Rating supported by satisfactory rate-setting mechanism

TransJamaican Highway (TJH), operator of Jamaica’s Highway 2000 toll road, has got a BB- rating on its debt by international ratings agency, Fitch.

In addition to a BB- rating, Fitch has also assigned a stable outlook to TJH senior secured notes. Fitch reports that while traffic on the toll road has been affected by the effects of the coronavirus pandemic, the company’s debt situation has enough security margins to absorb the negative impact as expected and to maintain its credit quality in levels sufficient to keep the current rating.

In giving its rationale for the rating Fitch argues that, “the rating reflects the stability and resiliency of a commuting asset strategically located in the outskirts of Kingston, Jamaica’s capital city. The rating is also supported by a satisfactory rate-setting mechanism, which allows tariffs to be adjusted annually by U.S. inflation and the variations in foreign-currency rate between the Jamaican dollar and the U.S. dollar.”

TJH debt is senior secured with typical project finance features that include limitations on additional indebtedness. According to Fitch, the debt has a “rating case minimum and average debt service coverage ratio (DSCR) are at 1.6x and 2.0x, respectively, which are viewed as strong for the rating category according to applicable criteria.”

It says the transaction presents robust break-even values for its most important variables and no dependency on traffic growth in order to repay the rated debt. Furthermore, it withstands domestic economic shocks beyond those observed between 2008-2014 when the Jamaican economy deeply deteriorated, supporting a rating above that of the Jamaican sovereign (B+/ROS), but constrained by Jamaica’s Country Ceiling of ‘BB-‘.

No great impairment from COVID-19

Fitch points out that while the most recent available performance data may not have indicated impairment, as a result of the pandemic, “material changes in revenue and cost profile are occurring across the transportation sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation.”

According to Fitch, its ratings are forward-looking in nature and as such it will monitor developments in the sector, as a result of the virus outbreak, as it relates to severity and duration. These results will be incorporated into a revised base and rating case qualitative and quantitative inputs, based on expectations for future performance and assessment of key risks.

The toll road is the main link between the capital city of Jamaica, Kingston, and other populated urban and industrial centres including the cities of Portmore and May Pen. The asset is currently the only high-speed roadway serving the western part of Kingston’s metropolitan area, with an estimated population of 1.4 million people along the corridor.

TJH 2020 performance

During 2020, the annual average daily traffic  was 56,268 vehicles, which is above Fitch’s rating case projection of 53,357 vehicles. While Fitch expected a traffic decline of 20 per cent for 2020, actual traffic decline was 15 per cent.

Revenue achieved is slightly above Fitch’s expectation of US$44,2 million, as a result of a milder traffic contraction. Tariff increases were applied in September of 2020 instead of July of 2020 due to the coronavirus pandemic situation.

These increases in tariffs were at 8.5 per cent, which positively compares with the six per cent expected by Fitch. The operating expenses in 2020 were in line with Fitch’s expectations.

TJH had some minor point-in-time expenses related with the company’s restructuration made during the Initial Public Offer in early 2020 but lower disbursements on the capex side, as it postponed US$1.17 million of renewal expenses to 2021. The better-than-expected revenue, together with expenses aligned to the budget, yielded a debt service coverage ratio at 2.1x, above Fitch’s projections of 1.9x.