DALLAS —A contractor's struggles and a newly disclosed project delay have put bonds for an Indiana highway public-private partnership on the final rung of investment grade.
The Indiana Finance Authority's $250 million 2014 private activity bond issue for the I-69 Section 5 project received a one-notch Fitch Ratings downgrade to BBB-minus, the lowest rating above the speculative grades, on Thursday.
Fitch also placed the bonds on rating watch negative. The PABs were issued for the public-private partnership on behalf of Interstate-69 Development Partners LLC.
Fitch attributed the fresh downgrade to "the deteriorating credit quality of Isolux Corsan SA (Isolux), parent of the construction contractor, Corsan-Corviam Construccion SA," and "a projected eight month delay to substantial completion, initially expected in October 2016, which was disclosed in the most recent construction update published in March 2016."
Isolux's rating was revised to B-minus and placed on rating watch negative on Feb. 12. It followed another downgrade in December.
"In Fitch's opinion the material delay in substantial completion implies a greater exposure to the credit quality of the construction guarantor," analysts wrote. The negative watch on the PABs reflects the contractor's negative watch status.
I-69 Development Partners, selected by the Indiana Department of Transportation to design, build and finance the highway renovation several years ago, contracted with Corsan-Corviam Construccion to design and build the project.
Work along section 5 of Interstate 69 was expected to be completed by October but is now slated to be completed in June 28, 2017. Construction problems occurred due to delays in obtaining some required obtaining permits as well as the updating and modification of other permits.
Officials say those issues have been resolved and Fitch notes in its report that -- based on all information it has received -- it believes the revised substantial completion date of June 28, 2017 is achievable.
Further construction delays "that jeopardize the likelihood of meeting the revised substantial completion date of June 28, 2017 would result in a further downgrade," Fitch warned.
The IFA issued the bonds, lending the proceeds to private contractor, I-69 DP. The proceeds are financing the renovation of a 21-mile stretch of highway between Bloomington and Martinsville that will become Interstate 69. It's the fifth of six stages of the construction.
The highway is a central thoroughfare for southwest Indiana, connecting Evansville to Indianapolis, and officials say it will be key to the state's future economy. I-69 will eventually extend from Mexico to Canada, "making Indiana an essential part of the primary north-south artery that moves goods and services across the United States," according to Indiana transportation officials.
The issue featured several tranches, including a small chunk of serial bonds maturing in 2017 and roughly $246 million of term bonds that mature from 2025 through 2046.
Fitch said the structure is 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," analysts said.
The bonds are secured by a first priority lien on I-69 DP net revenues. The IFA makes milestone payments during the construction period and then availability payments after the road opens.
At the time of the issue the IFA touted the structure.
"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," the IFA said then. "We also believe that the availability payment to the contractor is appealing to investors because they are secured by an appropriation from the state. That's something investors would find comforting in the context of risk and reward."
Fitch said a conservative bond structure including the fixed interest rate, full amortization, and 1.15 times reserves "provide bondholders with protection against adverse developments over the project life."