DALLAS – The already junk-rated bonds of a P3 highway project in Indiana received a downgrade from another rating agency as payment disputes among contractors reached a new level.

S&P Global Ratings on Wednesday downgraded $250 million of 2014 private activity bonds two notches to BB-minus from BB-plus. The rating remains on CreditWatch with negative implications. "The rating action reflects our view of increased construction risk at the project, which is eight months behind schedule and about 56% complete," said S&P Global Ratings credit analyst Tony Bettinelli.

In August, Fitch Ratings downgraded the bonds two notches to BB and placed them on rating watch negative.

Sept. 6, the Indiana Finance Authority and Indiana Department of Transportation issued a notice of non-performance to I-69 Development Partners over non-payment of subcontractors. The delay in payment has prompted at least one subcontractor to halt work on the project.

According to the IFA notice, I-69 Development Group has defaulted on $2.3 million in payments to subcontractors. The IFA said it has previously issued non-performance notices and could hold the I-69 Development Partners "in default" of contracts this week.

"The state expects contractors working on this project and all projects to be paid on time," said Indiana Public Finance Director Dan Huge. "The IFA is taking decisive action to protect taxpayer and motorist interests and hold our developer accountable."

The bonds are not an obligation of Indiana and do not feature a full faith and credit pledge. However the state, rated triple-A, is a counterparty on the deal. The agreement structure also includes a guaranteed maximum construction cost, which transfers the risk of cost over runs and construction delays to the private contractor.

In the event of default, S&P said it still expects a 90% to 100% recovery on the bonds. Fitch said in August cited the bond structure as a strong feature of the project.

"The project's robust performance security package combined with the remaining four month tail from the revised substantial completion date to the longstop date should be adequate to ensure the project is completed, even in adverse scenarios including one involving a contractor replacement," Fitch analysts said.

S&P's CreditWatch negative reflects the uncertainty that construction efforts will be able to meet the revised June 2017 target completion date and that counterparty relationships could be further strained.

The notice filed by the IFA and INDOT states that one company, Crider & Crider, which is owed $2.3 million, has stopped work and has threatened to demobilize its equipment.

I-69 Development Partners was selected by IDOT to design, build and finance the highway renovation several years ago. It contracted with Corsan-Corviam Construccion to design and build the project. Isolux Corsan SA (Isolux) is parent of the Corsan-Corviam. Isolux is overseeing the work of more than 30 subcontractors on the project.

Contractor Isolux responded to the charges in a press statement issued last Friday and said that it had informed the state about geological and permitting issues encountered that were beyond its control that would impact cash flow and delay payment to subcontractors. Isolux said it had brought 10 of these issues to the attention of IFA, requesting for extra work costs or a deadline extension.

"We have met with our subcontractors to fully inform them of these issues," the contractor said in a press release. "For the IFA to issue a notice of non-performance at the same time it has denied valid claims we have presented is simply misleading and unfair."

The IFA disputed the contractor's claims.

"The statement Isolux issued to the media late yesterday afternoon is littered with inaccuracies and some directly untrue claims, demonstrating a lack of understanding of legal requirements, contractual obligations and relationships, and proper permitting requirements," Jim Stark, director of public-private partnerships at the Indiana Finance Authority, said in a press release.

The project is already delayed by eight months because of utility coordination and permitting problems that led some subcontractors to demobilize from the site. The delay pushed the completion of the project to June 28, 2017.

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