Mobilinx Hurontario General Partnership

Presale: Mobilinx Hurontario General Partnership

September 26, 2019

Credit Ratings PRIMARY CREDIT ANALYST

Anubhav Arora Ratings List Toronto + 1 (416) 507 3219 Preliminary Ratings Assigned anubhav.arora C$122.98 million series A senior secured bonds due May 31, 2039 BBB+/Stable @spglobal.com SECONDARY CONTACT C$139.79 million series B senior secured bonds due May 31, 2054 BBB+/Stable Dhaval R Shah This presale report is based on information as of Sept. 25, 2019. The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the Toronto preliminary ratings. (1) 416-507-3272 dhaval.shah @spglobal.com

Project Description

Mobilinx Hurontario General Partnership (Mobilinx or the project) will design, build, finance, operate, maintain, and rehabilitate the Hurontario Light Rail Transit (LRT) Project in Mississauga and Brampton, Ontario. The concession provider, Infrastructure Ontario (IO), along with Metrolinx (collectively, the contracting authority, or CA), is a crown agent of Province of Ontario. The Hurontario Light Rail Transit Project is a public-private partnership (P3) project and its construction scope includes:

- A 18 km double track light rail transit line from the Port Credit GO station in Mississauga to the Gateway Terminal in Brampton, running along a semi-exclusive at-grade guideway in the center of Hurontario street;

- 18 at-grade stops and one below-grade station at Port Credit;

- The supply of 28 light rail vehicles (LRV) as well as system integration and testing;

- An Operations, Maintenance, and Storage Facility (OMSF) building to be located at Hurontario Street and Hwy 407;

- 15 traction power supply substations, an overhead catenary system, a signaling and train control system, and one operational control center located at the OMSF; and

- Additional third-party infrastructure that will allow Mobilinx to accommodate the project within the corridor. This includes new municipal, utility, rail facility, bus and rail infrastructure, all of which will be handed back to the applicable third party upon completion.

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© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer 2308021 on the last page. Presale: Mobilinx Hurontario General Partnership

Mobilinx proposes to raise C$122.98 million in medium-term bonds and C$139.79 million in long-term bonds. It will also use a C$487.29 million senior construction facility during construction (not rated). The proceeds, along with other key sources of funds (including C$56.54 million of equity, C$1,204.5 million of construction period progress payments, and C$604.89 million of substantial completion payment) will fund the design and construction of a C$2.62 billion project over an estimated construction period of 59 months. The senior credit facility will be repaid on substantial completion by utilization of the substantial completion payment and equity (the equity is to be backed by letters of credit prior to this contribution date). The medium-term bonds and long-term bonds amortize by May 2039 and May 2054, respectively.

Following the construction period, Mobilinx will be responsible for the operations, maintenance, and rehabilitation (OMR) of the LRT system, infrastructure (excluding additional third-party infrastructure) and the 28 vehicles, for a period of 30 years.

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Overall Illustrative Project Plan

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Project Diagram

Mobilinx is owned by John Laing Investment Limited (35%), Salini-Impregilo S.p.A. (21%), Astaldi Canada Enterprise Inc. (14%), Hitachi Rail STS S.p.A. (20%), Amico Project Holdings Ltd (5%), and Transdev North America Inc. (5%).

Mobilinx has effectively passed down its entire design-build (DB) obligations and the majority of OMR risk (excluding a small portion of project-retained lifecycle obligations) through the concession under a fixed-price, date-certain DB contract and OMR contract, respectively.

The construction contract for C$1.92 billion is with a joint venture comprising Salini-Impregilo Civil Works Inc (30%), Hitachi Rail STS Canada Inc. (30%), Astaldi Canada Design & Construction Inc. (20%), Amico Infrastructures Inc. (15%), and BOT Infrastructure Ltd. (5%). The construction period is about 4.93 years with substantial completion expected in Sept. 2024. During the construction

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phase, the project will rely on private capital for the initial 25% of the total capital cost and then it will receive progress payments from CA covering 85% of the monthly construction cost. It will also receive a substantial completion payment. The substantial completion payment will be sized to reduce the amount of private capital invested to no less than 15% of the total capital cost. As per the concession agreement, the construction contractor will enter into a LRV contract with Alstom Transport Canada Inc. Alstom is the LRV manufacturer appointed by the contracting authority.

The OMR contract is with a corporation with the following shareholders: Transdev Services (Canada) Inc. (60%), Hitachi Rail STS S.p.A. (20%), Salini-Impregilo S.p.A (12%) and Astaldi Canada Enterprises Inc. (8%), with the exception of some lifecycle that is excluded (works needed to meet the handback requirements of some structural elements, as well as the risks of latent defects related to some specific assets including foundations and structures after expiry of the latent defects period). The project will rely on monthly service payments (subject to performance deductions) to repay the debt over 30 years through the final bond maturity in May 2054 (about three months prior to concession expiry in Sept 2054).

While Astaldi S.p.A, which is currently undergoing a concordato process (creditor protection process) in Italy, is involved in the project, we believe that it's current financial situation will not impact the project (refer to the Transaction Structure section for details).

