Fitch Ratings has taken the following rating actions on two Colombian toll roads after Construcciones El Condor, S.A.'s (El Condor) deteriorated credit quality.

P.A. Autopista Rio Magdalena's (ARM) COP915,500 million UVR notes and COP278,000 million UVR loan 'BB+' and 'AA+(col)' ratings placed on Rating Watch Negative (RWN);

P.A. Concesion Ruta al Mar's (RAM) COP522,000 million UVR notes 'BB+' and 'AA(col)' ratings placed on Rating Watch Negative (RWN).

RATING RATIONALE

The rating actions reflect the projects' exposure to the credit quality of El Condor, who has signed engineering, procurement and construction (EPC) contracts with ARM and RAM. During the completion phase, the projects are exposed to the credit quality of their EPC contractors, including El Condor. In Fitch's view, El Condor's credit quality has deteriorated.

ARM

El Condor is in charge of the execution of the toll roads's functional units (UF) UF1 and UF2. As of October 2023, according to the Independent Engineer (IE) report, the overall construction progress is 51.1%. According to the Agencia Nacional de Infraestructura's (ANI) website the overall progress is of 69% as of November 2023. Therefore, the project still has a relevant completion risk. Therefore, according to Fitch's Completion Risk Criteria, ARM's ratings are constrained by El Condor's credit quality. The Negative Watch reflects Fitch's view that the credit quality of El Condor has deteriorated and the impact on ARM's rated debt will be evaluated after the update of the IE view on the Replacement Cost Premium given construction progress. Fitch considers the Level of Performance Security to Cover Replacement Cost Premium as an input to define project's completion risk credit view.

The Negative Watch on ARM will be resolved once Fitch has completed its assessment according to the Completion Risk Criteria.

RAM

El Condor is RAM's sole contractor. Although completion risk is assessed as 'High Stronger' due to its qualitative attribute assessments and available security, RAM's rated debt could still be constrained by El Condor's credit quality in case there is not available liquidity to repay the debt or replace the contractor in case needed. The construction advance is close to 93.5% with 85% of UFs (functional units) above 98%. The Negative Watch reflects Fitch's view that the impact of El Condor's deteriorated credit quality could impact the ability of the concessionaire to service the debt, if available liquidity is not sufficient.

Fitch notes that, as of today, the transaction has performance bonds covering the EPC agreement, letter of credits to secure equity injections and reserve accounts. The Negative Watch on RAM will be resolved once Fitch has completed its assessment of project's liquidity and dependence on El Condor's creditworthiness to complete the construction of the remaining works, according to the Completion Risk Criteria.

KEY RATING DRIVERS

ARM

Completion Risk Limited by Weak Contractor [Completion Risk: Stronger]:

Construction works are performed under two fixed-price date-certain EPC contracts. According to the IE, works are of low complexity and are executed by experienced contractors, and the completion schedule is adequate. The security package provides adequate liquidity should the EPC contractor need to be replaced, by means of combination of performance bonds, letters of credit and EPC contract retention clauses between 5.0% and 7.5%.

RAM

Completion Risk Reasonably Mitigated [Completion Risk: High Stronger]:

Construction works are being performed by Construcciones El Condor under a fixed-price date-certain engineering, procurement and construction (EPC) contract. The works comprise the construction of short road stretches and minor bridges, and the improvement of existing roads. Fitch views the complexity of the construction works as low and without a critical path. The advanced stage of construction and remaining duration and costs to complete the works drive the assessment for completion, duration and scale, according to applicable criteria.

Although construction is expected to continue for one more year and end-of-year in 2024, the most complex works have already been completed. As of October 2023, IE report shows a construction progress of 93.5%, and excluding UF 7.1 (Lorica) progress is at 97.7%. Only ~7% of remaining progress is trying to move forward project end date to December 2024.

RATING SENSITIVITIES

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

ARM:

Fitch concludes the analysis of the level of liquidity embedded in the EPC agreement given IE's updated view on the replacement cost premium;

Completion difficulties leading to delays and cost overruns beyond those already contemplated in Fitch's scenarios;

Deterioration in Fitch's view regarding the credit quality of ANI's grantor obligations;

RAM:

Lack of liquidity to service the debt in 2024 in case of further delays in the completion of Functional Units;

Fitch's conclusion that completion risk remains exposed to El Condor's creditworthiness

Completion difficulties leading to delays and cost overruns beyond those already contemplated in Fitch's scenarios;

No tariff inflation adjustment in 2024;

Tariff catch up for the 2022 inflation does not occur within the next one to two years;

Traffic performs materially below Fitch's rating case levels of annual average daily traffic (AADT) 29,111 in 2023 and 29,939 in 2024;

Removal, relocation or modification of the Caimanera toll or its fees without compensation that mitigates the resulting loss of cash flows.

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

ARM:

A positive rating action is unlikely in the short term given the rating is on Negative Watch.

RAM:

A positive rating action is unlikely in the short term given the rating is on Negative Watch.

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 listed below.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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