Fitch Downgrades Northwest Parkway (Colorado) Senior Revs to 'CCC+'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Northwest Parkway Public Highway Authority, CO's (Northwest Parkway) $420.4 million in outstanding senior revenue bonds, series 2001A, 2001B and 2001C to 'CCC+' from 'BB-'. The Rating Outlook is Negative. A 'CCC' category rating means that default is a real possibility and capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions. Fitch expects Northwest Parkway's resources to provide about three to four years before it encounters debt service payment problems on the senior revenue bonds.

The senior revenue bonds are insured by Ambac Assurance Corporation and Financial Security Assurance, Inc. (both of whose insurer financial strength is rated 'AAA' by Fitch). Fitch does not rate the $52.5 million in outstanding first tier subordinate revenue bonds.

Fitch's downgrade to 'CCC+' and Negative Outlook reflect an increasingly constrained financial environment where, despite growing traffic levels and the Jan 1, 2006 main line toll increase, toll revenues remain insufficient to pay the escalating debt service profile. As a result, Northwest Parkway is drawing down its internal liquidity to meet its obligations. Fitch's rating also recognizes Northwest Parkway's demonstrated base level of traffic demand and a moderate level of economic rate making ability that combined with available internal liquidity provides the authority with some time before it encounters debt service payment problems on the senior revenue bonds. Potential resistance to toll increases remains a risk. Although Northwest Parkway is evaluating a leasing strategy that would involve a payment from a concessionaire that would be used in part to repay the outstanding bonds, this is not factored into Fitch's rating on the outstanding bonds given this repayment is not currently part of the bonds' legal security and is subject to successful negotiation and execution of a concession arrangement that meets the mutual needs of the authority and a concessionaire.

While traffic and revenue continue to exhibit strong growth, the gap between actual toll revenues and the 2001 forecast developed at the time the bonds were sold is also widening. Toll revenues equaled 67% of forecast in 2004 and, while increasing by 33% in 2005 to $5.6 million, represented 54% of the 2001 estimate. Although the authority raised the main line toll rate this year to $2.00 from $1.75, an increasing share of traffic is using the Sheridan Interchange where the toll is set at the lower rate of 50 cents. This has muted the effects of the rate adjustment. Therefore, based on year to date data through October 2006, an expected 17% increase in toll revenues to $6.6 million for the full year primarily reflects underlying traffic growth and represents 38% of Northwest Parkway's forecast.

Fitch estimates that traffic and toll revenues will be about 25-30% of the 2001 forecast through the near term. Internal liquidity at the start of 2007 consisting of about $12 million in remaining and uncommitted construction funds, $36.2 million in the senior debt service reserve fund and $5.1 million in the first tier subordinate bonds debt service reserve fund provide an offset to lower than projected traffic and revenue and are expected to be tapped to pay debt service in the near term.

Given expected traffic and revenue growth and available internal liquidity, Fitch estimates the authority's resources will not be sufficient to meet senior debt service obligations beyond 2009-2010, while the first tier bonds would encounter payment problems as early as 2008-2009. Debt service payment problems may be deferred with higher levels of traffic growth and the authority's need to raise tolls to meet the rate covenant requirement where net revenues provide at least 1.30 times (x) senior debt service and 1.15x debt service due on senior and first tier subordinate bonds. Nevertheless, the 53% increase in debt service expenses next year poses a significant financial challenge given current toll revenue levels and will likely require the authority to draw down most of the remaining construction funds to meet this obligation.

At present, the authority has identified 11 firms to submit proposals for a long term lease of the Northwest Parkway. In exchange for the winning concessionaire's payment that would be used in part to repay the outstanding bonds, the concessionaire is expected to have the right to operate, maintain, set rates and collect toll revenues on the Northwest Parkway for a period of at least 50 years based on the parameters negotiated under a concession agreement between the authority and the concessionaire. Fitch notes that although the Northwest Parkway is experiencing significant near term financial challenges, the number of bidders recognizes the potential growing long term economic value of the toll road. Northwest Parkway expects to identify a preferred a bidder in February 2007 and complete negotiations and close the transaction by May 2007.

The senior bonds are secured by toll revenues after payment of operations and maintenance expenses. The Northwest Parkway is a westward extension of the Denver region's beltway and consists of the two-mile Interlocken Loop between State Highway 128 and Tape Drive and a nine-mile limited access toll road between Tape Drive and I-25 with a connection to E-470. Northwest Parkway, which is a subdivision of the State of Colorado as authorized by the public highway authority law and was established in 1999 by the City and County of Broomfield, Weld County, and the City of Lafayette, is responsible for the financing, design, construction, and operation of the Northwest Parkway.

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