Table 1

Transaction Summary

Key Participants

Project Company/Debt Mobilinx Hurontario General Partnership Issuer

Concession Ontario Infrastructure and Lands Corporation and Metrolinx (Contracting Authority) Provider/Owner

Equity Sponsor(s) John Laing Investment Limited (35%)

Salini-Impregilo S.p.A. (21%)

Astaldi Canada Enterprise Inc.(14%)

Hitachi Rail STS S.p.A. (20%)

Amico Projects Holdings Limited (5%)

Transdev North America Inc. (5%)

Design Lead IBI Group

Financial Advisor National Bank Financial

HSBC

Trustee/Collateral AST Trust Company (Canada) Agent

Account Bank National Bank of Canada

Lenders Technical LeighFisher Canada Inc. Advisor

Key Features

Sector Transportation

Project Description The Hurontario LRT will be 18 kms, running from the Port Credit GO station in Mississauga to the Brampton Gateway Terminal in southern Brampton, including service to the transit hub at Missisauga City Center.

Mobilinx is responsible for design, build, finance, operate and maintain the project.

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Table 1

Transaction Summary (cont.)

Revenue Availability-based payments

Bankruptcy Remote Yes

Security Collateral Perfected first-priority security interest in all real, personal, tangible, and intangible assets, all material accounts and contracts, permits and approvals, and the general partners' interest in the project.

Key Milestones

Financial Close Oct. 21, 2019

Scheduled Substantial Sept. 24, 2024 (59 months) Completion Date

Outside Date (Longstop Sept. 24, 2025 Date)

Lender’s Longstop Date 3 months prior to project longstop date

Concession Expiry Date 30 years after substantial completion (Sept. 24, 2054)

Construction Period

Construction Period 4.93 years Length

DB Contractor Salini-Impregilo Civil Works Inc (30%) (Construction Contractor)

Hitachi Rail STS Canada Inc. (30%)

Astaldi Canada Design & Construction Inc. (20%)

Amico Infrastructures Inc. (15%)

BOT Infrastructure Ltd. (5%)

DB Guarantors (Joint & Salini-Impregilo S.p.A. Several)

Astaldi S.p.A.

Hitachi Ltd. (The guarantee will shift to Hitachi Rail STS S.p.A. post expiry of Warranty Period)

Amico Operations Holdings Limited

S. BOT & Sons Enterprise Limited

DB contract price C$1.92 Billion

Liability Cap 35% of DB price

Security (Demand Sized at 3.7% of the construction contractor price in form of Demand Bonds. It will increase to 5% Bonds) of the contract price if, at any time, either Hitachi Ltd. is downgraded to a rating of A- or lower by S&P Global or the Technical Advisor is of the reasonable opinion that project's substantial completion date is likely to be delayed by nine months or longer from the original schedule (as defined in the lending agreements). Post substantial completion: Reduces to 1% of the contract price plus $2,000,000 on the first business day after the substantial completion date.

Liquidated Damage 2.74% of the contract price (includes LDs payable to CA of $10,000 per business day up to Regime longstop date for failure to achieve substantial completion by substantial completion date)

Retainage None

Performance and None Payment Bond

Warranty 2 years following the substantial completion date

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Table 1

Transaction Summary (cont.)

LRV Type Alstom Citadis Spirit LRV

LRV Supplier (wrapped Alstom Transport Canada Inc by DB contractor)

Operations Period

Operating Period Length 30 years from substantial completion date

O&M Contractor Transdev Services (Canada) Inc. (60%) (Corporation)

Hitachi Rail STS S.p.A. (20%)

Salini-Impregilo S.p.A. (12%)

Astaldi Canada Enterprises Inc. (8%)

O&M Guarantors (each Transdev North America Inc. joint & several)

Hitachi Ltd.

Salini-Impregilo S.p.A

Astaldi S.p.A.

Liability Cap In-contract cap - In contract liability cap during the operation period prior to termination will be 100% of the service provider average annual service fee. This pre-termination liability cap will be reset on an annual basis (subject to aggregate liability cap of 200% of the service provider average annual service fee). SP average annual service fee for a year will be sum of (i) SP annual service payment in such year; (ii) average annual lifecycle payment over the operational term of 30 years, indexed.

Termination cap of 200% of the service provider average annual service fee

Security (Letter Of 50% of the service provider average annual service fee Credit)

Reserve Accounts

Debt Service Reserve Equal to 6 months debt service (principal & interest) funded on the substantial completion Account

O&M Liquidity See above

Major Maintenance 3 Year MMRA 100/50/25 for the lifecycle obligations retained by the project amounting to ~0.4% reserve account of total lifecycle costs

Interest Reserve Currently sized at C$5.65 million to be funded on substantial completion. This is to support the Account (IRA) first interest payment after substantial completion.

