CHICAGO--()--Fitch Ratings assigns an 'AA-' rating to Harris County Toll Road Authority's (the authority) senior lien toll road revenue refunding bonds, series 2010C and series 2010D. In addition, Fitch affirms its 'AA-' rating on approximately $2.1 billion in outstanding parity senior lien obligations and its 'F1+' rating on approximately $199.92 million in outstanding toll road revenue refunding bonds. The Rating Outlook is Stable for all of the senior lien bonds. The series 2010C and 2010D bonds are scheduled for negotiated sale during the week of Sept. 13, 2010, and the proceeds will be used to refund a portion of the authority's outstanding series 2002, 2004B-1, and 2005A bonds.
RATING RATIONALE:
The 'AA-' rating reflects the established and stable traffic demand of the toll road system, solid historical financial performance, and significant financial flexibility afforded by the authority's strong cash and reserve fund balances. Additionally, the authority's toll policy provides for future increases at the greater of 2% or inflation, which creates greater certainty for toll rates. Off-setting credit concerns include the authority's high operating expense growth over the last few years and the toll system's vulnerability to economic downturns and weather-related catastrophes that can negatively impact traffic and revenue growth.
The 'F1+' rating is based on the authority's cash position and revenue pledge which is on parity with the outstanding toll road bonds. The series 2010A bonds have a maturity date of Aug. 15, 2021 and a mandatory tender date of Aug. 15, 2011, but the authority has not yet identified its plans to redeem the bonds if tendered. While failure to pay the tender price would be an event of default, the authority has held an average of approximately $588 million in unrestricted investments (excluding money market funds) in each month since January 2006, resulting in more than 1.25 times (x) coverage of liquid assets to principal. The authority does not anticipate additional short-term borrowing in the near term and its $200 million parity commercial paper program has been suspended.
KEY RATING DRIVERS:
While traffic and revenues have fared well during the economic downturn, the authority's operating expenses have grown 27.1% and 33.1% in fiscal years 2009 and 2010, respectively (ended Feb. 28). The authority will need to diligently manage the growth to preserve financial flexibility and maintain debt service coverage. Management expects expenses to only increase 6% year-over-year in the near to medium term. In addition, while the authority's five-year capital improvement plan (CIP) of approximately $400 million is down significantly from its previously projected $4.6 billion CIP, it is possible that the authority may reinstate the long-term projects that have been delayed/suspended, which would likely involve a large debt component. Nevertheless, Fitch believes the authority's slower approach to its CIP and as a consequence, reduction in expected future debt issuances, illustrates management's proactive approach to maintaining its financial flexibility.
SECURITY:
All senior lien bonds are secured by a gross lien on toll revenues.
CREDIT SUMMARY:
The authority's latest toll increase was implemented in September 2009 (fiscal 2010), resulting in a 3.5% year-over-year increase in toll revenues, excluding the Katy Tollway (opened in April 2009), for a total of approximately $432.7 million. Meanwhile, traffic increased 2.1%, excluding Katy, for a total of 361.5 million transactions. For the first five months of fiscal 2011, traffic and toll revenues, excluding Katy, are down 0.4% and up 0.5%, respectively. Fitch notes that the increase in toll revenues generated from the toll rate increase indicates the system has some rate-making flexibility.
Historically, the authority's traffic and toll revenues have grown at a healthy pace. Between fiscal 2006 and 2010, traffic and revenues increased at a compound annual growth rate (CAGR) of 2.6% and 7.5%, respectively. The increase in traffic is mainly due to the growth of the greater Houston metropolitan area and the critical transportation links provided by the authority's assets, as well as the opening of the Hardy Toll Road airport connector, Westpark Tollway and the Katy Tollway. Meanwhile, the growth in toll revenues is a function of positive traffic trends and three toll rate increases in fiscal years 2005, 2008 and 2010. While toll revenues have increased every year, traffic has declined twice, in fiscal 2004 (1.5%) and 2009 (5.8%). The drop in traffic in fiscal 2009 was a result of weather-related road closures from Hurricane Ike in September 2008.
Net operating revenues have declined by 5% and 8.7% in fiscal 2009 and 2010, respectively. This caused net debt service coverage on the senior bonds to drop to 3.24x in fiscal 2010 from a 10-year peak of 4.53x (reached in fiscal 2008). Reduced coverage is mainly due to an overall increase in debt service and operating expenses. Operating expenses have increased by 27.1% and 33.1% in fiscal 2009 and 2010, respectively, due to a rise in maintenance-related costs. Harris County, including the authority, established a hiring and salary freeze in calendar 2009 that is expected to moderate costs in the near term. Management indicated that costs are projected to increase by 6% year-over-year compared to a 10-year CAGR of 15.6%. Although the bonds are secured by a gross revenue pledge, Fitch calculated coverage on a net revenue basis in a stress case scenario to be at least 1.80x over the medium term.
The authority's toll revenues are derived from a diverse system of 14 assets that include approximately 115 miles of roadway in the Houston/Harris county area. The revenue-generating assets of the toll road system principally consist of the Hardy Toll Road, Sam Houston Tollway, Sam Houston Ship Channel Bridge, Westpark Tollway, the Katy Tollway, and the Fort Bend Parkway Extension (formerly Spur 90A). Harris County encompasses the city of Houston and is the largest county in Texas and the third largest in the nation. With a population totaling 3.9 million, the county experienced solid continued growth since the 2000 census with the majority occurring in the unincorporated parts of the county.
Additional information is available at 'www.fitchratings.com'.
Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated 16 Aug. 2010;
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated 10 Aug. 2010.
Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265
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