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

The Rating Outlook for both ratings has been revised to Stable from Negative. The international and local notes are supported by the cash flow generation Costa Rica's Ruta 27 toll road.

The Outlook revision to Stable reflects Fitch's updated view on Costa Rica's sovereign credit risk ('B'/Stable), given the the project's links with the sovereign's credit quality through the minimum revenue guarantee (MRG). The Outlook also reflects a post-pandemic traffic recovery that is generally in line with Fitch's expectations, and the limited effects thus far of the completion of the first phase of improvements to the San Jose-San Ramon competing road, which Fitch expects will remain the case in the short term.

RATING RATIONALE

AdS's ratings reflect the asset's traffic and revenue profile, supported by an adequate toll adjustment mechanism. Mostly used by commuters, the project may face significant competition in the short-to-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 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 minimum and average debt service coverage ratios (DSCR) are 0.9x and 1.2x, respectively, which remain in line with Fitch's criteria guidance for the assigned rating. The eventual shortfalls in coverage ratios will likely be covered by the reserve accounts available within the structure. Under this scenario, Fitch expects the project will receive MRG payments from 2025 onward, which totals 9% of annual revenues on average.

KEY RATING DRIVERS

Mostly Commuter with Growing Heavy Traffic [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 as it serves as a link between San Jose (Costa Rica's capital city) and its surrounding metropolitan area with the Pacific Coast. The road 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 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. It is USD-denominated 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. There is an NPV cash trap mechanism to prepay debt if revenue overperforms, 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 1.20x distribution trigger and limitations on investments and additional debt.

Financial Summary: Under Fitch's Rating Case, the project yields a minimum and average DSCR of 0.9x and 1.2x, respectively. The concession is expected to expire in July 2033, which matches its concession maturity. It assumes payments under the MRG starting in 2025, which amounts in average to 9% 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-/Stable) in Jamaica. AdS and TJH are similar projects since 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' lower metrics (average DSCR of 1.2x versus 2.1x 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+/Stable) and is constrained by Jamaica's 'BB-' Country Ceiling.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on Costa Rica's sovereign ratings could trigger a corresponding negative action on the rated notes.

Traffic (WAADT) performance significantly below the Fitch's rating case expectation of 40,560 vehicles in 2022 and 38,379 vehicles in 2023, and/or a substantially greater than expected traffic loss occurs due to the completion of works in the competing route.

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:

A further positive rating action for the international rating is unlikely in the near future given the tight financial profile that is expected for the coming years with DSCR close to 1x until 2025.

The national scale rating may present a positive rating action if traffic (WAADT) performs above Fitch's base case expectation of 41,432 vehicles in 2022 and 41,868 vehicles in 2023.

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

During the first five months of 2022, traffic reached 95% of 2019 traffic, generally in line with Fitch's Rating Case expectation of 96% of 2019 volume. The traffic mix has shifted slightly since the pandemic, with a proportional increase of heavy vehicles (now 7% from 6% in 2019) as it decreased less than other categories, and a decline in bus traffic generally due to pandemic-related effects 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 traffic.

Tariffs in 2022 increased around 13%, in line with U.S. inflation, plus an extraordinary adjustment in May to account for a variation of the CRC/USD greater than 5%, generally maintaining their real value in USD terms.

Revenues through May 2022 at USD 32.9 million slightly surpassed 2019 revenues for the same period. Even though traffic did not reach levels commensurate to 2019, higher tariffs have resulted in a faster recovery in revenues. Actual revenues in this period were 5% higher than those expected in Fitch's Rating Case, given tariffs were greater than forecast, considering the higher actual inflation.

Operational expenses have been generally in line with Fitch's expectations. However, total expenditures were materially lower, given that investments for slope stabilization were considerably lower than projected at USD3.5 million vs. the expected USD9.8 million, due to permitting issues that are being resolved. The postponed investments are expected to be executed in the second half of 2022. These investments, which include the construction of a viaduct, are needed because of settlements detected in a section of the road, which requires that it be reinforced to avoid the destabilization of the roadway. DSCR for June 2022 was 1.01x, higher than the expected 0.72x given the lower CAPEX investment.

The first phase of improvements to the competing route San Jose-San Ramon (Ruta Uno) were completed in early 2Q22 and have not materially affected AdS's traffic. The execution of the second phase has presented recurrent delays, originally expected to begin works in 2021 and having little progress to date. The third and fourth phases are scheduled to begin works later this year and concluded in 1H2023. Fitch expects the conclusion of these works until 2024. Ruta Uno announced that they will increase the toll tariffs of the road; however, the general expectation is that total tolls will be cheaper than those of Ruta 27.

FINANCIAL ANALYSIS

Considering that traffic has stabilized, nearly recovering to pre-pandemic levels, Fitch has reintroduced a Base Case in this review.

Fitch's Base Case assumes a traffic recovery in 2022 of 95% relative to 2019 levels based on the following average assumptions of quarterly traffic: 98% and 93% for 3Q22 and 4Q22, respectively. The traffic reduction in 4Q22 reflects the expected effects of the completion of the second phase of improvements in the competing road. For 2023 and 2024, Fitch assumes traffic of 96% and 80% relative to 2019 levels, which considers, among other factors, a tempered negative impact from the competing route that will likely complete its improvements in 4Q22 and 2024. From 2025 until 2033, Fitch expects a compounded annual growth rate of 4%.

O&M and major maintenance expenses were projected following the issuer's budget plus 7.5% for every year U.S. inflation is forecast at 6.5% for 2022, 2.8% for 2023, 2.7% for 2024 and 2.0% afterward. This scenario resulted in a minimum and average DSCR of 0.93x and 1.23x, respectively.

Fitch's Rating Case assumes a traffic recovery in 2022 of 93% relative to 2019 levels based on the following average assumptions of quarterly traffic: 98% and 85% for 3Q22 and 4Q22, respectively. The traffic reduction in 4Q22 reflects the expected effects of the completion of the second phase of improvements in the competing road.

For 2023 and 2024, Fitch assumes traffic of 88% and 71% relative to 2019 levels, which considers, among other factors, a greater negative impact from the competing route that will likely complete its improvements in 4Q22 and 2024. From 2025 until 2033, Fitch expects a compounded annual growth rate of 4%. O&M, major maintenance and inflation assumptions are the same as in the Base Case.

This scenario resulted in a minimum and average DSCR of 0.89x and 1.20x, respectively. Available liquidity is sufficient to withstand transitory shortfalls when CFADs cannot fully cover debt service. In 2022, O&M reserves are expected to cover the forecasted shortfall which is driven mainly by the additional CAPEX investments. Under this scenario, MRG will be received from 2025 onward.

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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