fitch infrastructure global outlook - 20100301

8/8/2019 Fitch Infrastructure Global Outlook - 20100301

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Global Infrastructure & Project Finance

2Global Infrastructure & Project Finance 2010 Outlook March 1, 2010

mismatches if cost growth outstrips revenue. The pace of economic recovery willimpact consumer spending. The volatility and level of commodity prices will impactenergy and transportation projects. Major swings in oil and gas prices in particular and

the decoupling of oil, gas, and power prices in some markets will likely continue toresult in unexpected outcomes.

Counterparty risk remains a factor, especially in projects where macroeconomicvolatility is mitigated by long-term contracts with corporate, public sector, andfinancial institutions. While the credit quality of counterparties was affected duringthis crisis, it remained more stable than might have been expected. Therefore, thepresence of these contracts provided a measure of stability, and projects ratings werenot significantly impacted.

A phenomenon to watch is how infrastructure assets in developing economies performrelative to those in developed economies and whether this recovery will be different

Summary of 2010 Rating OutlooksProject Sector 2009 2010 Change

Thermal Power Stable U.S. Stable to Negative Latin America StableIndia Stable to Negative

Renewable Power StableU.S. StableEMEA Stable to Negative Latin America Stable

Oil and Gas Stable to Negative U.S. Stable +EMEA Stable to Negative

AirportsU.S. Negative NegativeLatin America Stable to NegativeEMEA Stable to Negative Stable to NegativeIndia StableAustralia Stable Stable

Toll RoadsU.S. Negative Stable to Negative +Latin America Stable to Negative Stable +EMEA Stable to Negative Stable to NegativeIndia Stable StableAustralia Stable Stable

Maritime PortsU.S. Negative Stable to Negative +EMEA Negative Negative

Availability-BasedEMEA Social Infrastructure Stable StableEMEA Transport Stable Stable

Whole BusinessU.K. Pub Companies Negative NegativeU.K. Healthcare Stable to Negative Stable to Negative

U.S. Sports Stable to Negative Stable to NegativeRating outlook reflects the prospective balance between upgrades, downgrades, and affirmations of Fitch-rated instruments.Source: Fitch.


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Global Infrastructure & Project Finance 2010 Outlook March 1, 20103

from prior ones. GDP growth in the developed world is likely to be sluggish in 2010.Emerging markets in general have been resilient to the global financial crisis and areexpected to recover stronger than the mature economies in 2010. In the infrastructure

space, there is evidence that the adverse credit impacts from the dire global economicdecline across most infrastructure sectors has been less adverse than one might haveexpected in developing economies. This is in part because developed markets arefacing the strongest negative headwinds due to the adverse impact on their economiesfrom the excesses of the financial markets prior to the global financial crisis, and thelack of adequate policy and regulatory controls to avoid mispricing of risk. It is also inpart because the sample of infrastructure projects in developing countries is small andtherefore those that rise to the surface tend to have the strongest economic profiles inthe country and are better suited to withstand adverse events, versus the broaderproliferation of such projects in the developed world where many with moderate-to-weak economic profiles have had good access to the capital markets but are now morevulnerable to downside risk.

Other longer term considerations are also at play, such as climate change and theimpact of related regulation and market factors on credit quality. While they remainmaterial credit factors, the lack of clarity on how they will impact credit quality meansthat they currently impact rating outlooks, which have a 12 24-month horizon, in only alimited way. Environmental reform and climate change considerations will likelytransform the way energy is produced and used, and the modes by which people andgoods are transported in the long term. This is one of the most important knownunknowns in todays world. While the ability to incorporate this risk in a meaningfulway is limited, Fitch in its analysis seeks to assess the relative ability of projects toabsorb unexpected downside risks and reflect it in its ratings.

The table on page 2 summarizes Fitchs 2010 global infrastructure and project financerating outlooks.

Energy Projects The energy sector has been roiled from almost every angle over the course of the pastcouple of years as economies floundered, demand dropped, and energy prices varieddramatically. While oil and gas prices have recovered, pricing uncertainty, security ofsupply, and environmental legislation will continue to affect the markets in whichpower and oil & gas projects operate for the long term.

Merchant plants have been more susceptible to these factors. However, thepreponderance of projects that Fitch rates have strong and stable contractualarrangements that have allowed them to ride through the storm with less adverseconsequences and with their cost-recovery provisions cushioning credit quality.

Gas liquefaction projects have performed reasonably well, supported by strong take-or-pay contracts, low break-even prices, and generally oil-linked revenue streams,although liquefied natural gas (LNG) producers selling mainly to the North Americanmarket are more exposed to uncertainty regarding future U.S. gas prices. Oil refiningand pipeline projects faced significantly reduced margins from drops in utilization andprices.

An interesting contrast to the experience in the developed world is that of manydeveloping countries where the inadequacy of power generation and supply networkshad generally suppressed demand, so this downturn has not had an adverse effect ondemand. Available supply was still met with commensurate demand, but the level towhich demand outstripped supply just narrowed.


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The renewable power space generally showed more stability as it benefits from supportiveregulatory and policy frameworks. In most cases, the ability to structure around theresource and technology risks associated with these projects created a platform for more

stable credit performance through this cycle and going forward.Thermal Power ProjectsU.S.

Rating Outlook: Stable to Negative

Thermal power generators with long-term off-take agreements have shown resilience to theadverse economic conditions of 2009 and are expected to perform similarly in 2010. Thecredit profile of competitive generators reliant on spot sales of unhedged power is weakerbut not expected to worsen in 2010. Lower demand due to weak economic conditions andexcess supply resulted in very low natural gas prices, energy prices, and spark spreads in2009, but modestly improved pricing is expected for 2010. Exposure to new and increasingenvironmental compliance costs elevates the risk of reduced cash flow for fossil-fueledgenerators, and in particular coal-fired projects. Merchant coal-fired generators areparticularly likely to continue experiencing reduced levels of cash flow.

The 2010 Outlook for most contracted thermal power projects is stable. In 2009,reduced electricity demand due to the global economic downturn and persistently lownatural gas prices characterized challenging market environments for power projects.Investment-grade power projects with contracted off-take agreements avoideddowngrades in 2009 due to the stability of their cash flows and are expected to performsimilarly in 2010. Facilities with fixed-price capacity payments and tolling arrangementsfor fuel and energy pricing exhibited the highest degree of cash flow stability. Projectswith power purchase agreements where energy pricing is indexed to market prices wereless effective at mitigating market price risk but generally avoided downgrades as well.

The 2010 Outlook for competitive generators lacking long-term off-take agreements and

selling directly into merchant markets is stable to negative. Hydropower and efficientnatural gas-fired generators in this class experienced declines in cash flow and debt-service coverage in 2009 but are not expected to worsen in 2010, with an expectationfor modest improvement. Certain non-contracted coal-fired projects experienceddramatic declines in cash flow and erosion in financial cushion available to service debtin 2009 and have a negative outlook for 2010. Such projects were subject todisplacement on the dispatch curve by more efficient gas-fired facilities, resulting inlower revenues and capacity factors.

Energy prices in many U.S. markets are highly correlated to natural gas prices, withnatural gas generators frequently setting the market clearing price for power. Low gasprices combined with sluggish demand resulted in unexpectedly low electricity pricesand spark spreads for 2009. Natural gas prices have increased from their lowest levelsof 2009, but continue to defy their typical correlation to oil prices, which haveincreased significantly in the same period. Gas prices and energy demand are expectedto stabilize or improve gradually during 2010, in line with improvement in the overalleconomy. A slower-than-expected improvement in the economy is likely to translateinto continuing challenging conditions in the U.S. power markets.