Financial Metrics

Debt Service Coverage 1.28x (minimum, 2026)/ 1.64x (average) (S&P Base Case)

Debt/equity ratio 93% at financial close

82.3% at substantial completion

Distribution lockup 1.20x calculated 12 months backward and forward

Other liquidity No

Debt Tail 3 months from expiry of Series B bonds

Recovery rating N/A – investment grade

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Rationale

On Sept. 26, 2019, S&P Global Ratings assigned its preliminary 'BBB+' rating to the proposed C$122.98 million series A senior secured bonds due May 31, 2039, and C$139.79 million series B senior secured bonds due May 31, 2054. The outlook is stable.

The rating reflects our view of the project's contractual structure (which appropriately allocates risk between the project and the CA), and an integrated consortium that has experience in designing and building similar large LRT projects globally. This international experience is complemented by local experience from Amico, BOT, and a dedicated subcontractor for the OMSF, PCL Constructors Canada Inc. The ratings also reflect relatively simple construction that does not entail any complex structures, such as long-span bridges or tunnels and complex underground stations, which often pose construction challenges for an LRT project.

During the concession term, the project's entire design and construction risk, and operational risk (except for small lifecycle obligations retained by the project) are supported by a parent guarantee from a creditworthy counterparty-- Hitachi Ltd. (A/Stable/A-1)--under a DB agreement and operations and maintenance (O&M) contract. This mitigates the construction schedule and cost-budget risk and produces robust coverage ratios during the operating period, with a minimum debt service coverage ratio (DSCR) of 1.28x and 1.26x (above distribution test of 1.20x) under our base and downside financial forecast, respectively.

The concession provider also shares many significant risks during construction and provides adequate schedule and cost protection, including for delays in delivery of LRVs by the manufacturer (Alstom), thereby significantly mitigating the vehicle delivery risk for the project. Further, failure by a Category 1 (gas, hydro and telecom) utility company to perform its obligations, as laid out in the utility baseline document, alteration of works due to unknown or mislocated utility infrastructure or unknown contamination, and delays by the concession authority in providing access to the lands are also relief and compensation events covered by the CA.

The rating reflects the following additional credit strengths:

- A strong revenue counterparty in Infrastructure Ontario (along with Metrolinx)

- Cost and schedule relief for vehicle delivery delay from the CA and performance security from Alstom supporting its obligations.

- An availability-based payment mechanism once operations start means that the project is not exposed to any passenger volume risk.

- The operation requirements are not onerous compared with similar LRT projects.

The project has the following weaknesses:

- The corridor for the project is relatively congested along with a large scope of utility relocation work and traffic management needs, though this is partly mitigated by generous right of way (RoW) and an experienced construction contractor. We believe this could challenge the construction schedule.

- Rating dependency on the creditworthiness of two major counterparties, which we consider to be irreplaceable: IO and Hitachi Ltd.

- Uncertainty with forecasting lifecycle costs during a 30-year term, mitigated by a pass-through of lifecycle obligations to the service provider with only a small portion of project retained lifecycle costs.

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- The consortium hasn't worked together in the Canadian market, and hence, the local experience of both Amico and BOT will be critical, even though they plan to perform only 10% and 8% to total construction works, respectively.

Liquidity

From financial close to substantial completion, the project will have access to liquid security from the construction contractor in the form of a demand bond. Liquidated damages are sized to compensate the project for delays up to the long-stop date. The liquid security will be sized at 3.7% of the construction price (C$71.2 million). This will be sufficient to cover our construction downside scenario, which assumes six month of delay to substantial completion. The amount of liquidated damages and demand bonds will be finalized at the financial close based on the final pricing of the bonds and senior construction facility.

The project will benefit from a debt service account sized to meet six months of principal and interest, and an equity lock-up mechanism that can provide additional liquidity when the DSCR falls below 1.20x. In addition, the project will also be pre-funding an additional reserve of $5.65 million at substantial completion, which will support the interest obligations in Nov. 2024 (first debt service due after substantial completion). The project has a three-year forward-looking (100%/50%/25%) major maintenance reserve for the lifecycle costs retained by it.

Commencing on year 16, and thereafter on the 18th and 20th anniversaries of substantial completion, the Lender's Technical Advisor (LTA) is required to assess the adequacy of projected passed-on lifecycle costs. In case there is deficiency (i.e., projected lifecycle budget plus balance in the rehabilitation account are less than projected remaining costs of lifecycle work), the service provider must fund the rehabilitation account (or provide a letter of credit) with such projected lifecycle deficit (if the deficit exceeds 5% of remaining lifecycle budget). With respect to the retained lifecycle, the LTA will conduct the abovementioned look-forward test in year 17, and the project will have to deposit the deficiency in the MMRA. We note that the testing dates occur approximately one to two years before the larger spikes in the retained rehabilitation and passed-down rehabilitation cost profile.

Outlook

The outlook is stable, with the expectation that the project will complete construction on time and within budget, given the collective experience of the construction contractor joint venture and the clear assignment of risk within the concession, along with adequate liquidity to sustain delays under our downside scenario. Thereafter, we expect operations to be characterized by well-defined responsibilities and stable availability-based revenues. Once the project is operational, we expect a DSCR minimum of 1.28x, with an average of 1.64x through the life of the long-term debt.

