In recent years, the number of project-financed complex megaprojects has increased. These are projects that typically cost more than $1 billion to develop and are built over a long period, involve multiple public and private stakeholders, and have a transformational impact on millions of people. The scope of investors has also evolved beyond traditional project finance investors to include cross-over investors in other areas, such as the municipal sector.

The "Recent Megaproject Financing In A Sea Of Cross-Over Investors" webinar, moderated by Anne Selting, S&P Global Ratings Analytical Manager and Managing Director of Project Finance North America, discusses two such megaprojects: Foundry JV Holdco LLC and Brightline Trains Florida LLC. Foundry JV Holdco reflects the trend of strategic investments by infrastructure funds using back-levered minority holding companies, while Brightline Trains Florida is an example of a significant transportation project (with financings at multiple levels of the organizational structure).

Foundry JV Holdco LLC (Holdco) is a special-purpose entity created by Brookfield Asset Management to enable its investment as part of a joint venture with Intel Corp. to create Arizona Fab LLC to finance the construction and operation of two semiconductor fabrication (fab) facilities at its Ocotillo campus in Chandler, Ariz. The joint venture (JV) company will produce finished silicon wafers, which are essential components in manufacturing semiconductors and used in a variety of common electronic devices. Of the total $29.4 billion of scheduled project costs to build the facilities (inclusive of $400 million of overrun commitments), Brookfield is providing $14.6 billion in exchange for a 49% equity share in the JV company. The Brookfield shares are held by Foundry JV Holdco LLC (Holdco or the Brookfield member). Arizona Fab Holdco Inc. (Intel member) owns the remaining 51% of the shares and is providing the remaining construction funding of $14.78 billion.

Brightline Trains Florida LLC owns, operates, and manages a 235-mile high-speed passenger rail system that runs from Miami to Orlando, Fla. connecting major population hubs (Brightline or the project). As a first-of-its-kind rail system, it is the first private railway project in North America in more than 100 years and is fully exposed to ridership risk and operational risks. Our analysis divides the operational phase into two parts--the ramp-up period that we expect to extend through 2028 and a post-ramp-up stabilized period after that time.

Webinar speakers included:

• Trevor d'Olier-Lees, S&P Global Ratings Managing Director and Sector Lead, Project Finance North America
• Dina Shaher, , S&P Global Ratings Director, Project Finance North America
• Siddharth Bhatia, , S&P Global Ratings Senior Analyst, Project Finance North America,
• Vedika Mehta, , S&P Global Ratings Senior Analyst, Project Finance North America
• David Tsui, , S&P Global Ratings Managing Director & Technology Sector Lead
• Kurt Forsgren, , S&P Global Ratings Managing Director, U.S. Transportation Infrastructure, U.S. Public Finance

(For more information, please see current reports and our Related Research section below.)

Here we answer frequently asked questions.

Foundry JV Holdco LLC

Intel is currently rated 'A-' with a negative outlook, while the rating we assigned to the JV company is a notch below at 'BBB+', also with a negative outlook. Why don't we equate the project rating to Intel's rating? How do we assess the relationship between Intel and the project?

From a project finance perspective, we separately assess the construction and operations phases as part of our determination of the rating. Note, we use rating-to-principles to rate this transaction. Given Intel is taking the risk of construction, our construction risk assessment starts at 'a-' (current rating of Intel), and is then notched downward to reflect structural weakness (explained below), bringing it to 'bbb+'. The rating is then capped by the creditworthiness assessment of the JV company as well as the Intel member given the cross default in the financing documents. The technology team considers the JV's relationship to Intel as highly strategic, which implies a notch difference from Intel's 'A-' rating, leading the creditworthiness of the JV company to be capped at 'BBB+'. The structural weakness notch is applied in both the construction and operations phases, because unlike a typical operating project where the debt is at the operating level and the debt-holders have security over the key contracts, in this transaction the debt is at a minority holding company level and the debt-holders do not have direct security in the contracts. However, the material project documents are between the JV company and Intel, and performance under the contracts is backed by a parent guarantee from Intel, which somewhat offsets the risk. In the operations phase, we expect a minimum debt service coverage ratio (DSCR) of 1.13x, which leads to a preliminary operations SACP of 'a'. As mentioned, a structural notch is applied leading to 'a-' and this is capped to 'bbb+' with the creditworthiness of the JV company and Intel member. Overall, the rating is capped at 'BBB+' in both phases.