National laws regulating greenhouse gas (GHG) emissions are looming, with little impactin 2010 but expected to negatively affect the profitability of power generating projectsin the longer term. While the specific form and cost of GHG regulation is unknown, thefinancial impact is expected to be significant. Power generators with zero and minimalemissions, namely nuclear, hydro, and renewable energy projects, stand to benefitfrom eventual federal GHG regulation. In the northeastern U.S., thermal power


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projects are currently subject to compliance with environmental regulations under theRegional Greenhouse Gas Initiative (RGGI), further stressing cash flows due tocompliance costs, which may escalate faster than currently anticipated. Merchant coal-

fired generators are significantly more burdened by RGGI compliance costs than theirgas-fired counterparts, due to the greater quantity of regulated GHG emitted. Whilethe current lack of a cost-recovery framework is a concern, the potential for one todevelop is not ruled out, so Fitch does incorporate the possibility that adverse impactsmay be partially mitigated over time.

What to watch:

Slower-than-expected improvement in the overall economy, leading to slowerrecovery in demand and energy pricing.

Reversion to historical price relationship between coal and natural gas, improvingcompetitiveness of coal-fired generators, or the development of a new normal.

Accelerated implementation of new emissions regulations.

Changes in the subsidy/incentive framework that could have positive or negativeimplications.

Lat in America

Rating Outlook: Stable

Latin American power projects with long-term off-take agreements have shownresilience to the economic slowdown of 2009. In Central America and South America,power projects performed in a relatively stable manner during 2009. In expectation ofan economic recovery, supportive regulation and given the strategic importance of theelectric grids, Fitch expects a stable outlook for 2010.

What to watch:

Access to fuel supply for thermoelectric facilities in remote locations.India


A stable outlook for the sector is expected due to the essential nature of powerconsumption, Indias favorable economic growth prospects, and its yawning capacityshortage. Nevertheless, concerns remain with respect to sustainable fuel supplies(particularly for coal), and with the deteriorating credit quality of stategovernment owned electric utility counterparties.

For certain projects under construction, completion risk can play out in different waysto negatively impact rating levels. Residual land acquisition for building the plant orancillary facilities such as a railway siding could be a stumbling block. Implementationschedules are getting aggressive, particularly in the light of the strategies employed bydevelopers to accomplish construction. Rather than use the EPC route for construction,companies are choosing to break down the entire activity into packages to beimplemented by specialist firms, with project oversight and management being doneinternally, sometimes with help from consultants; the rationale advanced is toeconomize on project costs. This is the opposite response to best practices indeveloped countries, but is perhaps in recognition of pressure to deliver large numbersof projects within India.

The ability of counterparty equipment vendors to adhere to delivery schedules and alsoguarantee operating performance remain key sensitivities. Many projects continue to


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depend on a single source (Bharat Heavy Electricals Limited) for supply of criticalequipment, such as their boiler-turbine-generator package, even though it has anoverflowing order book. There is a marked willingness now to contract with Chinese

equipment vendors as they offer significant savings in capital costs along with thepromise of accelerated delivery, although actual performance in Indian conditions is yetto be established on a meaningful scale.

Recently, a number of new merchant power plants have been announced; they areexposed to several risks many of these represent completely unrelateddiversification for their sponsors. Although power prices in the spot market arecurrently high, Fitch is concerned about their long-term sustainability. Significant newcapacity additions that are planned and the deteriorating financial health of the off-taker utilities could result in a sharp reduction in price realizations for the new plants.

Some of the plants that have recently announced financial close also carry a high debtload of up to even 80% in the financing plan. Coupled with a lack of firm arrangementsfor securing coal supplies, the risk profile of these projects is heightened.

What to watch:

Financial health of state government owned utility off-take counterparties. Visible constraints on land availability, equipment vendor capacity, and sustainable

fuel supplies for projects under construction. Impact of the obligations imposed on India, if any, by the ongoing Climate Change

Summit 2009 confabulations for restricting carbon emissions.

Renewable Power ProjectsU.S.


The 2010 rating outlook for renewable projects is stable. Renewable portfolio standards(RPS) in many states require utilities to purchase increasing proportions of their powerfrom renewable energy sources. These requirements allow utilities to sign long-term off-take agreements with renewable power projects, helping to enable investment-gradeproject ratings. However, renewable energy projects without the benefit of off-takecontracts are expected to face the same pricing challenges and profiles as fossil-fueledmerchant generators, i.e. low to modestly improving prices.

Many renewable power projects are subject to intermittent resource risk, whereelectrical output is correlated to the availability of the renewable resource such aswind or solar energy. Fitch notes that wind projects in particular have been prone tofall short of originally forecast levels of total energy production. However, theproduction shortfalls have tended to fall within the acceptable range for assigned rating

categories and are not expected to lead to ratings downgrades.The intermittent generating profile of certain renewable power projects has alsoresulted in transmission congestion issues that have caused reduced dispatch factors.Such constraints are generally limited to certain geographical areas and solutions arebeing implemented as the demand for renewable energy increases, particularly withrespect to RPS requirements. Fitch considers such constraints to be temporary and ingeneral unlikely to result in negative rating action.

Significant tax incentives and federal loan guarantee programs have stimulatedinvestments in renewable power in 2009, and the trend is expected to continue in 2010.In general, renewable power is more expensive than power generated from


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nonrenewable fuels, and renewable power projects typically require relatively high-priced power purchase contracts to achieve investment-grade ratings. Increasing costsfor meeting emissions regulations under current and expected legislation favor non-

emitting renewable power projects and help reduce the green premium relative totraditional power resources.

What to watch:

Revisions to timing and compliance requirements for RPS mandates. Slower-than-expected improvement in overall economy, leading to slower recovery

in demand and energy pricing. Accelerated implementation of new emissions regulations.

EMEA


Both wind farms and PV projects benefit from various forms of government supportmitigating their exposure to volatile wholesale energy prices. Fitch views as unlikely achange in such regulatory frameworks that could negatively affect currently operatingprojects. However, projects under construction may be exposed to material constructiondelays that impact their ability to meet operational deadlines and consequently their abilityto qualify for higher tariff levels. On the positive side in the near term, Fitch expects thatmost projects will continue to benefit from stable prices.

The rating outlook for onshore wind is stable to negative. Primary concerns arise fromthe projects abilities to meet the forecasted energy yield, usually as a result of eitherunsatisfactory availability due to technical failures, usually stemming from problemswith gearboxes, blades, or turbine foundations; or overestimation of the actual energyproduction achievable on site in pre-completion assessments. Both of these featuresare quite common in Fitchs experience and are, together with a generalunderestimation of operating and maintenance costs, the reasons for the downgradesduring 2009 on the Breeze 2 and 3 transactions. If the observed trends of technicalproblems and low wind production continue, then this may put pressure on theprojects financial performance and result in further negative rating actions. In certaininstances, these problems have been compounded by weak sponsors.

The rating outlook for solar PV, however, is stable. Solar PV operates at a lowertechnical complexity, with less operating risk than wind farms. Site-specific solar yieldsare also more easily predictable and less volatile than wind, with lower fluctuation inproduction levels. Long-term warranties are an unusual feature of this sector, resultingin a greater focus on the long-term credit quality of the manufacturer.

