With several years of smooth traveling behind them, a group of Mexican toll road transactions have hit potentially shaky ground.
A law that went into effect Jan. 1 gives private concessionaires operating toll roads one of two options for paying taxes. They can pay a new flat business tax - known by its Spanish acronym IETU - either on the resources within the trust estate of the toll road, or at the corporate level, outside the trust estate.
For outstanding deals, choosing the former might mean trouble.
"The effect of this action would be to lower the cushion available for the payment of senior and subordinate debt," said Fitch Ratings in a release earlier this month.
The agency went on to slap a rating watch negative on both tranches of a deal originated by Concesiones y Promociones Malibran, after the sponsors opted for taxing at the corporate level (see table). Santander and local brokerage Interacciones led the Malibran deal, which closed in May 2005.
The agency said it will discuss the impact of the tax with the operator's management over the next few weeks. Fitch analysts didn't return calls or an e-mail request for comment.
Around the same time as its rating move on Malibran, Fitch said it was revising other deals in light of the new regime, which establishes a minimum annual tax of 16.5% in 2008, 17% next year and 17.5% in 2010 and beyond. The agency's final decision on those deals depends on whether the concessionaires will adopt the project-level approach or the more benign corporate-wide one.
Even if deals opt for taxing within the trust estate - and thereby siphoning flows from the structural waterfall - a drop in creditworthiness isn't automatic. Standard & Poor's Associate Director Fabiola Ortiz said even transactions that go this route might set up other features to make up for the potential drop in coverage. "Nothing has been decided yet," she said.
Ortiz also pointed out that, generally, toll road transactions have beat expectations over the last few years primarily on the back of higher-than-projected traffic. The impact of the tax would have to eat through that extra meat of the beefed-up overcollateralization before running into trouble.
Moody's Investors Service Senior Vice President Chee Mee Hu said that none of the sponsors of the deals that the agency rates has approached the agency about altering the tax regimes of the structures in question. Should any changes take place, the impact would highlight differences between stronger and weaker deals, she added. "The ones that are better situated fundamentally, those that throw off more cash flow, would do better than the marginal deals," she added.
From the exposure standpoint, this is an issue not only for the pension funds and insurance companies that buy these transactions.
Gateway Asset Class
MBIA and XLCA have also been active in the sector. "MBIA has evaluated the implications of the new Mexican income tax (IETU) and determined that it will not have any material adverse effect on MBIA-insured toll road credits," the company said in an e-mail message. XLCA declined to comment.
Toll roads were the gateway asset class for the guarantor wrap in Mexico, with the first surety in the domestic market provided by MBIA on a 2003 deal for concessionaires Promotora de Autopistas del Pacifico and Promotora y Administradora de Carreteras. Over the past couple years, real estate receivables have attracted more guarantor business in Mexico.
The impact of the IETU on deals will differ according to their structure, sources said. But one banker with experience in the sector said that as a rule of thumb it has the most potential to hurt deals that collateralize flows from projects that have been operating between five and eight years.
Under the previous regime, through depreciation and other mechanisms, a toll road project could typically avoid paying taxes for the first seven or eight years of its life, while paying the IETU at the project level would generate a tax burden as early as the fifth year, the banker said.
He added that while the tax could shave down the cash flows in existing deals, it wouldn't impact the prospects for future transactions, as they would simply be structured with the tax in mind. "The problem is only for deals under the old regime," the banker said. "They already have all their financing tied up."
Not all transactions that collateralize toll road revenue in Mexico are potentially affected by the new tax. There's a sub-category in which states are the sponsors and as government entities aren't subject to the new tax. These include deals originated by Chihuahua and Veracruz.
While Fitch has already put one deal on watch negative, players aren't concerned that the tax issue could trigger a retread of the mid-90s. Back then, the mega-devaluation of the peso in early 1994 coupled with a sharp slowdown in vehicular traffic to provoke defaults of dollar paper issued by toll road projects in the early 90s. All the current deals are denominated in pesos, eliminating the currency risk.
On the issuance front, the toll road sector has been unusually quiet over the past year. Players in the field have been concentrating their efforts on a bidding program run by government fund Farac. The program is designed to bring private operators back to road projects that the government rescued in the aftermath of the mid-90s crisis.
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