DALLAS -- Bonds issued for a P3 highway project in Indiana were downgraded to junk following construction delays and payment disputes among contractors.
The Indiana Finance Authority's $250 million 2014 private activity bond issue for the I-69 Section 5 project received a two-notch Fitch Ratings downgrade to BB on Friday. The rating agency had previously downgraded the bonds to BBB-minus in April.
The bonds remain on ratings watch negative where they were placed last April.
The PABs were issued for the public-private partnership on behalf of Interstate-69 Development Partners LLC.
Fitch attributed the downgrade to continued delays in construction on the back of unresolved payment issues between the construction contractor and subcontractors.
I-69 Development Partners was selected by the Indiana Department of Transportation to design, build and finance the highway renovation several years ago. It contracted with Corsan-Corviam Construccion to design and build the project. Isolux Corsan SA (Isolux) is parent of the Corsan-Corviam.
Payment issues prompted I-69 Development Partner to issue two notices of default to the contractor Thursday, citing failure to promptly pay subcontractors and failure to present a remedial plan.
"We support I-69 Development Partners in issuing the two default letters to its design-build contractor, and fully expect the cure time frames to be met," Jim Stark, the IFA's director of public-private partnerships, said in an e-mail. "The State will exercise all contractual means necessary to ensure the delivery of I-69 Section 5 to a level of quality and timeliness that meets expectations."
The notice of default follows an already eight-month delay in completion of the project because of utility coordination and permitting that led to some subcontractors demobilizing from the site. The delay pushed the completion of the project to June 28, 2017.
On April 7, 2016, Fitch downgraded the IFA's PABs to BBB-minus, which reflected the deteriorating credit quality of Isolux coupled with the I-69 project's projected delay.
Fitch believes that significant construction progress, which would be 70% to 80% completion in the next three months, is critical in order for the project to meet its revised June 2017 target.
"Payment issues have not been resolved with all subcontractors leading to continued delays to the project, which is already significantly behind schedule," said Fitch. "Unless significant construction progress occurs over the next several months and the default issues are adequately addressed, further negative rating action is likely."
The IFA issued the bonds, lending the proceeds to private contractor, I-69 DP. The proceeds are financing the renovation of a 21-mile stretch of highway between Bloomington and Martinsville that will become Interstate 69.
The highway is a central thoroughfare for southwest Indiana, connecting Evansville to Indianapolis, and officials say it is important to the state's future economy. I-69 will eventually extend from Mexico to Canada, "making Indiana an essential part of the primary north-south artery that moves goods and services across the United States," according to Indiana transportation officials.
"The project's robust performance security package combined with the remaining four month tail from the revised substantial completion date to the longstop date should be adequate to ensure the project is completed, even in adverse scenarios including one involving a contractor replacement," Fitch analysts said.
The bonds are secured by a first priority lien on I-69 DP net revenues. The IFA makes milestone payments during the construction period and then availability payments after the road opens.
Fitch said a conservative bond structure including the fixed interest rate, full amortization, and 1.15 times reserves "provide bondholders with protection against adverse developments over the project life."
