OREANDA-NEWS. S&P Global Ratings said today that it affirmed its 'BBB-' issue-level ratings on U. S. managed-lanes road project NTE Mobility Partners Segments 3 LLC (NTEMP-3). The issues consist of $274.03 million senior-lien revenue bonds series 2013 (issued by the Texas Private Activity Bond Surface Transportation Corp.) and $531 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. At the same time, we have removed the ratings from CreditWatch, where they were placed with negative implications on June 30, 2016. The outlook is stable. The CreditWatch resolution follows our determination of the impact of the misapplication of criteria on the debt rating. To correct the misapplication, we have revised how we calculate debt-service coverage ratios (DSCRs) for projects that have TIFIA loans that include deferrable, or so-called "scheduled" payments. NTEMP-3's debt structure includes a TIFIA loan. TIFIA loans for volume-exposed roads such as those with managed lanes often include mandatory debt service and scheduled debt service payments. The project must pay mandatory debt service when due as with any conventional debt instrument. However, scheduled TIFIA debt service can typically be deferred (in the case of principal) or capitalized (in the case of interest), provided that the project meets specified conditions under the TIFIA loan agreement, including that there are insufficient funds available to pay the scheduled TIFIA obligations. (To the extent there are sufficient funds and scheduled debt service is not paid, this would typically be an event of default under the TIFIA loan agreement.) Such a deferral is allowed during a specified period, after which deferred or capitalized debt service needs to be paid. In the case of NTEMP-3, all TIFIA payments become mandatory in the last 10 years of the transaction, after the senior debt matures in June 2043. We had been calculating debt-service coverage excluding any scheduled debt payments under TIFIA to reflect the flexibility to defer those payments, during the allowable deferral period, if a project had insufficient funds. Payments that were forecast to be deferred were capitalized and reflected in the mandatory payment periods, affecting the DSCR at that moment. However, scheduled payments that were excluded from the DSCR but were expected to be paid in the period in which they were originally scheduled were not included in the DSCR. This is a misapplication of the criteria. We are now calculating the DSCR based on total debt service in the project's structure--including senior, TIFIA-mandatory, and TIFIA-scheduled principal and interest. Thus, we will now factor scheduled payments into the DSCR of the year in which they were scheduled if we project the payment will be paid. Under the revised approach, NTEMP-3's total DSCR is close to 1.0x for several years after the TIFIA capitalized interest period is over in 2022. This is because we expect that the project will take longer until it achieves sustainable traffic revenues/cash flows and also due to major maintenance expense and funding profile. This is based on guidance published in Paragraph 65 of "Key Credit Factors For Road, Bridge, And Tunnel Project Financings," Sept. 16, 2014. In the case of NTEMP-3, a lengthy lean DSCR period occurs as traffic moves to stabilization along with a lumpy five-year major maintenance expense and funding profile that starts shortly after the capitalized interest period. As a result, in our base-case scenario, the project's cash flow stabilization does not occur until 2029. Although the project's DSCR remains close to 1.0x for a significant period after the project ends a five-year period in 2022 in which it does not pay any TIFIA debt service, the project continues to maintain significant liquidity balances (on an average, total liquidity is above 100% of annual total debt service over these lean periods). As such, we are excluding these abnormally low DSCR periods in our analysis, per Paragraph 65 of "Key Credit Factors For Road, Bridge, And Tunnel Project Financings," Sept. 16, 2014. The resulting total DSCR of 1.32x under our revised approach is lower than our previous estimate of 1.43x and maps to a lower preliminary operations SACP. However, the operations phase SACP remains unchanged at 'bbb-' because the project now receives a one-notch (none previously) benefit under comparative advantage over other comparable volume-risk road projects. In the case of NTEMP-3, an estimated 24% of its total debt service is scheduled; missing a scheduled payment does not result in a default. Importantly, the project's DSCRs during the mandatory amortization period (which begins in July 2043) are robust, with a minimum of 2.9x and an average of 3.62x, providing a significant cushion for higher-than-expected deferral/capitalization of TIFIA scheduled payments under our base case. NTEMP-3 also benefits from an eight-year equity tail, providing flexibility to accommodate debt refinancing or debt-maturity extensions. NTEMP-3 is under construction, and for the purpose of this review (which focuses on resolution of the CreditWatch to correct the misapplication of the criteria), we have not reviewed the construction progress and construction phase stand-alone credit profile (SACP), which remains unchanged at 'bbb-'. We are expecting to perform our full annual review on the project by the end of August. NTEMP-3 is a public/private partnership with the Texas DOT (TxDOT) to develop, design, build, finance, operate, and