What to watch:

Onshore wind: Technical failures and reliability of wind forecasts. Solar PV: Panel life and degradation rate; credit quality of manufacturer providing

warranty package.

Lat in America


Hydroelectric projects have remained stable through this crisis. Low rationing riskduring the period driven by good hydrology conditions contributed to credit stability.For 2010, Fitch expects operating projects to continue to benefit from automatic


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pricing readjustments, reservoir levels to be above risk aversion thresholds andcontinuation of a stable regulatory environment. Overall, Fitch believes that the credittrend remains stable for Latin American renewable power projects.

What to watch:

Delays in obtaining timely environmental permits for hydro and onshore wind powerprojects that affect timely completion.

Oil and Gas ProjectsU.S.


The rating outlook for oil and gas projects is stable, with the oil and gas pricingenvironment expected to improve modestly in 2010. U.S. LNG terminals saw minimalregasification activity in 2009, and the situation is unlikely to change in 2010 withoutcontinuing improvement in gas pricing. Natural gas prices have recovered somewhatfrom the 2009 trough and are expected to continue rising in response to increaseddemand from overall improvement in the economy. As with thermal power facilities,LNG terminals with fixed-price take-or-pay usage contracts were able to maintaininvestment-grade ratings even at minimal levels of utilization, and negative ratingaction is not expected in 2010.

Petroleum refinery projects experienced significantly compressed refining margins in2009 and pricing conditions are expected to persist in 2010, gradually moderating asthe general economy improves and demand for refined products increases. Lower-than-expected profitability for refiners may lead to negative rating action, which couldreduce the credit quality of refinery projects. Oil pipeline projects with merchantcapacity exposure face similar demand risk, although pipeline capacity pricing isgenerally more stable than commodity prices.

What to watch: Off-taker and supplier counterparty risk. Slower-than-expected improvement in overall economy, leading to slower recovery

in demand and energy pricing.

EMEA


The assets in this category are large-scale oil and gas projects whose ability to servicedebt in the majority of cases is linked to global or regional hydrocarbon prices. Thisgroup includes projects involved in the production of oil and gas, gas liquefaction, andoil refineries that tend to be very large and expensive to develop, with project costs in

excess of USD5 billion. They benefit from experienced and financially strong sponsors(particularly oil majors), often including the host government for example, QatarPetroleums 70% stake in RasGas 2 and 3 or Mubadalas 51% stake in Dolphin Energy.They are also generally important strategic assets in their host country, such as DolphinEnergys role in supplying Abu Dhabi and Dubai with natural gas.

The rating outlook for oil and gas production projects is stable. Exposure to marketrisk for these transactions is mitigated by low break-even levels, generally in theUSD20 USD30/bbl range. This is lower than the low point reached by oil prices inthe first quarter of 2009 and well below current and forecasted oil and gas prices.For specific projects, negative rating actions could result from a material


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deterioration in the credit quality of the sovereign where the operations andreserves are located.

The rating outlook for LNG projects is stable to negative. These projects have beenadversely impacted by the low U.S. spot prices in the natural gas market caused by theincrease of shale gas supply. This weakness is mitigated by long-term take or paytype contracts for a significant majority of LNG sales. These are generally linked toregional or global oil prices rather than to natural gas prices, typically with large utilitycompanies with strong investment-grade ratings and a long history of LNG purchasing.Further mitigation is provided by significant diversification in terms of off-takers andgeographical markets and by the fact that these projects generate a significant portionof revenues (30%) from condensate and LPG sales (both linked to oil prices). Forexample, only 16% of revenues of RasGas 2 and 3 in Qatar (rated A+) derive fromcurrently uncontracted LNG sales, with the rest of its LNG sold to a portfolio of eightcustomers spread across Europe, Asia, and the U.S. Therefore, LNG producers can beseen to be principally exposed to oil rather than gas prices.

The rating outlook for refining projects is also stable to negative. The expectedpersistence of depressed refining margins during 2010 is addressed in Fitchs analysis bythe use of through the cycle economic assumptions combined with stress testing forsevere downturns. However, the persistence of weak demand for transportation fuelsbeyond 2010 could have a negative rating impact.

What to watch:

Oil and gas production: Sustainability of recovery of oil prices; deterioration inemerging market sovereign credit quality.

Gas liquefaction: Continued weakness in U.S. gas/LNG spot markets. Oil refining: Pace of recovery for diesel and gasoline prices and light/heavy spreads.

Transportation Projects Transportation assets that are dependent on volume and periodic price increases tosupport their debt obligations have been adversely impacted across the board in thisdownturn. A number of adverse rating actions have been taken on toll roads, airports,and maritime ports, mainly in the U.S., due to greater volatility in demand thanhistorically experienced. Performance on most of these assets indicates that a bottomwas found in 2009, and there has been a flattening of demand and in some cases amodest return to growth.

Toll-road assets, which are more directly correlated to economic activity, show astronger sign that they may soon reach stability. Airports, with a greater exposure todiscretionary corporate and leisure travel, appear to also be close to a bottom,except for the risk they face from airline financial, network, and capacity decisions.Between 2000 and 2009, airlines lost a combined USD50 billion according to theInternational Air Transport Association (IATA). They have in effect subsidizedtravelers in seeking the goal of maintaining or gaining market share. That was and isunsustainable. Rationalization of routes and consolidation of carriers remains ameaningful ongoing risk particularly for secondary and tertiary hubs and destinations.Maritime ports were pummeled by the tremendous disruption in global trade, butthey are seeing a return from the precipice as trade volumes begin to show growth.The current level of activity remains a far cry from the glory days of the past decade,so considerable risk remains as trade patterns reset to a new environment resulting inwinners and losers.


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The adverse ramifications on developing countries have been mixed. Some, like Mexico,were battered by sudden drops in road, air, and sea traffic. On the other hand, tollroads and airports in India, Brazil, Colombia, and Chile saw more of a slowing of rapid

rates of growth and more recently a gradual return to steady growth.The wide range of Rating Outlooks for transportation projects is reflective of thecounteracting factors that affect this space.

AirportsU.S.

Rating Outlook: Negative

The outlook for the U.S. airport sector remains negative for 2010, the third consecutiveyear that Fitch has held this sentiment. Since early 2008, U.S. airports haveexperienced one of the longest and deepest passenger declines in the last two decadesas passengers and airlines have been hit by a confluence of economic and financialevents. Although the level of traffic loss has begun to moderate in the final months of2009, signs of broad stabilization are not yet evident. Over the near term, airportbudgets and projected financial performance will continue to be constrained given thecombined pressures of leveraging activity in this sector, more challenging revenue-generation abilities from both airline and non-airline sources, and the generaluncertainty for economic improvement. Also important to note is that the operatingand financial challenges facing the domestic carriers are likely to continue in the nearterm. Despite the improving trends in financial results posted by the major carriers atthe end of last year, including several postings of positive earnings during the fourthquarter, the domestic airlines are still rationalizing capacity as the traffic demand andfare-pricing picture remains weak.

The median credit quality for U.S. airports still remains at the A level, although negativerating actions taken over the past year have significantly exceeded positive actions, and the

overall rating levels are reflective of the somewhat greater risk profiles across the aviationsector. In 2009, Fitch downgraded eight airport credits, a sharp contrast to mostly positiverating actions in the earlier part of the decade. For a number of affected airports, steeptrends in traffic losses coupled with rising airline cost profiles have led to weaker metrics interms of airport finances. Further, single-carrier operating risks and concerns related tocapital structures and leveraging have also factored into rating actions. Looking ahead,additional rating actions remain a possibility given the number of airports that have hadratings placed on Negative Outlooks over the past two years. Fitch believes that economicconditions in the local air-trade service area together with trends in traffic activity, costcompetitiveness, and financial performance will be the primary drivers to either ratingstability or further downward actions. Currently, there are still strong headwinds to areturn to positive performance given historically high unemployment rates and slowercorporate and discretionary spending.