From the technology team's perspective, the focus when rating Intel and Foundry JV is the relationship between the two, which follows the corporate methodology. There are five different levels of group status, the tightest level being core, which is defined as an entity being integral to the group's identity and strategy and the rest of the group is likely to support these entities under any foreseeable circumstances. The next level is highly strategic, which is how we characterize the relationship between Intel and the JV. The subtle difference from core is that the entity is almost integral to the group's identity and strategy and support from the group is likely under almost all foreseeable circumstances. As such, there may be situations where support for this highly strategic entity will be limited in order to preserve the viability of the rest of the group members. The next level down is strategically important, whereby the entity is less integral to the group and support is likely under most foreseeable circumstances. Most JVs typically do not have a status that exceeds strategically important, and therefore, strategically important was the beginning benchmark for our assessment of the relationship between the parent and the JV. Here, the JV is highly unlikely to be sold, especially given Intel's chip demand requirements. Furthermore, the chip manufacturing line of business is important for Intel to produce its products. Intel has 10 manufacturing sites with six manufacturing wafers, and each wafer fab is earmarked for the manufacturing of chips based on forecasted demand using particular equipment for specific process technologies. Another project feature is the wafer offtake whereby Intel will maintain an 80% minimum production level at the JV. There is also a contractual commitment for Intel to pay distributions for 13 years. For all these reasons, the relationship is found to be tighter than a typical strategic JV, warranting the highly strategic status.

If Intel decides to participate in more JVs to operate manufacturing facilities, what would the credit impact be to Foundry JV?

Foundry JV Holdco, although rated to principles, meets our limited-purpose entity requirements and is therefore isolated from other entities, with the exception of Intel to which it is linked. If Intel were to build more chip manufacturing facilities and the technology team determined this to be negative for credit quality, a downgrade of Intel would indirectly impact Foundry JV. However, if Intel's rating remains 'A-' with the building of subsequent facilities, such activities would not lead to a rating action on Foundry JV.

As a infrastructure fund, why is Brookfield involved in a chip manufacturing facility? How does Intel benefit from the relationship with Brookfield?

Looking at Intel's recent performance, the company has faced significant financial constraints based on a cyclical decline in its core business of personal computers (PC) and data center chips. While the cyclical nature implies there will be a rebound, in the meantime, it is showing significant free cash flow deficits that are also attributable to its expansion of wafer fab capacity, which is highly capital intensive. In the past, Intel has financed and owned all of its fabs 100%, but they have engaged in its "smart capital strategy" to better match its capital expenditures (capex) and cash flow generation in this JV structure.

Specifically with respect to Brookfield, looking at the structure as constructed, Intel is taking most of the risk and has operational control as if they owned 100% of the project, with Brookfield acting as a financial partner. This structure fits Intel's strategy in terms of retaining control of construction and operations of wafer output, reducing capital investments in the fab buildout phase, and in exchange, ceding some of the profits and cash flows once the fab enters the wafer production phase.

Overall, this trend of bringing in JV companies or JV asset-backed pools through a back-levered holding company is something S&P Global Ratings analysts are observing. There are many sophisticated infrastructure fund players, such as Brookfield, who wish to deploy their funds and expertise in raising finance with corporate sponsors who will retain operational responsibility. While Brookfield via Holdco is not running Intel's chip manufacturing facility, this structure gives them exposure as well as investment income, which is one of the trends we believe we will see more of in the market.

We've emphasized that there is a linkage between the Intel rating and the project rating, which is one of the reasons for a one-notch rating difference. We also noted that the project has a negative outlook, which reflects Intel's negative outlook. What drives Intel's negative outlook, and what are the triggers to potentially further downgrades?

S&P Global Ratings has taken a number of negative rating actions on Intel over the past few years, going from 'A+' with a positive outlook to 'A-' with a negative outlook. As mentioned earlier, Intel has underperformed in recent years, partly due to an industry downturn, as well as manufacturing and product delays leading to market share loss to its main competitor, Advanced Micro Devices Inc. (AMD). Capex has also been a strain on Intel's free cash flows (FCF), resulting in negative FCF in 2022 and 2023. In 2024, it is likely that its FCF will be neutral to slightly positive and we expect its FCF over the next two to three years will be near neutral. A large part of this is not because of revenue growth or profitability further weakening; in fact, we expect its revenue to grow, but capex intensity for wafer fab capacity expansion continues to be elevated, despite government incentives providing some offsets.

