Fitch Ratings has affirmed Autopistas del Sol, S.A.'s (AdS) international notes at 'B' and national scale rating on its local notes at 'A(cri)'.

The Rating Outlook is Stable. The international and local notes are supported by the cash flow generation from Costa Rica's Ruta 27 toll road.

RATING RATIONALE

AdS's ratings reflect the asset's traffic and revenue profile as a toll road that serves a strong reference market within Costa Rica, which is supported by an adequate toll adjustment mechanism. Mostly used by commuters, the project may face significant competition in the medium term once the main competing road is improved, and especially if its tariffs are significantly lower than those of Ruta 27. Toll rates are adjusted quarterly to the exchange rate and annually to reflect changes in the U.S.' Consumer Price Index (CPI). The ratings also reflect a fully amortizing senior debt structure with a fixed interest rate and a net present value (NPV) cash trap mechanism that prevents an early termination of the concession before debt is fully repaid.

Fitch's rating case average debt service coverage ratio (DSCR) of 1.2x is in line with Fitch's criteria guidance for the assigned rating. Nonetheless, minimum DSCR is 0.9x. Fitch believes the eventual shortfalls in debt coverage will likely be covered by the reserve accounts available within the structure. Under this scenario, Fitch expects the project will receive minimum revenue guarantee (MRG) payments from 2028 onward, which totals 7% of annual revenues on average.

KEY RATING DRIVERS

Heavy Traffic of Mostly Commuters Growing [Revenue Risk - Volume: Midrange]

The asset is a toll road that serves a strong reference market, playing an important role in the broader transportation system. The road serves as a link between San Jose (Costa Rica's capital city) and its surrounding metropolitan area with the Pacific Coast, and is used by commuters on workdays and by San Jose residents traveling to beaches on the weekends. The road could face significant competition once major improvements to the existing and congested San Jose-San Ramon Route are made. The concession agreement provides an MRG that compensates the issuer if revenue is below certain thresholds, somewhat alleviating this risk.

Adequate Rate Adjustment Mechanism [Revenue Risk - Price: Midrange]

Toll rates are adjusted quarterly to reflect changes in the Costa Rican colon (CRC) to U.S. dollar (USD) exchange rate, and annually to reflect changes in the U.S. CPI. Tolls may be adjusted prior to the next adjustment date if the U.S. CPI or the CRC/USD exchange rate varies by more than 5%. Historically, tariffs have been updated appropriately.

Suitable Capital Improvement Program [Infrastructure Development & Renewal: Midrange]

The asset is operated by an experienced global company with a higher-than-average expense profile due to its geographical attributes. The majority of the investments required by the concession have been made. The concession requires lane expansions when congestion exceeds 70% of the ideal saturation flow, which triggers the need for further investments. However, the project would only require the grantor to perform these investments to the extent they do not represent a breach in the DSCRs assumed by the issuer in the financing documents.

Structural Protections Against Shortened Concession [Debt Structure: Midrange]

Debt is senior secured, pari passu, fixed-rate, and fully amortizing. The debt is denominated in USD, but no significant exchange rate risk exists due to the tariff adjustment provisions set forth in the concession and because CRC-denominated toll revenues will be converted to USD daily. The structure includes an NPV cash trap mechanism to prepay debt if revenue outperforms the base case revenue indicated in the issuer's financial model, which largely mitigates the risk of the concession maturing before the debt is fully repaid. Typical project finance features include a six-month debt service reserve account (DSRA), a six-month backward and forward-looking 1.2x distribution trigger and limitations on investments and additional debt.

Financial Profile

Under Fitch's base case, the project yields a minimum and average DSCR of 1.0x (in 2023) and 1.4x, respectively. While under Fitch's rating case, minimum and average DSCR are 0.9x (in 2023) and 1.2x, respectively. The eventual shortfalls in debt coverage will likely be covered by the reserve accounts available within the structure. The concession is expected to expire in July 2033. It assumes payments under the MRG starting in 2028, which amounts in average to 7% of annual revenues. The metrics are in line with Fitch's applicable criteria for the assigned rating.

PEER GROUP

Comparable projects in the region include TransJamaican Highway (TJH; BB-/Positive) in Jamaica. AdS and TJH are similar projects as they are both strong commuting assets within their respective country's capital cities. Although they share similar attributes, the difference in ratings comes from AdS's lower metrics (average DSCR of 1.2x versus 2.2x of TJH under Fitch's rating case) and because TJH has no dependency on traffic growth in order to repay the rated debt. TJH is rated above the Jamaican sovereign (B+/Positive) and is constrained by Jamaica's 'BB-' Country Ceiling.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Traffic performance (expressed as Weighted Annual Average Daily Traffic or WAADT) significantly below the Fitch's rating case expectation of 42,304 vehicles in 2023;

Substantially greater than expected traffic loss occurs due to the advancement of works in the competing route. Fitch's rating case expectation is a loss of 15.0% in 2025 and 23.5% in 2028;