Airports that serve the strongest origination/destination (O&D) markets as well as thosethat act as primary hubs or international gateways have been the leading trafficperformers over past two-year downturn, while secondary hubs in addition to airportsthat serve smaller markets or act as reliever facilities faced the most pressure onservice and enplanements. Collectively, Fitch believes the sector will most likely startto see a pattern of recovery later in 2010 or perhaps in 2011 as the economy pulls outof the deepest stages of the current recession. Fuel costs and pricing power may beinfluential on how quickly carriers add back.

Most airports are responding to this stress through cost-cutting measures, utilizing thebalance sheet to ease the growth in airline use and lease payments and deferring


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capital spending. Importantly, the large reduction in traffic volume has not translatedinto equivalent levels of declines in top-line operating revenues, although net marginsand debt-service coverage ratios have narrowed in many cases. So while management

actions have mitigated the impact of the downturn up until this point, it is Fitchs viewthat a prolonged recessionary period may require even further steps to maintainfinancial stability or credit risks will become more acute.

What to watch:

Differing levels of passenger traffic performance at international gateway, primaryhubs, secondary hubs, and reliever airports.

Health of U.S. carriers and exposure to consolidations or even bankruptcy filings onairports with high concentration levels.

Impact of large derivative or variable rate positions on capital.

EMEA

Rating Outlook: Stable to NegativeLarger hub airports (typically above 40 million passengers a year) with a more stabledemand base and a diverse carrier mix tend to have Stable Rating Outlook as adversedevelopments from lower traffic levels are already encapsulated in the ratings. Smallerairports, notably playing minor roles in the regional networks, are more exposed toslow-moving regional economies and weaker airlines and still retain a Negative RatingOutlook.

Airports have faced meaningful traffic reductions in 2009 ( 6% in Europe, 8% in SouthAfrica). The economic crisis highlighted performance gaps between strong, primaryhubs, and second-tier players in the industry. The former had limited declines ataround 2% 4% and maintained solid nonaeronautic revenues (e.g. London Heathrowfared much better than London Gatwick, and Paris Charles de Gaulle better than ParisOrly). Even the primary hubs have faced pressure BAA Airports Limited, with its highleverage, avoided a downgrade largely due to a capital injection. Aroports de Parismaintained its credit quality thanks to relatively stable performance and its financialflexibility. ACSA in South Africa was downgraded because of traffic declines expectedto coincide with large capital expenditure plans.

Fitchs expectation is that as the recovery progresses traffic growth will resume, whichin turn should benefit the financial profile of the airlines. There is evidence that trafficgrowth turned positive in the fourth quarter of 2009. Full-service airlines that profitwith premium passengers on longer haul routes should benefit from increasedbusiness travel as international trade grows.

A prevalent market risk is that EU airlines are exposed to excess capacity and growing fuel

costs, which could influence fare-increase decisions, hence reducing traffic volumes.According to IATA forecasts, European airlines are expected to post a net loss of EUR3.5billion collectively in 2009. This is in particular due to a fall in their revenue, driven moreby lower yield than by lower numbers of passengers carried. Arguably the actual yield ofairlines (i.e. whether passengers fly business or economy) is not directly affecting airportsin the short run, since airports tend to be remunerated based on the number of passengersand aircraft (regardless the class of travel). In the longer run, however, loss-making airlinescannot continue to offer the same level of capacity, which may affect airports.

This risk is not evenly affecting all airports: major hubs will probably not lose much, asthey offer the most profitable routes (intercontinental routes to other major capitalcities, such as London New York and Paris Tokyo) and large numbers of feeders


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(second-tier European airports, also called spokes) for those routes, which help fillplanes on their intercontinental flights.

Other airports that serve smaller catchment areas and serve as hubs to weakerinternational carriers are more exposed. Brussels and Zurich, which had Sabena andSwissair, respectively, are examples.

Some ratings are on Negative Outlook, predominantly those lacking routes and airlinediversification.

What to watch:

Pace of recovery in GDP growth. Fare increases by airlines against a backdrop of fuel-cost increases. Route reductions and airlines concentrations.

Lat in America


Despite the global slowdown, Fitch-rated airports in Latin America largely maintainedtraffic growth in 2009. At hubs such as Lima airport passenger traffic grew by 6.1%, to8.7 million passengers, compared to 2008. Other, smaller airports in the region havealso proven to be resilient to the effects of the economic downturn. The entrance oflow-cost carriers in countries like Brazil and Peru has heightened competition andresulted in cheaper fares, higher volumes, and new routes. The upswing was largely indomestic passenger demand as airports serving domestic destinations benefited fromlocal citizens opting to travel within their countries on affordable vacations versustraveling abroad. Concurrently, airports in Latin America that rely heavily on globaltraffic demand including tourist or business have experienced reduced levels ofenplanement and cargo activity, particularly in Mexico. The effects of the swine flu

epidemic exacerbated traffic figures during the early part of 2009 in Mexico, whichexperienced large traffic drops in the high teens. As the recovery accelerates in 2010,Fitch expects that domestic traffic growth will continue, but possibly slower in placeswhere market pricing dynamics have spurred demand; and international traffic will turnpositive.

Fitch believes that traffic patterns in Latin America will remain somewhat constrainedin the early part of 2010. A rebound is likely as the year progresses and as the economicengines in the region get into gear.

What to watch:

The global economic recovery does not take hold as currently anticipated resultingin lower-than-expected traffic volumes

High and sustained U.S. unemployment could cast a lasting shadow on U.S.consumer spending and consequently Latin American growth

High inflation could pressure the political feasibility of timely and adequate tariffincreases

India


The ratings outlook is stable, although at a low ratings level. Airports in India continuewith their facility rebuilding and modernization exercises, which result in high debt


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loads. Other ratings constraints include onerous revenue sharing arrangements with theAviation Authority of India, and the heavy reliance of financial forecasts on revenuesfrom airport-based real estate development. Mitigating factors to this risk profile

include a supportive economic environment and substantial passenger bases at thecountrys larger airports.

Recent passenger enplanement data suggest a gradual recovery after a brief slow downlast year, with most of the improvement coming from growth in domesticenplanements. The governments decision to allow the airports at Delhi and Mumbai tolevy airport development fees for a period of three years has provided a new fundingsource for the large capex needs of airports undergoing rebuilding exercises. TheAviation Economic Regulatory Authority, Indias independent airport regulator, wasfinally constituted in 2009 after some delay. Should the AERA proceed with the exerciseof creating a framework for rate setting based on which the airline use and leaseagreements can be negotiated, it can have a beneficial impact on aeronauticalrevenues.

What to watch: Extent and nature of recovery in airport traffic. Concerns over the health of Indias airline industry. Ability to achieve various construction milestones as per the master plans.

Aust ralia


The ongoing economic recovery in Australia, and the strategic nature of the majorAustralian airports, including the absence of regional competition (as is present in partsof the U.S. and Europe), contribute to a continuation of the stable outlook for bothratings and the sector. Major international airports saw some dip in international travelearly in 2009, related to the economy and the outbreak of the H1N1 virus, but trafficbegan to rebound later in the year. None of this passenger volatility had a materialeffect on the credit metrics for projects with a Fitch rating, and 2010 is expected to bea good year for Australian airport activity.

