CHICAGO--()--Fitch Ratings assigns an 'AA-/F1+' rating to Harris County Toll Road Authority's (the authority) senior lien toll road revenue refunding bonds, series 2011A. In addition, Fitch affirms its 'AA-' rating on approximately $2.1 billion in outstanding parity senior lien obligations. The Rating Outlook is Stable for all of the senior lien bonds.
The series 2011A bonds are scheduled for negotiated sale during the week of July 18, 2011, and the proceeds will be used to refund the series 2010A bonds. Similar to last year, the authority is contemplating two funding options for the series 2011A bonds, either window variable rate demand bonds (VRDBs) or put bonds. The window VRDBs are dual put bonds supported by self liquidity that can be tendered at any time. If market conditions are not favorable, the authority will pursue a one- or two-year put bond.
RATING RATIONALE:
The 'AA-' rating reflects:
--Established and stable traffic demand of the toll road system with
traffic and revenue growth in nearly every year since at least fiscal
1999 (ended Feb. 28).
--The authority has had strong historical
financial performance with net debt service coverage of more than 2.0
times (x) since fiscal 1996.
--Significant financial flexibility
afforded by the authority's strong cash and reserve fund balances,
resulting in net working capital exceeding $1 billion in fiscal 2011
(unaudited).
--The authority's policy provides for future toll
increases at the greater of 2% or inflation; historically the authority
has raised rates on a timely basis to manage capital needs.
--The
authority's high historical operating expense growth with a 16.4%
10-year and 22.2% five-year compound annual growth rate (CAGR) due to
additional segments coming online.
--The Commissioners Court
adopted a transfer policy that calls for a $120 million annual transfer
from the authority to the county. While subordinated to the senior and
junior lien bonds, this transfer reduces the overall cash reserves
available to the toll system, thus increasing the likelihood the
authority will fund future projects with additional debt. However, the
transfer amount can be adjusted at any time.
The 'F1+' rating reflects:
--The authority's cash position and revenue pledge which is on parity
with the outstanding toll road bonds. The series 2011A bonds may have a
mandatory tender date in the next one to two years depending on market
conditions. 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
$500 million in unrestricted investments (excluding money market funds)
in each month since January 2006, resulting in more than 1.25x 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:
--The authority will need to diligently manage operating expense growth
to preserve financial flexibility and maintain debt service coverage
above 2.0x.
--The authority may reinstate long-term projects that
have been delayed/suspended which could possibly result in a
significantly larger debt burden and lower coverage of debt service for
the authority.
SECURITY:
All senior lien bonds are secured by a gross lien on toll revenues.
CREDIT SUMMARY:
Traffic and toll revenues in fiscal 2011 were up 2.5% and up 3.8%, respectively, which includes the Sam Houston Northeast segment that opened February 2011. In addition, the first three months of fiscal 2012 show positive traffic and revenue trends, up 4.2% and 4.7%, respectively. Management indicated the next automatic rate adjustment will take effect Sept. 10, 2011. The authority's last toll increase was implemented in September 2009 (fiscal 2010), resulting in a 4.4% year-over-year increase in toll revenues, including the Katy Tollway (opened in April 2009), meanwhile, traffic increased 4.9%, including Katy. While toll revenues have increased every year, traffic has only 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 declined by 5% and 8.7% in fiscal years 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 grew by 27.1% and 33.1% in fiscal years 2009 and 2010, respectively, primarily due to a rise in maintenance-related costs, interest expense and salaries. 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 16.4%. Unaudited operating expenses for fiscal 2011 indicate a 7.5% decline due to management actions. 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 2.0x through final maturity in fiscal 2050.
The authority's capital improvement plan (CIP) was significantly reduced after the county notified the state they were not participating in three segments of the Grand Parkway project in December 2010. The current fiscal 2011-2012 CIP is approximately $367 million and involves the most essential projects, including the replacement and/or update of the toll collection equipment and software, the Sam Houston widening, and the Hardy downtown connector. However, it is possible the authority reinstates the long-term projects that have been delayed/suspended, which could result in increased leverage and lower debt service coverage ratios.
The authority's toll revenues are derived from a diverse system of 15 assets that include approximately 128 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 4 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'.
Applicable Criteria and Related Research:
--'Rating Criteria for
Infrastructure and Project Finance,' (Aug. 16, 2010);
--'Rating
Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 10, 2010).
Applicable Criteria and 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
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 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.
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