder and Company Strategy a) Ability and willingness to pursue opportunistic corporate activity (M&A, disposals & investments) b) Ability and willingness to increase leverage c) Targeted proportion of revenues outside core concessions

Total

6 - Key Credit Metrics a) Cash Interest Cover b) FFO / Debt c) Debt Service Coverage Ratio d) RCF / Capex e) Debt/PV Base Cash Flows or CLCR

0

0

0

0

0

0

0

0

0

0

0

0

1

1

1

1

1

1

0

0

1

1

1

1

2

1

1

1

1

1

1

1

1

3

3

0

0

0

1

1

2

1

1

0

0

0

0

0

Weightings of Factors in Final Output:

1- Asset Type

2 - Fundamentals of Service Area

3 - Traffic Profile

5 - Shareholder and Company Strategy

4 - Concession and Regulatory Framework

6 - Key Credit Metrics

Weightings of Ratings in Final Output:

GRAND TOTAL COUNT (UNWEIGHTED):

GRAND TOTAL COUNT (WEIGHTED BY FACTOR):

GRAND TOTAL COUNT (WEIGHTED BY FACTOR & RATING):

DISTRIBUTION OF WEIGHTED RATING COUNT:

Mapping:

Mapping Score:

MODEL OUTCOME: Ba2

0

20.0%

10.0%

10.0%

10.0%

10.0%

40.0%

100.0%

1

Aaa

0.0

0.0

0.0

0.0%

0.0

12.0

0 0

1

Aa

0.0

0.0

0.0

0.0%

0.0

1

A

1.0

1.8

1.8

5.2%

0.3

1.15

Baa

4.0

3.9

4.5

13.1%

1.2

2

Ba

10.0

8.8

17.6

51.3%

6.2

3

B

3.0

3.5

10.5

30.4%

4.6

5

Caa

0.0

0.0

0.0

0.0%

0.0


2. Rating Look-Up

The final distribution of scores resulting from the grid is mapped to an indicated rating as follows.

Final Distribution per Category

Value

Aaa

0.0%

1

Aa

0.0%

3

A

5.2%

6

Baa

13.1%

9

Ba

51.3%

12

B

30.4%

15

Caa

0.0%

18

For example, a final score of rounded 12 is mapped to a Ba2 rating based on the following look-up table.

Baa3

Ba1

Ba2

Ba3

B1

B2

B3

Caa1

Caa2

Indicated Rating

Aaa

Aa1

Aa2

Aa3

A1

A2

A3

Baa1

Baa2

Overall Score

1.49 or lower

1.50 - 2.49

2.50 - 3.49

3.50 - 4.49

4.50 - 5.49

5.50 - 6.49

6.50 - 7.49

7.50 - 8.49

8.50 - 9.49

9.50 - 10.49

10.50 - 11.49

11.50 - 12.49

12.50 - 13.49

13.50 - 14.49

14.50 - 15.49

15.50 - 16.49

16.50 - 17.49

17.50 - 18.00

This rating may be subject to further uplift for structural enhancements, which are evaluated separately in respect of

Debt Structure and Liquidity Protection and Control Afforded to Creditors.


Appendix III – AADT per Lane Km Calculation

This appendix explains in more detail and with the help of examples Moody’s approach to calculating Annual Average

Daily Traffic (AADT) per Lane km, which is one of three sub-factors we use to assess the Traffic Profile of operational toll roads.

Moody’s Global Rating Methodology for Operational Toll Roads defines this ratio as follows:

AADT/Lane Km = number of vehicles that on average use a km of lane every day in BOTH directions

This means that, if AADT/Lane is 8,000 and we have a 2x2 motorway, 4,000 vehicles on average use each lane of the motorway every day to go in one direction (e.g. north to south) and 4,000 vehicles to go in the opposite direction (i.e.

south to north).

However, different data may be available in different jurisdictions. The following examples show alternative calculations of AADT/Lane Km. If different stretches of an operator’s toll road network have a different number of lanes,

Moody’s uses the weighted average number of lanes with the weighting based on the length of each motorway section.