What to watch:

Continued diversification of the international carrier base at major hub airports. The pace and direction of potential changes to Commonwealth airport regulations,

and the effect of these changes on planned capital investments.

Toll RoadsU.S.


While Fitchs outlook for the U.S. toll-road sector remains negative in the near term,the agency expects a move toward stability over the medium-to-long term, albeit withsome challenges. The near-term outlook is primarily driven by operating and financialperformance and the medium-to-long term outlook is driven by management decisions.The poor traffic performance seen in 2008 began to moderate in mid-to-late 2009, asexpected. Starting in the second quarter of 2009, monthly vehicle miles traveled (VMT)exhibited slight growth reaching a 2.5% high in September for the first time sinceNovember of 2007. This should ultimately drive volume on toll roads to improve as freeroads operate much closer to capacity than the tolled alternatives. From June 2009


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onward, seven toll facilities, primarily turnpikes, posted flat-to-positive year-on-yeartraffic. As expected, traffic declines on turnpikes, expressways, and bridges havemoderated faster than stand-alone facilities and international bridges, both of which

have higher toll rates. By region, traffic on Southwestern facilities exhibited growth inthe first three quarters of 2009 while traffic on Northeastern and Midwestern facilitieslagged slightly, with growth beginning in the second half.

As the economy slowly recovers from the downturn, Fitch expects volumes to trendbetween no growth and very modest growth over the course of 2010 and into 2011.However, were fuel prices to spike as they did in mid-2007 through mid-2008, growthcould be suppressed given the fragility of the U.S. consumer. Credit quality through2010 and into 2011 will be driven in large part by management decisions. For somecredits, a move to rating stability could occur by the end of 2010 if the recent stabilitythat is developing holds and financial margins show improvement. For others,additional borrowing based on optimistic assumptions will likely be the primary reasonfor any negative credit action rather than actual performance. Overall, Fitch expectstraffic and credit performance for toll roads to exhibit stability for 2010, with thepotential for small improvements.

In August 2008, Fitch indicated that its outlook for the U.S. toll-road sector wasnegative given the deteriorating fundamentals that many facilities were experiencing,primarily due to the spike in fuel prices in late 2007 but also a weaker economicenvironment. In the second half of 2008, when fuel prices dropped dramatically,unemployment growth replaced it as the primary driver of traffic and revenue declines.By October 2008, virtually all toll roads were either experiencing no growth over thesame month in 2007 or experiencing reductions ranging from 5% to 18%, and inDecember 2008, aggregate traffic on 33 facilities (31 publicly run and two privately run)was down approximately 4% from December 2006.

Revenues mirrored traffic through March 2008, albeit at a lower rate, but from April2008 onward revenue declines began to ease as toll increases on both publicly andprivately run facilities were implemented to fund essential system rehabilitation andstem the tide of revenue losses. By December 2008, traffic was down 1.1% fromDecember 2007, while revenue was up 4.0% over the same period. Through 2009, thetrend continued and by December 2009, traffic was down 1.3% from December 2008while revenue was up a whopping 13.3% over the prior year.

While revenue trends have been outperforming traffic levels, state governmentsand regional authorities are viewing existing toll roads as highly valued andunderleveraged, especially as the hope of increased federal funds and/or gas taxesfades. In Fitchs view this will likely lead to more debt. In addition, there ispotential for longer term changes such as an increased emphasis on transit fundingand/or the impact of changes in federal or state transportation policy, to adverselyaffect the credit quality of some U.S. toll roads. Recent events include a new

$8 billion high-speed rail fund grant program that was announced in late January2010 and the Environmental Protection Agencys (EPA) proposal for a more stringentlimit on the amount of smog-forming nitrogen oxide that cars and trucks can emitper hour. The EPA will ensure at least one monitor is located next to a majorhighway in urban areas with more than 500,000 people by 2013 and states will haveuntil 2021 to comply with the new standard or risk having Federal HighwayAdministration funding withheld. It is too early to predict if these announcementswill result in real competition between rail and road, or if they will require existingtoll roads to fund highway expansion to mitigate congestion and thus improve airquality. Nonetheless change is afoot.


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Finally, given the funding needs for major maintenance and expansion and the uncertaintyof the passage of significant new/additional revenue at the federal level, the cost ofhighway travel could increase in real terms. Low-to-moderate toll rates have proven

valuable in the current recession. While toll increases have been beneficial in the nearterm, the higher base of toll rates could present challenges in the next downturn.

What to watch:

Steady return to growth of monthly VMT and improved toll facility volumes. Spikes in fuel prices that constrain growth. Higher and more rapid increases in toll rates on publicly managed facilities with

concomitant political resistance. Increased leverage on publicly managed facilities to fund subsidies for non-system

purposes. Rate of recovery in commercial volumes and impact on Interstate turnpikes.

EMEA


As in 2009, Fitch sees a blended Outlook for European toll roads, which is a mix ofStable (for mature and well-positioned networks) and negative (for stand-aloneschemes or those with aggressive business or financial plans). Although toll roads haveall suffered from declining traffic in 2009, as was expected in late 2008, the pain wasnot equally spread between all types of issuers, and Fitch sees a need fordifferentiation in the sector. Extreme cases have posted double-digit traffic declinesyear on year; however, the sector has remained resilient overall, with downgradeslimited to one or two notches.

Large, diversified and mature networks located in more resilient economies enjoyedstable EBITDA (compensating slight traffic decline with toll hikes and savings onoperations and maintenance). Fitch sees these networks (such as AtlantiasAutostrade in Italy or Vincis ASF, Abertis Sanef and Eiffages APRR in France) asbenefiting from a resilient business case, making these facilities more similar toutilities. Indeed they are mature networks with little or no free alternative, strongregulatory frameworks (although not always very transparent and predictable) andlittle prospects for introduction of road competition. These networks are wellprotected against short-term downturns, and are only exposed to longer term trends,which are still difficult to predict. These include modal competition (according tovarious surveys, a majority of toll-road users would prefer to use another travelmode), which may be slow to become an actual threat, despite material investmentefforts being implemented in the European rail sector. These networks areincreasingly managed like utilities, with a trend to link the remuneration to the

capital expenditure agreed with the regulator, an intention to optimize the cost offunding, and the extraction of value from efficiencies.

Close to this category, some networks have large and diversified portfolios ofmotorways, but have proven less resilient, because they were exposed to morecompetition (toll-free national roads in Spain, shadow toll roads in Portugal, forexample) and less robust economies. Abertis (for its Spanish part) and Brisa fall in thiscategory, and both were downgraded in 2009. Fitch does not expect more downside riskfor this type of issuers, for which the effect of the economic downturn (unless itworsens instead of turning to recovery) are already incorporated in the ratings.


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Stand-alone facilities are by definition more fragile, because they are not diversifiedbut also often because they are more recent (in Europe, most toll roads were built bynational or regional networks until the mid-1990s) and do not benefit from a strong

patronage basis and are less essential to their economic environments. Although toll-road transactions are generally resilient to brief economic downturns, with amortizinglong-term debt and coverage ratios accommodating for a temporary slowdown ofrevenue growth, Fitch sees a number of transactions with relatively high leverageand/or mini-perm debt structures, more dependent on actual growth of traffic, as wellas more exposed to refinancing risk. These fragile facilities include those linking largemetropolitan areas with weekend tourist destinations, those urban schemes expectedto serve newly developed areas, and facilities with a high component of commercialtraffic (heavy goods vehicles), and they remain under Negative Outlook.