A deterioration of the liquidity available for debt service, beyond the expected use of reserves.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Traffic performance (WAADT) above Fitch's base case expectation of 43,177 vehicles in 2023 and 43,613 vehicles in 2024.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

TRANSACTION SUMMARY

The asset serves as a connection between the city of San Jose and its metropolitan area with Puerto Caldera, along the Pacific Coast. The asset is operated by Globalvia, one of the world leaders in infrastructure concession management, which manages 28 concessions in seven countries. The company was established in 2007 by FCC Group and Bankia Group. In March 2016, Globalvia was acquired by pension funds OPSEU Pension Plant Trust Fund (40%), PGGM N.V. (40%) and Universities Superannuation Scheme Ltd (20%).

CREDIT UPDATE

As of May 2023, traffic was 99% of 2019 volume, above Fitch's Base and Rating case expectations of 97% and 96%, respectively. According to the concessionaire, the increase in traffic is possibly due to a decrease in oil prices, the appreciation of the CRC, which could have improved purchasing power, and macroeconomic conditions in Costa Rica.

Traffic mix has shifted slightly since the pandemic, with a proportional increase of heavy vehicles (7.5% in 2022 from 6.3% in 2019) as it decreased less than other categories, and a decline in bus traffic generally due to pandemic-related effects that prevail on public transportation. This is consistent with what Fitch has observed with other toll roads, given the significant effects of pandemic-related measures on commuting and touristic traffic.

Revenues from January to May 2023 of USD38.2 million surpassed 2019 revenues for the same period by 20%. The higher tariffs and a traffic mix leaning to heavy vehicles have resulted in a faster recovery in revenues. Actual revenues in this period were generally in line with Fitch's cases. During the same period, total expenses were USD13.7 million, also in line with Fitch's expectation of USD13.6 million. Tariffs in 2023 increased in line with U.S. inflation, maintaining their real value in USD terms.

According to the concessionaire, part of the road is built on a sloping embankment, which has presented constant settlement issues. As this situation worsened, it was concluded that to avoid the risk of landslide, it was necessary to construct a viaduct without any support on the potentially sliding surface. Construction began in 2021, but was delayed due to lack of permits and other negotiations with the government. It is projected to be completed in October 2023, with an expected investment of USD12 million. Almost half of the investment (USD6.3 million) has already been contributed by the shareholders and the remaining amount is expected to be made between July and August 2023.

DSCR as of May 2023 was 1.3x (considering the contribution of USD6.3 million), slightly higher than the expected 1.2x and 1.1x in Fitch's last review base and rating case. As of March 2023 (according to the last financial statement report) the debt service reserve account is fully funded.

According to the concessionaire, the first of five phases of undelayable work to the competing route San Jose-San Ramon (Ruta Uno) has been completed. However, the next four phases have been severely delayed, which has resulted in an updated expected completion date of 2025, and the expansion of the truncal road is expected to be completed in 2028. Ruta Uno announced that they will increase the road's tariffs to maintain financial equilibrium. Nonetheless, the total tolls are expected to be less than those of Ruta 27.

FINANCIAL ANALYSIS

Fitch's base case assumes traffic recoveries in 2023 and 2024 to 99% and 100%, respectively, relative to 2019 levels. From 2025 until 2033, Fitch expects a compounded annual growth rate (CAGR) of 4%. From this baseline, Fitch deducts the expected effect of the expansion and improvement of the competing road with traffic drops of 7.5% in 2025 and 11.8% in 2027. O&M and major maintenance expenses were projected following the issuer's budget plus 5% stress plus annual U.S. inflation, which is forecast at 3.7% for 2023, 2.7% for 2024 and 2.0% afterward. This scenario resulted in a minimum and average DSCR of 1.0x (in 2023) and 1.4x, respectively.

Fitch's rating case assumes traffic recoveries in 2023, 2024 and 2025 of 97%, 98% and 100%, respectively, relative to 2019 levels. From 2026 until 2033, Fitch expects a compounded annual growth rate of 4%. From this baseline, Fitch deducts the expected effect of the expansion and improvement of the competing road with traffic drops of 15% in 2025 and 23.5% in 2027. O&M and major maintenance expenses were projected according to the issuer's budget with a stress rate of 7.5% plus annual U.S. inflation. The inflation estimate is the same as in the base case.

This scenario resulted in a minimum and average DSCR of 0.9x (in 2023) and 1.2x, respectively. Under this scenario, MRG will be received from 2028 onward.

According to the concessionaire, the USD5.7 million shareholders' contribution to finance the remaining works is expected to be received in July or August. Given such contribution does not constitute a formal commitment nor an enforceable obligation, and the shareholders' capacity to make the payment is unknown by Fitch, it has not considered it in its cases it, which results in a cash shortfall in 2023. Nonetheless, Fitch has comfort in the fact that the structure's available liquidity would be sufficient to withstand transitory shortfalls if needed.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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