Example 1 – Suitable AADT figures available

Data:

• AADT per Km = 16,000

• Weighted Average No. of Lanes = 2.3

AADT/Lane Km = 16,000 / 2.3 = 6,956

Example 2 – Operator uses distance-based tolling

Data:

• No. of Vehicles x Km (i.e. total number of km travelled per year, usually for BOTH directions) =

146,000,000

• Length of Road = 25 km


AADT/Lane Km = 146,000,000 / 25 / 365 / 2.3 = 6,956

Example 3 – Operator records total number of transactions

Example 3a

Data:

• Total No. of Transactions per Year (in BOTH directions) = 5,840,000


Moody’s Assumption:

• Most vehicles use the full length of the road

AADT/Lane Km = 5,840,000 / 365 / 2.3 = 6,956

Example 3b

Data:

• Total No. of Tolled Transaction per Year (in BOTH directions) = 17,520,000



• On average vehicles use one third of the full length of the road

AADT/Lane Km = 17,520,000 / 3 / 365 / 2.3 = 6,956


Example 4 – Operator uses one-way tolling

Example 4a

Data:

• Total No. of Tolled Transaction per Year (in ONE direction) = 2,920,000



• Most vehicles use the full length of the road

AADT/Lane km = 2,920,000 x 2 / 365 / 2.3 = 6,956

Example 4b

Data:

• Total No. of Tolled Transaction per Year (in ONE direction) = 8,760,000



• On average vehicles use one third of the full length of the road

AADT/Lane Km = 8,760,000 x 2 / 3 / 365 / 2.3 = 6,956


To order reprints of this report (100 copies minimum), please call 1.212.553.1658.

Report Number: 101003

Author

Monica Merli

Editor

Justin Neville

Associate Analyst

Stefanie Voelz

Production Associate

Tara Cheparev

© Copyright 2006, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALL

INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED,

FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN

ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by

MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY,

EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER

OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.

MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by

MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody’s Corporation

(MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate

Governance — Director and Shareholder Affiliation Policy.”

This credit rating opinion has been prepared without taking into account any of your objectives, financial situation or needs. You should, before acting on the opinion, consider the appropriateness of the opinion having regard to your own objectives, financial situation and needs.


Rating Methodology December 2006

Rating Methodology

Operational Toll Roads

December 2006

Overview

Industry Definition

Industry Overview

About the Rated Universe

About this Rating Methodology

Rating Factor #1: Asset Type

a) Asset Features

b) Competing Routes

Rating Factor #2: Fundamentals of Service Area

a) Robustness and Diversity of Service Area

b) GDP/Capita in Service Area

Rating Factor #3: Traffic Profile

a) User Profile

b) Track Record and Stability of Tolled Traffic

c) Annual Average Daily Traffic per Lane Kilometre

Rating Factor #4: Concession and Regulatory Framework

a) Risk of Adverse Changes to Concession Terms and Conditions

b) Ability to Increase Tariffs

c) Protection against Events Outside the Concessionaire’s Control

Rating Factor #5: Stability of Business Model and Financial Structure

a) Ability and Willingness to Pursue Opportunistic Corporate Activity

b) Ability and Willingness to Increase Leverage

c) Targeted Proportion of Revenues Outside the Core Concession

Rating Factor #6: Key Credit Metrics

a) Cash Interest Coverage

b) FFO / Debt

c) Debt Service Coverage Ratio

d) RCF / Capex

e) Debt / PV Base Cash Flows Available for Debt Service, or CLCR

Accounting Considerations

Evaluating Ramp-up and Construction Risk

Structural Considerations and Sources of Rating Uplift from Creditor Protection

Other Rating Considerations

Related Research

Appendix I – Indicated Ratings and Results of Mapping

Toll Roads

Appendix I – Indicated Ratings and Results of Mapping (conginued)

Toll Roads

Appendix II – Rating Methodology Grid and Mapping

Appendix III – AADT per Lane Km Calculation

Related documents

Add this document to collection(s)

Add this document to saved

Suggest us how to improve StudyLib