What to watch:

Pace of recovery in GDP growth. Roads with (capacity-free) alternatives. Access to funding for transactions with refinancing risk.

Lat in America


Transportation demand remains closely correlated to economic activity and GDP. Fitchprojects positive GDP growth in Latin America and the Caribbean during 2010 withBrazil and Mexico expected to lead the way with higher expansion, with the formerprojected to grow by 3.8% and the latter by 3.0%.

In Mexico, the adverse trend in traffic performance continued in 2009; even toll roadswith commuting purposes, which normally are more resilient to economic downturns,started to display negative signs. Nevertheless, Mexican traffic during 2009 was downnot only due to the global crisis, but also because of the effects of the swine fluepidemic, among other factors. For 2009, the greatest revenue (real terms) decreasewas 12.3%, while the highest rate of growth was 7.9%. It is ironic that the 2008 data isalmost an exact inverse: the highest revenue growth was 12.2% (except for roads inramp up) and the lowest 7.3%. Although traffic volume is a main revenue driver, it isnot the only factor. As a result of the economic deceleration, the participation of largecommercial trucks gradually declined in the traffic mix. Given that these kinds ofvehicles generally pay higher tolls, revenues were also affected by this aspect.

Given performance dynamics, Fitch observed debt-service coverages fall belowhistorical levels. Nevertheless, similar to many Mexican financial structures, includingflexible debt amortizations and ample reserves, all of them had enough resources tomeet their obligations to bondholders. In 2010 Fitch expects Mexican roads to gradually

resume their historical growth patterns and positive trend.Meanwhile in Chile, traffic levels in the roads analyzed by Fitch were influenced by theglobal crisis, with some routes facing flat growth or slight reductions for 2009 (+0.5%/

1.5%), while others, linked to the national tourism sector, experienced surprisingincreases in traffic. There was a significant, higher-than-expected increase in lightvehicle traffic, between 5% 10% during 2009. This was due to the choice many driversmade to visit the summer vacation centers in the country instead of those locatedabroad. However, the drop in the forestry and industrial activity in the south of thecountry overshadowed this effect and led to a strong reduction in truck traffic levelsfor the segments of Ruta 5 Sur, reaching a maximum drop of 15% for the months of


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April/May 2009. Notably, this figure has improved during the year, though there is stilla reduction of approximately 7.5% for 2009 versus 2008.

Fitch expects an increase in the country GDP of approximately 4.8%; as such the agencybelieves traffic levels for the analyzed roads in Chile for 2010 will return to their long-term growth levels.

In Brazil, the toll-road sector remained fairly resilient to the global financial crisis,aided by Brazils countercyclical measures to stimulate domestic demand, supportiveregulatory environment that allows for inflation-adjusted rates, and the brownfield andmature nature of the majority of the concessions. The limited liquidity in the markethas had marginal effects in brownfield projects, as ongoing capital expenditures arelow and have been funded mainly by operating cash flows. Fitch expects traffic volumeand toll-road revenues will moderately improve as the economic activity picks up. Theview also reflects a continuation of supportive regulation.

Excluding Corredor Sur in Panama, which recorded year-over-year double-digit growth,

traffic performance on other toll roads in the region was generally down in 2009,largely due to the global economic woes. In general, Fitch expects traffic trends to bepositive in Latin America in 2010. The agency believes revenues will moderatelyimprove in 2010 from declining levels exhibited in 2009 and generally be in line withexpected economic growth for each respective country in Latin America.

What to watch:

The global economic recovery does not take hold as currently anticipated resultingin lower-than-expected traffic volumes.

High and sustained U.S. unemployment could cast a lasting shadow on U.S.consumer spending and consequently Latin American growth.

High inflation could pressure the political feasibility of timely and adequate tariff

increases.India


Current toll-road debt ratings (all national scale) are mostly stable as a group.Nevertheless, in 2009, some ratings were put under Rating Watch Negative, mostly forevent risk associated with their respective project construction phase. Amongst these,some select downgrades in 2010 are possible. The sector remains stable, as Indiaseconomy continues to grow the global financial and economic crisis had very littleeffect on the latent economic demand for upgraded highway capacity. Regionalinterconnections of key highway segments should strengthen the economic value of manyprojects over time, although debt ratings will continue to be constrained by a propensityfor construction delays, a high relative cost of capital, and heavy debt leveraging.

What to watch:

Resolution of regulatory hurdles including obtaining land/right-of-way to completeconstruction on schedule, securing National Highways Authority of India approvalfor tolling partially completed roads.

Banks willingness to reschedule loans to accommodate delayed completion andsponsors capacity and willingness to inject additional equity; extent of overruns.

Actual traffic performance in the ramp-up phase in relation to overly optimistictraffic forecasts based on which financial close is achieved.


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Efficacy of the dispute resolution mechanism in speedily settling compensation andconcession extension issues.

Aust ralia

Sector Outlook: StableCurrent ratings are stable as the economic downturn was short lived in Australia. Infact, Australia was among a small group of developed countries that avoided arecession, and most operating toll roads saw little to no decline in traffic and nodecline in revenue. Debt-service coverage levels were robust going into the downturn,and easily offset any economically induced slowdown in revenue growth, or higherinterest spreads from debt refinancings. In 2010, interest spreads are expected tonarrow marginally, but the cost of capital will likely remain high. The biggest risk forscheduled refinancings is shorter tenor, not credit exposure to interest rates. InSydney, the roads authority seems to be working cooperatively with concessionaires onproposed road upgrade projects.

The outlook for the sector is buoyed by the favorable economic backdrop, heightenedpublic interest in regional transportation projects, and a more stable (yet stillexpensive) cost of capital. The latter will make it harder to finance new stand-alonetoll-road projects.

What to watch:

Tenor and margin spreads for upcoming refinancings or expansion project debt. Interest by Australian pension funds in re-entering the market for infrastructure

investments.

Maritime PortsU.S.


Fitch has maintained a generally negative sector outlook for seaports since mid-2008. Thedramatic downturn in global maritime trade coupled with economic uncertainty for theU.S. and its trading partners have had a significant impact on the U.S. seaport sector, insharp contrast to the robust volume growth and capital expansion seen earlier in thedecade. The sectors operational and financial challenges, increased competition, andelevated leveraging risks have resulted in more profound changes in credit quality thanthose seen for toll roads and airports. This is mainly due to a larger drop-off inthroughput volumes and increased patterns of short-term volatility. Going forward,expected restraint by U.S. consumers over the next few years will likely keep growthrates below historical norms. It is Fitchs view that meaningful near-term improvement inoperational performance is still not clearly visible despite some measured stabilization inbroader economic indicators. Rather than a quick turnaround, Fitch believes that a slow

and gradual recovery is to be expected. Indeed, a return to the historic peak volumesseen in 2007 may take several years, if not longer, to achieve, meaning trouble for portsor terminal transactions with growing debt-service obligations.

After growing at a compound annual growth rate of nearly 7% from 1990 to 2007, portthroughput as measured in 20-foot equivalent units (TEUs) has declined across theboard at Fitchs largest rated ports (see chart). From 2007 to 2009, TEU throughputdeclines at the rated West Coast ports have ranged between 14% and 30% over the two-year period. For the largest rated East Coast ports, declines are between 12% and 18%.Volumes have shown some recovery in the third and fourth quarters of 2009, withdeclines slowing or reversing modestly on a year-over-year basis.


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Similar trends can be seen with the Baltic Dry Index (BDI), a measure of demand forshipping capacity versus available supply of bulk carriers. For 1990 2007, this index grewat a CAGR of 11% and peaked in May 2008 at nearly 12,000 points. Through the recession

the index has fallen 11-fold, and is now trading in line with its 10-year average.It is important to note that two key drivers of previous growth in throughput, robustconsumer spending and construction-related shipments, may take time to return to pre-recession strength. As a result, in order to maintain rating stability, operating ports willneed to focus on managing operating costs and net revenue; landlord ports will need toseek terminal lease renewals with favorable terms that provide downside protection,including minimum annual guarantees. Given consumer trends and economicexpectations, achieving favorable lease terms may prove challenging. From a ratingsperspective, all ports will need to carefully manage leverage over the next one to fiveyears. Increased competition from alternative transport modes and the expansion ofthe Panama Canal will result in changes in goods movement. Ports that borrow in thehope of gaining market share before the impact of the changes are fully understoodcould be left with debt and facilities beyond what they can actually capture.

Despite the challenges and expectation of slow recovery in 2010, the sectorsinvestment-grade ratings are buoyed by the essential nature of port infrastructure tothe global economy. Both U.S. and global trade depend on upon maritime ports in orderto transport goods. The U.S. port sector as a whole will also continue to benefit fromexposure to a diversity of trading partners and cargoes, limiting the influence of anyone partner. And, as testament to the essential nature of these assets, investment inport infrastructure by both private sector partners (Baltimore and Virginia are recentexamples) and by ports themselves indicate that the sector may find its way onto thepath to recovery in 2010.

What to watch:

Revenue-stabilizing measures through diversification of end markets and prudentcontractual agreements.

Increasing competition for discretionary cargo continuing rate pressures. Nature of capital improvement programs to meet existing demands and attract new

tenants/cargo. Changes in trade patterns and personal savings rates. Changing competitive landscape and dynamics in the shipping and logistics sectors.

EMEA

Rating Outlook: Negative

The economic crisis has triggered an unprecedented fall in international trade volumes

( 21% between October 2008 and March 2009, a record comparing with previous low of14% in 1982), which is the main driver for European seaports activity. Ports carry 90%of global trade, with European economies being among the most open in the world. Thisdecline, the most striking feature of which was the global synchronization, was notinconsistent with stress scenarios run by Fitch. However, the pricing competition thatfollowed between ports resulted in lower usage fees than had been assumed therebyputting pressure on ratings.

The fall in volume triggered a sharp reduction of capacity, as shippers, made even morevulnerable by unfavorable timing in their plans to increase capacity, reduced thenumber of calls and concentrated on more profitable and efficient destinations.


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Shipping lines suffered hard: for example CMA-CGM, the third-largest line globally, hadto restructure in order to avoid bankruptcy, and Hapag-Lloyd posted losses in excess ofEUR500 million.

Although this narrowing of the market sharpened the gap between leaders and second-tier competitors, even best-in-class suffered double-digit losses (Rotterdam 11.9% andAntwerp 19% during the first nine months of 2009). The slight improvement (actuallylower decline rates) seen since July 2009 is not expected to translate into a realrecovery before 2011.

The resulting competitive pressure among ports has created a race to the bottom inharbor dues. Rotterdam launched the race with a cut of 5% for 2010, which Hamburgand other competitors had to adjust to, confirming how price sensitive major ports are,and how fragile their natural monopoly situations can appear when demand isshrinking. This unexpected price pressure will weigh further on financial performance,unless a stronger-than-expected recovery pushes volumes up.

The most protected ports are those with a captive hinterland, which suffer much lessfrom competition (e.g. Dublin Ports) and the most exposed are those dealing with weakhinterlands and specialized in highly competitive segments (e.g. transshipments) orrelated to vulnerable industrial plants (e.g. on-sea steel production), the future ofwhich is jeopardized by the economic crisis.

What to watch:

Pace of recovery in global trade. Competition and dumping on harbor dues. Counterparty risk of shipping lines

Availability Based Pro jectsSocial InfrastructureEMEA


Fitch maintains a stable outlook on each of the main U.K. non-transportation public-private partnership/private finance initiative (PPP/PFI) sectors. Debt service forprojects in these sectors is supported by availability-based payment mechanisms, withpublic sector counterparties of relatively strong implied credit quality. The main PFIand PPP sectors now have reasonably long track records of contract tendering anddelivery. These projects are governed by well-developed contractual frameworks,which allocate risks between the public sector and the project company and have clearprovisions governing performance standards and termination.

While largely stable, there are threats to credit quality in social infrastructuretransactions. In line with their relatively low risk profile (relative to other projectfinance sectors), PFI/PPP projects are structured with high gearing and low debt-service cover ratios (DSCRs). Combined with the common practice of sculpting the debtamortization to create a flat DSCR profile, these projects have relatively little buffer toaccommodate shocks, particularly timing differences (e.g. with capex or taxes).

Many of the accommodation projects are exposed to the long-term lifecycle costs ofmaintaining the buildings. These costs can be difficult to predict and there is littlelong-term equivalent experience on which to base them.


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Typically, the construction and operational risks in these projects are passed down tosubcontractors. The ability of this subcontractor to perform adequately is central to thesuccessful operation of the project. Failure of the subcontractor to do this could lead

to delays and cost overruns, as subcontractors have to be replaced and hence thefinancial flexibility built into these projects is tested. Fitch has observed only a fewexamples in its portfolio of subcontractor insolvency during the recession.

While few PFI projects in Fitchs portfolio have experienced material performancepenalties, Fitch is aware of a small number of examples where the relationshipbetween the public sector grantor and the project company has deteriorated, resultingin or as a result of the accrual of performance penalties. Fitch monitors suchdevelopments closely, as the successful long-term operation of the project and thetimely payment of debt service depends on this relationship working smoothly.

What to watch:

Cost and timing shocks.

Long-term lifecycle cost profile. Performance of subcontractors. Relationship with public sector grantor.

Transport Availability ProjectsEMEA


These operate alongside similar factors to social infrastructure. Transport projects tendto be of larger size than social infrastructure and generally rely on strong andexperienced sponsors and contractors (often world leaders in civil engineering andtransport systems). Some of these projects could also include counterparty risk relating

to grantors whose credit quality may only be marginally above standard investmentgrade e.g. some Eastern European toll roads or Western European projects with lowinvestment-grade regional governments. The performance of these projects has beenstable through the crisis and Fitch does not expect particular changes in the Outlookhorizon.

What to watch:

Contractors credit quality. Labor and material costs. Credit quality of public authorities (weak local authorities or low investment-grade

sovereigns).

Whole Business Secur itizationU.K. Pub CompaniesRating Outlook: Negative

Fitch expects the performance of whole business securitizations (WBS) of pubcompanies (pubcos) to remain heavily correlated to the U.K. macroeconomicperformance. Rising unemployment, rising retail price inflation, the return of the valueadded tax (VAT) to 17.5%, alcohol duties, and uncertainties on the political andregulatory agenda will remain challenges affecting all pubcos.