Downside scenario

During construction, we could lower the rating if the project's construction were materially delayed beyond our downside scenario, or if the creditworthiness of Hitachi Ltd. or CA declines below the project rating. We could also lower the rating once the project enters operations if the minimum DSCR consistently falls to the lower end of the 1.2x-1.4x range or if the creditworthiness of Hitachi Ltd. or CA declines below the project rating during operations.

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Upside scenario

A higher rating is not likely during construction, even if the credit rating on the design-build contractor guarantors improves because our construction period stand-alone credit profile is currently set by the project's technical risk rather than the construction counterparties' strength. Once construction is complete, we would raise the rating to 'A-' given expected profile during operation period, subject to counterparty rating constraints (including that on the revenue, operational, and financial counterparties).

P3 Contractual Framework

The public-private partnership agreement broadly resembles key features found in other rated P3s, though in this case the concession provider retains much of the vehicle delivery risk, which has not been the case in some of the other North American LRT projects and has been a key risk for these projects.

The project will have adequate cost and schedule protection in case Alstom does not meet the proposed delivery schedule. Further, Alstom is liable to pay liquidated damages (LDs) to the construction contractor in the event of any delay in supply of LRVs, which incentivizes the LRV supplier to perform and meet its obligations. In addition and importantly, if the PA is terminated due to a failure of Alstom to supply the LRVs resulting in substantial completion to be delayed by 180 days, such termination would be treated as a non-default termination and the senior lenders would be protected with compensation from the CA covering the make-whole payments.

Utility companies present significant challenges for construction contractors, leading to delays in completing relocation work. The project is protected by the CA in regards to Category 1 utility works based on the work set out in the utility baseline documents, and further with respect to any mislocated or unknown utilities. There is adequate protection from failure by a Category 1 (gas, hydro, and telecom) utility company to perform its obligations (as laid out in the utility baseline document), alteration of works due to unknown or mislocated utility infrastructure or unknown contamination, and delays by the concession authority in providing access to the lands.

Project Counterparties

We cap our ratings with the counterparties that we consider not easily replaceable without significant time or cash-flow implications. (For further information, see "Project Finance Construction And Operations Counterparty Methodology," published Dec. 20, 2011, on RatingsDirect.) Currently, no counterparty constrains the project rating.

Revenue counterparty

We consider IO along with Metrolinx (both responsible on a joint and several basis), collectively called the CA (representing The Province of Ontario), as material and irreplaceable. Our assessment is based on the project's material exposure to CA as it relies on the milestone payments and monthly availability payments. With CA being a material and irreplaceable counterparty to the project, the project rating can be no higher than that its creditworthiness. However, this doesn't constrain our rating assessment and there is significant headroom between the CA and the project rating.

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Construction counterparty

The construction contractor comprises five primary parties: Salini-Impregilo Civil Works Inc (30%), Hitachi Rail STS Canada Inc. (30%), Astaldi Canada Design & Construction Inc. (20%), Amico Infrastructures Inc. (15%), and BOT Infrastructure Ltd. (5%). The obligations of construction contractor members are joint and several. Guarantors include parent companies of the primary contractors (Salini-Impregilo S.p.A, Astaldi S.p.A., Hitachi Ltd., Amico Operations Holdings Limited, and S. BOT & Sons Enterprise Limited). The construction contractor's creditworthiness, which due to the joint and several arrangement is based on our view of Hitachi Ltd's creditworthiness, and currently is not a constraint for the rating on the project.

Operation counterparty

During the O&M period, the O&M contractor is responsible for the entire O&M and most of the rehabilitation obligations (except excluded rehab). The OMR corporation has following shareholders: Transdev Services (Canada) Inc. (60%), Hitachi Rail STS S.p.A. (20%), Salini-Impregilo S.p.A (12%), and Astaldi Canada Enterprises Inc. (8%).

Salini-Impregilo S.p.A., Astaldi S.p.A., Hitachi Ltd., Transdev North America Inc. will provide parental guarantees on a joint and several basis. Although there are a number of qualified alternative players in the field and the project has sufficient liquidity to replace the contractor, the O&M contractor's creditworthiness, based on Hitachi Ltd.'s creditworthiness, underpins the operations-phase credit profile, so we consider the O&M contractor as irreplaceable for this rating.

Financial counterparty

The financial counterparties to the project--including the letter of credit providers for the equity funding; surety providers for demand bond during construction; letter of credit provider during operations; bank account providers; hedge providers; and senior credit facility providers--do not currently constrain the preliminary ratings. We note that the letter of credit providers for two equity sponsors are not yet finalized. However, based on our review of the permitted letter of credit providers in the financing documents, we believe these will not be a constraint for project rating.

Construction Phase Stand-Alone Credit Profile (SACP): bbb+

Relatively straightforward construction

The construction is relatively simple with no complex structures, such as long-span bridges, tunnels, and complex underground stations. Most of the work is on a linear corridor at street-level with a reasonable right-of-way. The stations and stops are also not complex as there is only one below-grade station at Port Credit and all the remaining stops are located at-grade. Mobilinx proposes to use the "Petrucco Box" method for the Port Credit station, which is a cut-and-cover technique that does not require any tunneling. The LTA has opined that this construction approach is appropriate and should significantly reduce interruptions to GO train and CN rail services and thus provide a high degree of comfort that liquidated damages (LD) will be avoided. As per the LTA, this approach has been tested in other Canadian projects and will not add significant risks to the

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project.

