DBRS Finalizes A (low) Rating on Capital City Link General Partnership

DBRS has today finalized its rating of A (low) with a Stable trend on the $534.8 million Long-Term Senior Bonds (the Senior Bonds) of Capital City Link General Partnership (ProjectCo), a special purpose entity (SPE) formed by ACS NEAH Partner Inc. (a subsidiary of ACS Infrastructure Canada Inc.), HOCHTIEF NEAH Partner Inc. (a subsidiary of HOCHTIEF PPP Solutions GmbH), and Meridiam Infrastructure NEAH ULC (a subsidiary of Meridiam Infrastructure North America), created to design, build, finance, operate and maintain the final 27-kilometre northeast leg of Anthony Henday Drive in Edmonton (the Project) under a 34.5-year Design Build Finance Operate and Maintain Agreement with the Government of Alberta (the Province, rated AAA with a Stable trend). The rating is primarily based on the high credit quality of ProjectCo’s revenue stream, which will come from the AAA-rated Province and is not dependent on traffic levels, the strong design-build team contracted by ProjectCo to assume all construction obligations under a date-certain fixed-price contract, the construction enhancement package, and the low-to-moderate complexity of the construction task. The contractor selected to undertake the relatively straightforward operating and maintenance obligations and the sound financial resiliencies foreseen for the operating phase also support the credit profile. Limiting the rating are the usual uncertainties associated with any large construction project, some project-specific challenges and complexities, the heavy leverage typical of public-private partnership (PPP) projects and the uncertainty associated with lifecycle obligations, which will be self-performed by ProjectCo.

The construction phase is scheduled to commence in May 2012, with an anticipated duration of approximately 53 months. The scheduled Traffic Availability Date is October 1, 2016. The construction team, consisting of Flatiron Constructors Canada Limited, Dragados Canada, Inc., Aecon Construction Management Inc. and Lafarge Canada Inc., has considerable expertise in road infrastructure and includes members that participated in the construction of other segments of Anthony Henday Drive under similar agreements with the Province. All members of the design-build team will be jointly and severally liable for all obligations to ProjectCo under the Design-Build Contract, with parent company guarantees from three of the builders’ parent companies providing additional comfort. The construction enhancement package includes a 13.5% letter of credit, which is substantial and appropriate for the rating. The brownfield and industrial nature of much of the Project’s right-of-way introduces some complexity to the Project, including extensive coordination with utilities and railways active in the construction zone, environmental challenges arising from soft soil conditions in localized areas, the industrial nature of much of the Project’s right-of-way, and the crossing of the North Saskatchewan River. The bondholders’ technical advisor, BTY Group, has offered the opinion that, notwithstanding some challenges unique to the site, the technical expertise of the design-build team is such that risk during the construction phase should be considered low to moderate and the construction schedule and budget proposed are realistic.

ProjectCo will pass down all operating and maintenance obligations (O&M) during the operating phase to Volker Stevin Highways Ltd. (Volker or the Operator). The O&M requirements are considered to be of low complexity. The Operator is a subsidiary of a large multinational construction and engineering firm; Volker is currently responsible for O&M on approximately 25% of Alberta’s highways and is therefore very familiar with the contractual requirements. Rehabilitation obligations for the new infrastructure will be retained by ProjectCo, which has been the case on other DBRS-rated highway projects, but introduces risk to the Project that will be mitigated in part by a dynamic lifecycle reserving mechanism and ProjectCo’s relatively sound operating resilience sufficient to absorb a 27% increase in the lifecycle and SPE budget (30% lifecycle alone) or a 40% shock to the O&M budget.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.