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The football World Cup could provide some trading uplift, likely to represent an increase ofat least 2% 3% on annual drinks sales, depending on Englands performance and theweather. Despite lower increases in minimum wage, pubcos profits will continue to suffer

from regulatory costs increases, inflation on food imports due to negative currency ratemovements, continuous promotion activity on food, and a lower proportion of drinks in theoverall profits margin mix. Managed pubcos EBITDA margins are expected to drop inpercentage; however, managed pubs remain more reactive in a volatile consumerenvironment and are generally expected to outperform leased and tenanted pubs.Depending on the magnitude and speed of the economic recovery, these formats wouldbenefit more rapidly from an improvement in retail conditions and consumer confidence.

Leased and tenanted pubcos are expected to continue to provide support to lessees andto dispose of lower end pubs. As leased pubcos adjust their rental expectations to alower long-term profit per pub reality, further permanent decreases in rental incomeare forecasted by the agency.

Until the agency considers that the industry has stabilized, Fitch currently does not

primarily rely on theoretical stable-state run-rate EBITDA and FCF in its analysis oftransactions ratings and instead focuses on break-even analysis. The agencycomplements this by using short- to medium-term forecast analysis on sales, costs, andoperating profits analysis. Resolution of numerous Rating Watch Negatives remains apriority with the number of downgrades likely to exceed affirmations across tranches.However, in many cases the uncertainties will translate into most tranches ratingseither remaining on Negative Outlook or on Rating Watch Negative.

It is also worth noting that one pub WBS transaction (Globe Pub Issuer) defaulted a fewmonths ago. Fitch withdrew its ratings several months before the default occurredbecause of a number of transaction-specific uncertainties that were identified andcommented upon at the time of withdrawal.

What to watch:

Seasonal trading results for Christmas and the football World Cup. U.K. economic and employment trends. Fiscal changes in the VAT and duties. Wet led (predominantly drinks sales) estates.

U.K. Healthcare (Private Nursing Homes & Hospitals)Rating Outlook: Stable to Negative

Despite strong long-term fundamentals, short-term funding issues remain a risk forprivate nursing homes WBS, especially for residential care. Budget uncertainties at thenational and local level coupled with a challenging economic and asset valuationenvironment for private patients will maintain revenue pressure on smaller and lowerquality nursing operators.

Fitch views estates with higher quality homes, diversified local authority budget exposure,and increased focus on nursing and dementia as more protected from a fee level andoccupancy standpoint. Despite lower increases in the national minimum wage, forecastedregulatory and utilities costs will continue to put profit margins under pressure.

Large diversified private hospital operators continue to outperform Fitchs expectationsdespite a challenging environment for private medical insured patients and reducedwaiting lists in the National Health Service.


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A number of transactions ratings and Rating Watch Negatives still depend on the finalresolution of refinancing issues. For WBS transactions with no short-term refinancingissues, ratings and Outlooks are expected to remain Stable.

Although the sector fundamentals remain robust, as illustrated by a number of ratingsaffirmations (UK Care, EPIC Barchester), transaction-specific downgrades and RatingWatch Negatives were warranted as result of restructurings following missed loanrefinancing deadlines, such as for Titan Europe 2006-4 and Titan Europe 2007-1.

What to watch:

Loan refinancing at borrower level. Government budgets. Client annuity/investment returns. Cost inflation.

U.S. Sports Rating Outlook: Stable to Negative

For 2010 Fitch maintains a stable to negative rating outlook for U.S. sports-related assets asthe sustained weak economic conditions will place increased pressure on individual andcorporate discretionary spending levels and impact ticket price levels and other game-dayrevenues. Unlike 2009, when a larger percentage of corporate sponsorships and advertisingcontracts were locked in, in 2010 and 2011 an increasing percentage will come up forrenewal at the leagues, facilities, and franchises in U.S professional sports, and uncertaindemand will constrain pricing. Premium products such as club seat and luxury suitesamenities and game-day ticket prices will remain subject to economic pressures given theirdiscretionary nature. Fitch believes these conditions will likely be exacerbated in citieswhere economic conditions continue to deteriorate or are slow to rebound and where teamperformance has been lackluster in recent years.Providing stability for the league ratings and a base level of revenue certainty at theindividual team level are the national broadcast contracts. The National FootballLeague (NFL) (senior unsecured notes rated A+, Stable Outlook, and secured term loanand notes rated A, Stable Outlook); Major League Baseball (MLB) (club trustsecuritization rated A , Stable Outlook); and the National Basketball Association(NBA)(league-wide revolving facility and senior notes rated BBB+, Stable Outlook)have national broadcast contracts that extend through 2013, 2013, and 2016,respectively. As a result, at the league level, lenders are largely insulated from the riskof lower revenues in the near-to-medium term. However, were the depth and length ofthe recession to affect longer term fan commitment, the viability of certain teamscould be threatened and result in some deterioration in league credit quality.

Financial performance will be tested at facilities in cities where significant dependenceon renewals of sponsorship and advertising revenue agreements and luxury suites, clubseats, and season tickets above inflationary rates was assumed. Importantly, Fitchsinvestment-grade ratings in this sector benefit from high levels of debt-servicecoverage 1.75x and above depending on the transaction structure which allowsfor substantial cushion in the event that revenues decline significantly. Fitchimportantly notes the presence of reserve funds to deal with a longer-than-expecteddeterioration of revenues.

Despite Fitchs concerns surrounding renewal risks in this economically challengedenvironment, attendance levels over the last 12 18 months have been stable across the


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four leagues, which continue to show the demand and fan support for these sports. TheNFL generally held the line with attendance for the 2009 2010 season while the NBAand National Hockey League (NHL) through the first half of the season experienced

modest 1% and 2% declines in attendance, respectively, after essentially flatattendance levels the year before. For 2009, MLB attendance declined approximately6%, in some part due to two new, lower capacity stadiums in New York City.Nevertheless, while performance at the leagues overall has been generally positivegiven the economic pressures, cities where local economic pressures have been greaterand team performance poor, attendance has been significantly affected. Some of thehardest hit cities have seen reductions in attendance approaching 20%.

Historically, there has been a lag effect to premium seating and club seat renewalsgiven the multiyear nature of the agreements. From 2001 to 2003 there werenoticeable reductions in pricing power for these products as disposable income withinthe fan base for high-priced tickets and amenities faced pressure. While all of theseareas saw a significant resurgence from 2004 to 2007, these cycles are indicative of theindustrys susceptible revenue volatility. In Fitchs view, proactive management of keypricing initiatives on tickets, suites, and club seats, the continuation of aggressivemarketing and sales, and creative franchise product development, can offset some ofthe effects of less-than-favorable economic conditions.

One key area to watch is the progress of the collective bargaining agreements (CBAs) inplace between the NFL, MLB, NBA, and NHL and their respective players associations,which are approaching renewal. The NFL is facing an uncapped salary season in 2010and an expiration of the current agreement at the end of the 2011 season. The NBAsCBA currently runs through 2011, with a league option for 2012. The MLBs and theNHLs CBAs also expire at the end of their respective 2011 seasons. Fitch is activelymonitoring the progress of the various negotiations between the leagues and theirrespective players unions. As the leagues and their players associations commencediscussions, the current financial environment will likely create more difficult and

potentially contentious negotiations on certain terms and the percentage of revenuesdistributed for player salaries. While a work stoppage cannot be ruled out in anyleague, Fitch notes the presence of reserve funds to pay bondholders for a minimum ofone year. Fitch views a work stoppage in excess of one year as a highly unlikelyscenario and further notes there has only been one full season work stoppage in U.S.sports, the NHLs 2004 2005 season.

What to watch:

Individual team and league attendance levels. Collective bargaining negotiations. Renewal rates and price points for luxury seating, sponsorships, and advertising.


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