Looking ahead, although we expect the semiconductor industry to continue to grow and Intel will continue to benefit, there are headwinds to Intel's core businesses. Challenges include fierce competition from AMD within the x86 chip market, the ARM architecture slowly gaining market share from the x86 architecture, as well as graphic processing units (GPUs) potentially taking workload away from those currently satisfied by x86 CPUs. We view these developments to be longer-term in nature rather than short-term phenomena. Nevertheless, these headwinds, coupled with weak credit metrics, are reflected in our negative rating outlook, which indicates there is a greater than one-third chance of a downgrade over the next one to two years. Before returning the outlook to stable, we are looking for Intel to execute its product design and manufacturing strategy, successfully stem its share loss to AMD over the next 12 months, and improve the efficiency in its Foundry business, which is currently sub-scale. We look for its FCF to approach 15% of debt, a level that is appropriate for an 'A-' rated company. Although we do not expect Intel to achieve this FCF threshold within the next 12 months, we need to believe it's on the right path prior to considering a rating outlook revision to stable. On the flip side, for a downgrade, if any of the headwinds described earlier materialize, or if Intel's business significantly underperforms and credit metrics are weaker than what we expect in our base case, we could consider lowering the rating.

Brightline Trains Florida LLC

Given the project has a very high risk business profile, what are the minimum debt service coverage ratios and how were they applied to the rating? Or is it rather based on pre-funded liquidity?

We consider both minimum debt service coverage and liquidity because we rate under a two-phase approach. During the ramp-up, we rate to the downside, under which we determine the rating based on how resilient the project is with respect to available liquidity rather than focusing on coverages. During the stabilized period, which starts from 2029 until 2053, with an operation phase business assessment (OPBA) of 10, a project would require a minimum coverage of at least 2.5x to achieve a 'BBB-' rating. For comparison, Indiana Toll Road (ITR), a mature toll road, has an OPBA of 3, and would require a minimum coverage of at least 1.175x to achieve a 'BBB-' rating. Overall, we believe the 'BBB-' rating on Brightline Florida is mitigated by conservative forecasts in both the base and downside scenarios, significant liquidity during ramp-up, and high coverage commensurate with a 'BBB-' rating for an OPBA of 10.

The project's first-of-kind nature in a country that is heavily dependent on cars makes the emergence of high-speed rail an accomplishment in the infrastructure space. Given that Brightline is now operational in Florida, might governments in other states rethink their approach to high-speed rail?

We believe that Brightline will set a new standard for what investors and other market participants would expect to see in a project of such scale and scope. This is especially relevant in states such as California, where efforts to construct high-speed rail have been slow for many years.

What is the riskiest phase for Brightline and how does it translate into default rates?

For projects with volume exposure, the ramp-up phase is the riskiest phase as the convexity of the curve is unknown. In the case of Brightline Trains Florida LLC, while the management case has a ramp-up of three years, we used analytical judgment to arrive at a ramp-up of five years in our base case and six years in our downside case. In this first phase, we do not rate to annual debt service coverage but rather look to see how fast the project depletes its liquidity. Brightline Trains Florida LLC has significant liquidity in the form of a one-year debt service reserve fund funded at close, a robust ramp-up reserve, and a pre-funded interest reserve. Therefore, we believe the project demonstrates resilience during the ramp-up years to support an investment-grade rating.

Webinar Replay

To register and gain access to the conference replay copy and paste this URL into your browser: https://event.on24.com/wcc/r/4592664/561CD0E611795608A2F8DC33D135EB79 

Related Research:

• Foundry JV Holdco's New Issuance Of $3.85 Billion Rated 'BBB+', Outlook Negative, May 7, 2024.
• Brightline Trains Florida LLC's $2.219 Billion Senior Secured Debt Assigned 'BBB-' Rating; Outlook Stable, May 8, 2024.
• Brightline East LLC's $1.325 Billion Senior Secured Debt Assigned 'B' Rating; Outlook Stable, May 8, 2024.
• Default, Transition, and Recovery: 2022 Annual Infrastructure Default And Rating Transition Study, Nov. 15, 2023.