maintain the NTE 3A and 3B managed lane project. NTEMP-3 entered into a 52-year concession agreement (ending 2061) with TxDOT. During the concession period, which includes the five years to build the managed lanes (MLs), the project will generate revenues through dynamic tolling on the ML portion of the highway, subject to specified base toll rates and minimum speeds. NTEMP-3 is owned by Cintra Infraestructuras S. A. (50.10%), Meridiam Infrastructure North America Fund II (13.9441%), Dallas Police & Fire Pension System (10%), and APG Infrastructure (25.9559%). Construction Phase SACP: bbb-The construction is relatively straightforward and involves expanding the existing roadway, adding two MLs, and improving the general-purpose and frontage roads. The project uses proven technology, an experienced contractor, and neutral funding adequacy that takes into consideration potential delays during the construction phase. The funding sources are negative because of the use of a TIFIA loan (similar to a bank loan with its material adverse clauses in place for construction draws) and construction contract liability cap secured by a corporate guarantee (Ferrovial Agroman SA, a subsidiary of Ferrovial SA; BBB/Stable) that meets our criteria. The project has sufficient funds even in our downside scenario. The impact of the negative funding leads to a two-notch reduction in the construction phase SACP. Construction of the Segment 3B portion by TxDOT is proceeding and is on schedule to be turned over to NTEMP-3 by TxDOT, when completed in November 2017. The Segment 3A service commencement is expected by Sept. 25, 2018, consistent with contractually required completion dates. Operations Phase SACP: bbb-The operating phase business assessment (OPBA) is '7', based on low market exposure and a satisfactory competitive position that reflects a managed lane project with exposure to traffic volume and revenue risk if congestion on the free general-purpose lanes do not generate sufficient demand for the managed lanes. Although we expect sound regional economic fundamentals, the project is exposed to regional economic downturns, including during ramp-up, and uncertain long-term traffic and revenue growth trends. Under our base case (resulting in net toll revenues that are significantly lower and are 51% of the managements' base-case forecast in 2018, 48% in 2020, 44% in 2030, 42% in 2040 and 41% in 2050), the minimum total DSCR of 1.32x is in line with our DSCR expectation for a 'b+' preliminary operations phase SACP. However, the project's average DSCR of 2.33x, resiliency under our downside case scenario, and its comparative advantage over other managed-lane and toll-road projects support the 'BBB-' rating. ModifiersModifiers don't affect the SACP. We view the project's liquidity as neutral. During the operating period, the project has an initial $27.4 million debt service reserve fund and, thereafter, a 12-month debt service reserve and an initial major maintenance reserve. There will also be a debt service reserve for a possible delay of Segment 3B construction by the TxDOT, which provides liquidity for a delay from the original substantial completion date to the long stop date. Liquidity is more than sufficient to cover any potential shortfalls that we foresee during ramp-up, the most vulnerable period for the project, when we assume that the project will draw about $7.5 million of the reserve during the first two years. The maintenance reserve will be funded at a service commencement date at $20 million and is not restricted in its use. A distribution test of 1.3x, including senior debt service and mandatory and scheduled TIFIA debt service, provides additional liquidity if debt-service coverage is declining. We calculate it based on the previous and next 12 months, which would require the project to retain additional liquidity during a period of underperformance. The cash is trapped for the benefit of the senior and TIFIA loans. The stable outlook reflects our view that the project will have sufficient liquidity to complete construction and to pay debt service during ramp-up. We also expect that traffic congestion on the general-purpose lanes will generate sufficient demand for the managed lanes to provide adequate coverage for senior and TIFIA debt service over the life of the debt. We anticipate that the project will draw on reserves during the first two periods to cover the debt service under our base case. However, we could lower the rating if the project's liquidity deteriorates materially during the projected lean DSCR periods through 2029 such that the debt service reserve balance (covering senior and mandatory debt service) reduces to less than 12 months or if the projected minimum debt-service coverage drops below 1.2x for an extended period thereafter (i. e., post 2029) because of less-than-expected growth in traffic/toll revenues or higher-than-expected operation and maintenance expenses. Factors that could lead us to lower the rating during construction include deterioration in the rating on Ferrovial to below the project rating or significant construction delays (which we consider unlikely given the straightforward construction task). We are unlikely to raise the rating until several years into the project's operations. We could raise the rating if the coverages consistently increase to the higher end of the 1.4x - 1.75x DSCR range due to higher-than-expected toll revenues or lower expenses.