NEW YORK--()--Fitch Ratings affirms the 'BBB+' rating on the Mid-Bay Bridge Authority, Florida's (the authority), approximately $100 million in outstanding senior lien revenue bonds and the 'BBB' rating on the authority's approximately $155 million in outstanding springing lien revenue bonds. The Rating Outlook on all debt remains Stable.
KEY RATING DRIVERS:
Important Evacuation Link Exposed to Leisure and Military: Mid-Bay Bridge (the bridge) and the Mid-Bay Bridge Connector (the connector), serve as important transportation links for commuters and tourists and also serve as a key hurricane evacuation route from the southern beach areas in Florida's Okaloosa and Walton Counties. The rating also considers the area's heavy dependence on local military operations, exposure to discretionary travel as well as some competition. Ongoing and anticipated future infusion of military personnel and their families at Eglin Air Force Base (Eglin AFB) somewhat offsets this risk through the related need for growth in traffic capacity.
Moderate Economic Rate-Making Flexibility: Management's proactive position to implement toll increases to support its escalating debt service requirements. Concerns include increasing dependence on projected toll revenue growth in conjunction with heightened political risks to implement future toll rate increases, should traffic fail to meet the authority's projections.
Infrastructure Renewal: A lease-purchase agreement with Florida Department of Transportation (FDOT) provides for a strong legal framework and an economic gross lien on toll revenues to bondholders, enhancing stand-alone credit quality. FDOT is obligated to cover operating expenses and renewal and rehabilitation advances for the life of the debt, which includes deeply subordinated repayments terms. The authority's capital plan is fully financed with the existing bond proceeds.
Moderate Leverage and Adequate Reserves: Above average all-in leverage on a net debt-to-cash flow available for debt service basis (at 13.2x) is somewhat mitigated by authority's maintenance of required liquidity (a minimum of $6 million in the general reserve account as well as other available reserves) beyond amounts in the debt service reserve fund. Fitch views the legal provision for a possible full spring or partial conversion of springing lien bonds to a parity senior lien position, upon satisfaction of the requirements for the issuance of senior lien bonds, as weak as it would allow for a significant level of future dilution of the senior lien bond coverage levels to the minimum requirement under the relatively low additional senior lien bonds test (ABT) of 1.4x of annual debt service. The springing lien bonds are subject to a 1.2x projected annual debt service coverage test, which is materially weaker than the test for issuing senior lien bonds.
Fixed-Rate, Multi-Tier Capital Structure: The senior lien bonds benefit from stronger legal provisions than the springing lien bonds. While the senior lien bonds are subject to a rate covenant requirement of 1.4 times (x) annual debt service (if the $6 million required reserve is not fully funded), the rate covenant for all bonds is weaker, at 1.15x total annual debt service. The authority does not have plans to issue new debt in the medium term.
WHAT COULD TRIGGER A RATING ACTION:
--Maintenance of the current rating will depend upon meeting projected traffic levels post expansion completion as well as toll raising flexibility, lack of additional leveraging and stability in coverage levels. Although the springing lien bonds would be eligible for conversion into senior lien bonds upon meeting the ABT, Fitch expects management to proactively manage senior lien debt service coverage comfortably above 1.4x.
The senior and the springing lien revenue bonds are all secured by a gross pledge of revenues of the authority, after administrative expenses only, including all funds and accounts established under the resolution, and related investment earnings. The springing lien bonds debt service repayment will be subordinate to the existing senior lien obligations.
The unaudited financial data for fiscal year (FY) 2012 (ended Sept. 30) indicate that toll revenues slightly increased to $15.8 million or 0.6%, reflecting a 0.1% increase in traffic relative to FY2011. These results are in line with Fitch's performance expectations. While healthy year-over-year traffic increases were observed in the busier months of the year, the total transactions remained flat compared with last year at 6.5 million, demonstrating slow economic recovery in the area. Management anticipates that traffic will increase in FY2013 reaching approximately 6.8 million transactions; October and November transactions were up by approximately 1.4% and 4%, respectively. Fitch expects slower traffic growth due to continued weak economic conditions and exposure to discretionary travel.
In FY2012, 2-axle SunPass traffic represented approximately 65% of total traffic on the bridge, while SunPass revenue accounted for approximately 55% of total toll revenue. Vehicles with three or more axles represented 1.4% of total traffic and roughly 5% of toll revenues. The authority's $2.41 average toll remained essentially unchanged from last year. It has determined that it will be necessary to implement the next toll increase in FY2016 to support the authority's accelerating debt service requirements.
Per indenture calculation (net of administrative expenses only), senior debt service coverage (excluding the required reserve) was 2.35x, and combined senior and springing lien coverage was 1.71x in FY2012. Combined senior and springing lien coverage based on a true net revenue basis was estimated at 1.35x in FY2012. The authority expects indenture based debt service coverage levels for on all debt not to fall below 1.48x in FY2023 when maximum annual debt service payment of $24.7 million is scheduled. Based on the authority's projections, the springing lien bonds will meet the requirements for issuing additional senior lien bonds and are expected to be converted to the senior lien in FY2016, with projected total debt service coverage (excluding the required reserve) of 1.60x.
Should the conversion of the springing lien bonds to the senior lien level result in a meaningfully diluted overall net senior lien coverage, resulting metrics will be inconsistent with the 'BBB+' rating category for the aggregate amount of senior lien bonds. Fitch will monitor developments and, in the event that financial margins decline, negative credit actions may be warranted.
Fitch assessed a forecast rating case scenario, which contemplated a recessionary 3% traffic decline in FY2013 followed by less bridge traffic and slower connector ramp-up, and factoring in the projected toll increase and higher cost increases. Under such assumptions, Fitch projects a minimum combined senior and springing lien indenture based coverage (excluding the required reserve) of 1.11x in FY2023. Fitch acknowledges the authority's healthy liquidity available for payment of debt service, including approximately $12.7 million in the General Reserve account and a total of $25 million in the Debt Service Reserve Accounts.
Under a lease purchase agreement with the authority, FDOT pays operating and maintenance (O&M) expenses for the bridge and remits all tolls collected to the authority as lease payments. The agreement remains in effect until all outstanding senior, junior and springing lien bonds have been repaid and all obligations owed to FDOT by the authority have been fully discharged, at which point FDOT will own the bridge.
The Mid-Bay Bridge Authority operates the three-mile long Mid-Bay Bridge (State Route [SR] 293) across the Choctawatchee Bay and four-miles in approaches on the northern and southern sides of the bridge. The bridge connects SR 20 with U.S. Highway 98 east of Destin, FL and provides a more direct route to tourists and residents between northern and southern Okaloosa and Walton counties. The facility is currently being expanded, with a construction of 11-mile expressway (or the connector) from the bridge toll plaza (at the north end of the bridge), north and west around Niceville, to SR 85. The connector is expected to serve as a link between Interstate 10 and intercept SR 85 and SR 285 traffic before reaching SR 20 in Niceville. Additionally, the traffic from the connector is expected to induce added traffic on to the existing span. The construction of phases two and three of the connector (eight miles, from Range Road to SR85) commenced in January 2011. According to management, the construction remains on schedule for completion in January 2014.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels