September 21, 2020

Fitch expects to rate Red Dorsal Finance 2015-1 Variable Funding Notes ‘BBB’; Outlook Stable

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FitchFitch expects to assign the following rating to the proposed issuance of senior secured variable funding notes (VFNs) by Red Dorsal Finance Limited (RDFL), a LLC incorporated in the Cayman Islands:

— Series 2015-1 senior secured VFNs ‘BBB (exp)’; Outlook Stable.

Fitch’s expected rating addresses the timely payment of interest and principal on a quarterly basis. Final rating assignment is subject to completion of legal documentation review and analysis.

The notes issued by RDFL, are backed by investment recognition certificates (Retribucion Por Inversiones [RPIs]) related to the construction and design of the Red Dorsal Nacional de Fibra Optica (RDNFO) fiber optic network in Peru. RPIs are unconditional and irrevocable obligations to receive through the Project Trust a series of 60 quarterly payments of a fixed amount denominated in USD.

KEY RATING DRIVERS

— Exposure to Construction / Performance Risk Mitigated

RPIs are unconditional and irrevocable obligations of the Government of Peru (GOP; Fitch Foreign Currency [FC] Issuer Default Rating [IDR]: ‘BBB+’, Outlook Stable) to cover any shortfalls if the collections from the project are not sufficient to make timely RPI payments. Payments on the RPIs are not subject to the completion of further milestones or future performance of the project.

— Reliance on the Sovereign Contingent Guarantee

Given that the RDNFO is a greenfield project, no historical information is available to validate the future flows from the tariff collections. As a result, Fitch assumes that payment on the notes will completely rely on government contingent support to make timely RPI payments.

— Moderate Exposure to Budgetary Approval Risk

Fitch believes that the most reliable and common source of RPI payment from the GOP will be through a regular annual budgeting process. The annual budget is approved by the Ministry of Finance (MEF (News – Alert)) and could be exposed to political and budgetary risk, which is reflected in the rating assigned to the transaction.

— Rating Linked to Sovereign IDR

Not all payment defaults of the sovereign would cause a sovereign IDR default. RPIs are contractual obligations of the GOP, but are not considered public debt. Given that sovereign ratings do not directly address all forms of obligations, it cannot be assumed that the credit profile of the government obligation backing this Government Backed Security (GBS) is consistent with Peru’s IDR.

— Adequate Liquidity

The transaction will benefit from a debtservice reserve account (DSRA) that will partially mitigate operational and/or budgetary risks. The DSRA will be funded at closing, and will equal six months of debt service payments on the notes. The balance of the DSRA will decrease to three months of debt service payments if the project trust coverage ratio is at least 1.5x.

— Early Redemption Protections

A commitment termination event (CTE) will not have a material adverse effect on the noteholders. Upon the occurrence of a CTE, the noteholders will be made whole with the remaining amounts not invested to purchase RPIs together with a Redemption Protection Letter of Credit (LoC) issued by an eligible counterparty rated at least ‘BBB’ or cash collateral, in each case provided by the Redemption Protection Provider.

RATING SENSITIVITIES

The rating expected to be assigned to the issuance of notes is sensitive to changes in Peru’s FC IDR.

Additionally, any change in Fitch’s view regarding the strength of the sovereign contingent guarantee may affect the ratings assigned to this transaction.

TRANSACTION SUMMARY

The RPIs backing the transaction are vested once a concession assets award order (CAAO, or Acta de Adjudicacion de los Bienes de la Concesion) has been executed. A CAAO is executed after the delivery and upon the acceptance by the Ministry of Transport and Communication (MTC) of the GOP of an Entrega, which is a partial delivery of works and represents an advance of the Plan de Cobertura under the Concession Agreement. Each Entrega is independent of completion of further advances of the Plan de Cobertura of the RDNFO.

Amounts under the VFNs will be drawn in seven consecutive advances on fixed dates. The proceeds of the first advance will be used to cover certain transaction expenses and will be protected by the Redemption Protection Amount; the other six advances will be drawn to follow the expected schedule of the Entregas. Proceeds from these six advances will only be released to the concessionaire once a CAAO has been executed and the RPIs have been purchased by the issuer.

According to the latest draft of the Trust Agreement received by Fitch, the GOP has already pre-budgeted total RPI payments due in the first semester of 2015 and will pre-budget the total RPI payments for the second semester of 2015 in June. For 2016 the GOP is expected to budget the differential between RPI payment obligations and tariff revenues on a semi-annual basis. Thereafter, the differential will be budgeted on an annual basis. These calculations will be performed based on the average annual tariff collections observed during the previous year and the annual RPI payments due in the next calendar year. Additionally, if the revenues are declining, the trustee will notify the MTC of such negative trend in order to adjust the budget accordingly.

For more details please refer to the presale report which will be available shortly on Fitch’s website at ‘www.fitchratings.com‘.

Additional information is available at ‘www.fitchratings.com’.

Applicable Criteria and Related Research:

— Global Structured Finance Rating Criteria – Aug, 2014

— Counterparty Criteria for Structured Finance Transactions – May, 2014

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979053

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News – Alert) THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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