oProlonged lockdowns and travel restrictions related to the COVID-19 pandemic have led to a sharper drop in traffic than we previously anticipated, with volumes on the Spanish toll road operated by Autopista del Sol Concesionaria Española's (AUSOL) down 40% compared with the 30% we forecast in April 2020.

oWe expect limitations on movement will persist through part of 2021. In our view, AUSOL's performance will continue to be subdued and reliant on a recovery in traffic volumes, which we now believe could take until 2023 to return to 2019 levels.

oWe are therefore lowering our rating on AUSOL's senior secured debt to 'BB+' from 'BBB-', and keeping it on CreditWatch with negative implications.

oThe CreditWatch indicates that we could lower our rating on AUSOL's debt if we see the project is exposed to further tax liability, following the tax consolidation.

MADRID (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.

Autopista del Sol Concesionaria Espanola S.A. (AUSOL or the project), a limited-purpose entity, issued a EUR467 million fixed-rate senior secured bond and EUR40 million in senior secured notes, both due Dec. 30, 2045. AUSOL used the proceeds to refinance the debt incurred for the construction, operation, and maintenance of a 96-kilometer section of tolled motorway southern Spain between Málaga and Guadiaro in the region of Andalucia. Part of the toll road has been operational since 1999 (75km section known as AUSOL I) and part since 2002 (21km section known as AUSOL II). AUSOL services its debt via the toll charged to users of the road.

Strengths

oStrong operational performance, which materially reduces the uncertainty in relation to the operations and maintenance (O&M) of the asset during the debt tenor.

oWe view the project as a simple toll road asset. Weather conditions are mild and there are no severe winters, resulting in relatively simple O&M.

oThe upward trend of the annual debt service coverage ratio (ADSCR) profile allows for some volatility of traffic growth in the long term, with sufficient headroom to the debt service.

Risks

oThe road is fully exposed to traffic risk, which is highly seasonal, with demand increasing around Easter and peaking during the summer months (July, August, and September).

oIt competes with one free alternative route, which was less attractive pre-COVID-19, since it operated close to capacity, but has become more competitive as overall traffic in the corridor has declined amid the pandemic.

oAUSOL is tax consolidated with its holding companies Infratoll and Meridiam Investments 5 SAS, and as per Spanish law, could be deemed jointly and severally liable for any unpaid tax liabilities owed by these companies.

The prolonged lockdowns and associated travel restrictions led to a larger traffic decline than what we expected.

During 2020 AUSOL's traffic declined by about 40% compared with our previous expectations of 30%. AUSOL's traffic is highly seasonal, with its peak historically taking place during the summer months. Contrary to our previous expectations, traffic did not sufficiently recover after restrictions eased before summer.

The second wave of COVID-19 infections and the associated containment measures have severely dragged on tourism in the region. According to Turismo y Planificación Costa del Sol S.L.U., a public company of the Malaga Provincial Council, the nearby Malaga Costa del Sol Airport reported a 74% drop in arrivals in the first 11 months of 2020, which represented close to 7 million fewer passengers than in 2019 (about 2.2 million fewer from the U.K. alone). This was in large part due to the U.K., the country's largest source of international tourists, having instituted a 14-day quarantine for travelers returning from Spain in July. Spain's domestic tourism was also weaker than we expected. During the first 11 months of the year, the number of Spanish residents travelling to Andalucia was 37% lower than in 2019, according to INE, Spain's statistics office.

Compared to the overall traffic performance of Spanish state toll roads, AUSOL's recovery has been weaker, according to the Spanish Ministry of Transport's data up to September 2020. This is not only due to the abovementioned exposure to tourism, but also the congestion-relieving nature of the road and presence of a toll-free alternative route nearby (N-340/A7). The low congestion resulting from the drop in traffic has strengthened the competitiveness of the N-340/A7, thereby weakening AUSOL's capture rate of traffic on the corridor.

Further limitations on national and international mobility are likely to weigh on tourism in the region and, in turn, slow AUSOL's traffic recovery compared to peers'.

While we expect full recovery of light vehicle volumes by end-2021 for most toll roads operators globally (see "Industry Top Trends 2021 Global Transportation Infrastructure," published Dec. 10, 2020), it may take until 2023 for AUSOL traffic to recover to pre-COVID levels.

Our slower recovery assumptions for AUSOL reflect uncertainty about the evolution of the pandemic and the availability of the vaccine, which could potentially impact the pace of borders openings and international tourist confidence. Moreover, containment measures in Spain may impair economic recovery and hurt local discretionary spending, which could also weigh on the traffic in nonpeak periods and nonwork days (see "Credit Conditions Europe: Waiting For Relief," published Dec. 3, 2020).

Project management's postponement of capital expenditure (capex) to ease liquidity pressures in the period prevented the project's credit quality from further weakening.

Project management acted to preserve liquidity by postponing discretionary capex due to the lower traffic level. Investments were also directly and indirectly impacted by the workforce being subject to mobility-containment measures during a peak outbreak. As conditions improve, we expect the project will resume capex, notably the required tunnels upgrade (Royal Decree 635/2006), which should be finalized by September 2021.

We currently don't expect AUSOL to draw on its liquidity reserves to service its debt. The project has a one-year debt service reserve and a three-year major maintenance reserve account that provide adequate cushion to the project. Furthermore, we expect its revised credit quality to be supported by expenditure savings as recovery lags.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic.

As vaccine rollouts in several countries continue, S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic and its economic effects. Widespread immunization, which certain countries might achieve by midyear, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Environmental, social, and governance (ESG) credit factors for this credit rating change:

oHealth and safety

CreditWatch

The negative CreditWatch indicates that we could lower our rating on AUSOL's debt if we see the project exposed to further tax liability, following the recent tax consolidation.

With a lower likelihood, we may further lower the rating if the COVID-19-related traffic decline deteriorates, causing forecast metrics to fall to about 1.10x.

Related Criteria

oCriteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019

oCriteria | Corporates | Project Finance: Project Finance Operations Methodology, Sept. 16, 2014

oCriteria | Corporates | Project Finance: Project Finance Transaction Structure Methodology, Sept. 16, 2014

oCriteria | Corporates | Project Finance: Key Credit Factors For Road, Bridge, And Tunnel Project Financings, Sept. 16, 2014

oCriteria | Corporates | Project Finance: Project Finance Framework Methodology, Sept. 16, 2014

oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

oCriteria | Financial Institutions | Banks: Assessing Bank Branch Creditworthiness, Oct. 14, 2013

oGeneral Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012

oCriteria | Corporates | Project Finance: Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011

oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

oIndustry Top Trends 2021 Global Transportation Infrastructure, Dec. 10, 2020

oCredit Conditions Europe: Waiting For Relief, Dec. 3, 2020

oSpanish Toll Road Operator AUSOL Debt Rating Lowered To 'BBB-' Amid COVID-19-Related Traffic Decline; On Watch Negative, April 17, 2020

oAutopista del Sol Concesionaria Espanola 'BBB' Ratings On CreditWatch Negative Following Tax Consolidation Grouping, March 19, 2020

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