The bridge work for the project is relatively simple. The elevated guideway over highway 403 is also a non-complex structure with a concrete cast-in-place substructure, and prefabricated girders supporting a concrete slab deck. The OMSF is also not considered to be a complex facility though it is critical it is completed on time given there is only a month buffer between the its scheduled readiness in November 2022 and the receipt of the first LRV, which will need to be housed and tested in the OMSF. However, we note that neither completion of OMSF nor vehicle delivery is on the project's critical path, and there is sufficient cushion available between vehicle delivery and project's substantial completion.The consortium has engaged PCL Constructors Canada Inc. as a dedicated subcontractor to construct the OMSF under a fixed-price, date-certain contract.

Experienced international contractors though there is reliance on relatively small local contractors

The strength and experience of the DB contractor (and its subcontractors) also underpin our construction assessment. Out of the five DB joint venture members, Salini-Impregilo, Hitachi Rail, and Astaldi have an extensive experience in delivering LRT projects internationally. These consortium members have delivered over 23 P3 rail projects globally. This international experience is complemented by local experience from Amico, BOT, and a dedicated subcontractor for OMSF, PCL Constructors Canada Inc. Although Amico and BOT are not very large contractors, they have local experience in stakeholder management, permitting, and utility and traffic management, due to their experience in early works for the Gordie Howe Project and also as subcontractor for the Rt. Hon. Herb Gray Parkway project in Ontario. While the work these two local contractors are performing are manageable, we believe their local experience is critical to the project. Our six-month delay scenario includes a one-two month delay, in line with LTA's opinion, to replace these contractors if needed, and there is liquidity to do so.

The DB contractor will assume construction risk under a $1.92 billion fixed price, date-certain contract (supported with sufficient liquidity and a parent guarantee by the highly creditworthy Hitachi Ltd.)

Utility relocation and traffic management are the key challenges

The volume of the utility work is relatively high as the project is located in one of the busy corridors with many high-rise apartment buildings. In addition, being on a major local road with high traffic volume, the project requires careful traffic management within the lane closure allowance to ensure normal traffic flow. The Project Agreement (PA), however, provides protection if a Category 1 utility company (including Enbridge, Alectra, and six telecom companies) fails to perform its obligations or charges the DB contractor more than what is agreed upon in the baseline cost, which we view as a credit positive. While such protection is not available for a Category 2 utility works (all other utilities which are not included under Category 1 utility work as per the baseline utility documents) that comprise the bulk of the utility work, the scope of work is relatively less complex because most of the utilities are running parallel to the project alignment, which allows utility work to be undertaken without disruption to traffic. The traffic management risk is further mitigated by a reasonable right-of-way with sufficient space to execute the construction.

Given that Hurontario is a busy corridor with high urban development, there will be some soil contamination expected on the project. The LTA has opined that so far the contamination encountered on the project is not substantial when compared to the other projects in the Greater Toronto Area. The CA provides protection in case the project has to undertake any alteration of

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works due to unknown contamination or discovery of unknown fossils.

Construction schedule has sufficient float to carry out critical activities

We believe the construction schedule of 4.93 years is reasonable for this project. The linear nature of the project can allow Mobilinx to mitigate schedule risk by undertaking construction activities simultaneously on various segments of the project. In case of a delay in one segment, Mobilinx has the flexibility to allocate its resources to other segments to prevent overall delays on the project. The project also plans to undertake the roadworks along with the utility work. This is possible given different works can be completed in different sections of the project--utility relocations could be undertaken in one block of the corridor while roadworks are being undertaken in another block.

Importantly, the project has around eight months of float between the delivery of the last LRV and the substantial completion date, and around seven months of float from acceptance (after testing) of the last LRV and substantial completion, that provides comfort on the construction schedule. Moreover, the critical path activities do not include utility relocations or permitting activities, which are more prone to delays, thereby mitigating the schedule risk.

Chart 1

The critical path activities are primarily related to design and construction work located in the northern segment of the project. The construction work in this segment is important to for the

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commencement of testing and commissioning the systems and as well as the burn-in tests for the LRVs, without the entire project being completed. Some roadwork activities in the southern section of the project are also located on the critical path. As per the LTA, given the critical path is largely focused to a geographic segment, the project can accelerate work in this area as required.

Alstom Transport Canada Inc. is the LRV manufacturer selected by CA and it will be a subcontractor to the DB contractor. In our view, there is significant de-risking in this mechanism for vehicle delivery delay from both Alstom and CA, which differentiates this project from other LRT projects.

- The delivery schedule of revenue vehicles is specified by the project as a part of its bid submission. Therefore, the revenue vehicle delivery dates are aligned with the project's construction schedule. At the time of the bid, Alstom provided seven options with different delivery schedules and contract prices and Mobilinx selected the base plus six option. According to this delivery schedule and as per the revision that the sponsors and Alstom made during the negotiation stage and Mobilinx agreed, the 28 vehicles are scheduled to be delivered from Dec. 2022 to Jan. 2024, with two to three vehicles delivered per month in most cases. Under this option, the OMSF has to be ready for train delivery and train testing and commissioning by Dec. 7, 2022, and based on the project's construction schedule there is only one month of cushion between completion of the OMSF and delivery of the first revenue vehicle by Alstom. However, we note that neither vehicle delivery nor completion of OMSF is on the project's critical path and there is sufficient cushion available between vehicle delivery and substantial completion.

- Alstom will pay the DB contractor delay LDs if it misses the delivery or acceptance schedule, subject to a subcap of 13% of the aggregate LRV purchase price or about $45 million. Alstom will provide two letters of credit (LoC) to support its performance with a step-down provision upon achievement of certain milestones. From the execution of the contract to the end of the warranty period, the two LoC combined range from at least 10% of the aggregate LRV purchase price or about $35 million to up to 25% or about $86 million.

- In addition, the CA offers robust protection for vehicle delivery delay in most cases with schedule relief and compensation beyond what can be recovered from Alstom.

- With respect to the on-board communications and control equipment, it should be noted that Alstom is responsible for installation of any systems that are supplied by the construction contractor. This in our view mitigates the interface risks. As per the LTA, this is considerably different from other LRT projects in Ontario where LRVs are supplied by the authority and the project is itself responsible for installing their on-board systems on the LRVs prior to commencement of service, leading to interface risks.

Construction Funding

The project will have sufficient funding to sustain our downside scenario. Project's design and construction costs are C$1.92 billion which the LTA considers to be appropriate for a project of this size and complexity. Further, the construction contractor will have advanced the design to approximately 30% by financial close, providing greater certainty around cost estimation.

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Chart 2

The construction will be funded by C$262.77 million in medium-term and long-term bonds, C487.29 million of senior construction facility (unrated), C$56.54 million of equity, C$1204.5 million of construction period progress payments, and C$604.89 million of substantial completion payment.

Table 2

Sources and Uses Of Funding During Construction (C$000s)

Sources Uses

Construction Period Payments 1,204,503.7 Total Construction Costs Net of Holdback 1,731,954.7

Substantial Completion Payment 604,893.9 Holdback Release 192,439.4

LT Rated Bond Drawdown 139,785.0 O&M Mobilization Costs 35,974.2

MT Bond Drawdown 122,980.0 Total SPV Costs During Construction 57,432.5

ST Bank Drawdown 487,293.9 Debt Upfront Fee 10,339.9

Interest Earned 1,631.3 Debt Interest 76,687.9

Equity Investment 56,540.5 Debt Commitment Fee 3,310.3

Equity LC Fee 6,998.8

Net HST Paid (Refund) 93.5

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Table 2

Sources and Uses Of Funding During Construction (C$000s) (cont.)

Corporate Minimum Tax Budget 956.1

DSRA Funding 8,500.0

IRA Funding 5,647.1

ST Bank Repayment 487,293.9

Total 2,617,628.3 Total 2,617,628.3

Apart from guarantee from the A/Stable creditworthy counterparty, the project benefits from more than 12 months of liquid security.

Our downside analysis assumes a construction delay of six months on substantial completion. We assume the project will have enough liquid security (in the form of demand bonds amounting to $71.2 million) sized to cover greater of 12 months (until the project long-stop date) of delay LDs or as prescribed by the LTA (currently 3.7% of the DB price) to meet funding needs under our downside funding needs. The liquid security under certain events steps up to 5%.

Operations Phase SACP: a-

Availability-based payments, achievable performance regime, and significant risk pass through (to a creditworthy counterparty--Hitachi Ltd.) will result in a stable financial performance through operating period

The project benefits from availability-based payments with no ridership risk. This availability-based payment regime includes a fixed capital component that covers the entire debt service and indexed components covering OMR costs.

The operation complexities of this project are higher than building-type Canadian P3 projects, reflecting the operating, maintaining, and rehabilitating of the rolling stock, various LRT systems along with track, LRT stops, the OMSF and several structures. The additional complexities are captured in our Operation Phase Business Assessment of '4'. Further, we believe the operation requirements are not onerous compared with similar LRT projects. For example, we view the headway requirement of 7.5 minutes during peak hours as reasonable, and simulation results suggest that this is achievable.

The project significantly benefits from an O&M contract (supported by the highly creditworthy Hitachi Ltd. guarantee) that passes through the higher O&M and lifecycle costs and availability payment deductions risk to the O&M contractor (except for the lifecycle obligation retained by the project or about 0.4% of total lifecycle costs). We also view the project's pre-termination aggregate liability cap of 100% of annual service payment and average annual lifecycle costs over the concession term as adequate and sufficient to absorb the deductions under our downside scenario. Moreover, the liability cap resets every year, which is in line with some of the other P3 projects we have rated.

In our view, trip availability failures are most likely to attract deductions or failure points. The trip availability ratio is measured by whether the project can meet the headway requirement at the Port Credit, Mississauga City Centre, Gateway and Mississauga again on the way back for a round trip. The PA also allows for headway buffer at these stops: one minute for Port Credit and Gateway,

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and two minutes for Mississauga City Centre. Overall, we view the 98% trip availability ratio target as reasonable and comparable to similar projects. Further, the LTA has opined that the deduction thresholds included in the PA are reasonably sized and performance requirements have a clear and simple mechanism and should pose low risk to the project

The lifecycle retained by the project is mainly related to the rehabilitation work needed to meet handback requirements for a few structural elements where the useful life exceeds the project's operational term. In addition, the project will also be retaining the risk of latent defects after the expiry of the latent defects period for some structures and foundations. The risk of latent defects is, however, mitigated by a latent defects period of 10 years, which would help in identification of most latent defects post construction. The project is proposing to have a major maintenance reserve account (MMRA) for the retained lifecycle, which will be funded on a three-year look forward basis (100%/50%/25%).

Chart 3

Given the significant level of O&M risk transfer, the project generates robust financial performance with a minimum DSCR of 1.28x under our base case and 1.26x under our downside case financial forecast. The project's minimum DSCR under the base case translates to a Preliminary Operations Phase SACP of 'bbb'. The project benefits from two notches uplift under our downside case due to robust coverages under our downside case. As a result the Operations Phase SACP is 'a-'.

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Table 4

Preliminary Operations Phase SACP

--Preliminary operations phase SACP outcome in column headers-- --Minimum DSCR ranges shown in the cells below*--

aa a bbb bb b

OPBA

1-2 => 1.75 1.75–1.20 1.20–1.10 <1.10§ <1.10§

3-4 N/A => 1.40 1.40–1.20 1.20–1.10 < 1.10

5-6 N/A => 2.00 2.00–1.40 1.40–1.20 < 1.20

7–8 N/A => 2.50 2.50–1.75 1.75–1.40 < 1.40

9–10 N/A => 5.00 5.00–2.50 2.50–1.50 < 1.50

11-12 N/A N/A N/A => 3.00x < 3.00

*DSCR ranges include values at the lower but not upper bound. For example, for a range of 1.20x-1.10x, a value of 1.20x is excluded while a value of 1.10x is included. §To determine the outcome in these cells, the key factors are typically the forecasted minimum DSCR (with at least 1.05x generally required for the 'BB' category), as well as relative break-even performance and liquidity levels. Please see "Project Finance: Project Finance Operations Methodology," published Sept. 16, 2014. SACP--Stand-alone credit profile. OPBA--Operations phase business assessment. DSCR--Debt service coverage ratio. N/A--Not applicable.

S&P Global Ratings Base Case Assumptions & Metrics

Assumptions

- O&M, SPV, and life-cycle costs as per management's forecast.

- Availability payment deductions will be passed down to the OMR contractor. The LTA has opined that the deductions for the retained rehabilitation portion are expected to be zero.

- No interest income.

- Inflation at 2%.

Key metrics

- Minimum DSCR: 1.28x

- Average DSCR: 1.64x

S&P Global Ratings Downside Case Assumptions & Metrics

Assumptions

- The irreplaceable O&M contractor will bear availability payment deductions and cost escalations on pass-through OMR responsibilities. The LTA has opined that the deductions for the retained portion are expected to be zero.

- Special-purpose vehicle costs increase by 5%.

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- Retained lifecycle costs increase by 10% and shift the peak retained lifecycle one year forward.

- We do not include interest income.

- Inflation increases by 1% for the first five years.

Key metrics

- Minimum DSCR: 1.26x

- Average DSCR: 1.61x

Chart 4

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Chart 5

Transaction Structure

We view the project's transaction structure to be consistent with the project's operation phase SACP.

Single-purpose and separateness

In our view, the project meets our criteria for a special-purpose entity by virtue of an adequate anti-filing mechanism in the form of multiple owners with blocking rights, limits on additional debt, restrictions on objects and powers, and separateness covenants.

We understand Astaldi S.p.A. (construction guarantor and service provider guarantor) is undergoing a Concordato process (creditor protection process) in the Court of Rome, after filing for a voluntary protection filing. However, the project parties--Astaldi Canada Enterprises Inc. (equity Sponsor for Mobilinx) and Astaldi Canada Design Construction Inc. (construction contractor member)--are not insolvent. Further, it is our understanding, based on a legal opinion shared by the project, that these Canadian entities won't be consolidated into Astaldi S.p.A's insolvency. Hence, there is no material exposure of the project and its Canadian GP (Astaldi Mobilinx Hurontario GP Inc.) to Astaldi S.p.A.

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Under an agreement among the shareholders, Salini Impregilo will provide the Astaldi entity's share of equity support (LoC) and demand bond (for the Construction Contractor) at financial close, if Astaldi is not able to provide the same. Within 12 months of financial close, Astaldi is required to provide its own equity support and demand bond, presumably after the completion of its insolvency proceeding. Should it fail to provide these, Salini Impregilo entities will absorb Astaldi's participation as equity member (with Astaldi retaining only 0.1% share in equity), construction contractor member, and service provider member. In case Astaldi's share is taken over by Salini, we do not see absence of Astaldi to have a major impact on the project given the experience of other construction contractor and OMR contractor consortium members.

We also note that the project is sufficiently protected from the bankruptcy of Astaldi S.p.A under the terms of the financing documents.

The project can raise additional senior secured debt subject to extraordinary resolution, requiring 66.67% of bondholder's consent or a rating affirmation test. The project can raise subordinated unsecured debt of up to $5 million and other subordinated debt that we assume will meet our subordinated criteria.

Cash management

The transaction agreements create what we view to be a robust waterfall that will provide the project with sufficient cash flow to meet its debt service consistent with the preliminary rating. The distribution test of 1.20x is calculated 12 months backward and forward.

Collateral, security, and enforceability risk

The lenders are secured by a perfected first-priority security interest on the borrower's interest under the concession and a perfected first-priority security interest in all real, personal, tangible, and intangible assets, all material accounts and contracts, permits, and approvals, and the general partners' interest in the project.

Peer Comparison

The closest S&P Global Ratings' rated peers for Mobilinx are GrandLinq GP and Purple Line Transit Partners LLC. GrandLinq is an LRT project in Waterloo, Ontario, which also entails simple civil construction with no tunneling or underground. There is no vehicle supply risk in GrandLinq as the concession authority has entered into a separate vehicle supply agreement with the LRV supplier. Purple Line is an LRT project inside the I-495/Capital Beltway, which circles Washington, D.C. The CA in Purple Line doesn't provide protection against vehicle supply risk. In that respect, GrandLinq is more comparable to Mobilinx, where the CA is providing protection against vehicle delivery risk. We have also presented a comparison against Bridging North America General Partnership (Gordie Howe Bridge Project), which is also under construction.

Comparing operations profile, Hurontario is a Canada-based P3 availability project with no market risk, same as GrandLinq and Gordie Howe. The project's CA is a government authority with high credit quality. The Operations Phase Business Assessment (OPBA) scores for Hurontario, Purple Line, and GrandLinq are '4', which reflects the complexity of operating and maintaining an LRT system along with vehicle O&M responsibility. We consider this as relatively more complex than Gordie Howe, which has an OPBA of '2'.

Hurontario has slightly better DSCR than Purple Line. Purple Line has a minimum DSCR of 1.25x

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while Hurontario has a minimum DSCR of 1.28x, which when combined with an OPBA of '4' leads to a preliminary operations phase SACP of 'bbb' for Hurontario and 'bbb-' for Purple Line. In both cases, downside DSCRs are robust and lead to plus-two notches on preliminary operations phase SACP. The final operations phase SACP becomes 'bbb+' for Purple Line and 'a-' for Hurontario, with no further adjustments. For GrandLinq, operations phase SACP is 'a-' due to higher DSCR (min. 1.37x) and one notch benefit from downside.

Table 5

Ratings Score Snapshot And Peer Comparison

Mobilinx Hurontario Bridging North America Purple Line Transit General Partnership General Partnership Partners LLC Grandlinq GP

Construction phase SACP (senior debt)

Construction Phase bbb+ a- bbb+ a- Business Assessment

Funding Adequacy Neutral Neutral Neutral Neutral

Construction Funding Neutral Neutral Neutral Neutral

Counterparty a bbb bbb N/A

Construction Phase SACP bbb+ bbb bbb a-

Operations phase SACP (senior debt)

Operations phase business 4 2 4 4 assessment

Minimum DSCR 1.28 1.18 1.25 1.37

Average DSCR 1.64 1.33 1.3 1.54

Preliminary SACP bbb bbb+ bbb- bbb+

Downside assessment +2 notches +2 notches +2 notches +1 notch

Capital structure and avg. None None None None DSCR

Liquidity Neutral Neutral Neutral Neutral

Comparative ratings None -1 notch None None analysis

Counterparty rating None bbb bbb None adjustments

Sovereign rating limitation None None None None

Operations phase SACP a- bbb bbb a-

Modifiers (senior debt)

Parent linkage Delinked Delinked Capped Delinked

Structural protection Neutral Neutral Neutral Neutral

Full credit guarantee None None None None

Senior debt issue rating BBB+ BBB BBB A-

SACP--Stand-alone credit profile. DSCR--Debt service coverage ratio.

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Related Criteria

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

- General Criteria: Guarantee Criteria, Oct. 21, 2016

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

- Criteria - Corporates - Project Finance: Project Finance Framework Methodology, Sept. 16, 2014

- Criteria - Corporates - Project Finance: Project Finance Operations Methodology, Sept. 16, 2014

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

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

- Criteria | Corporates | Project Finance: Project Finance Construction Methodology, Nov. 15, 2013

- Criteria - Corporates - Project Finance: Project Finance Construction And Operations Counterparty Methodology, Dec. 20, 2011

- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

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