Fitch Expects to Rate Kentucky PTIA's $308MM First Tier Revs & $452MM Notes 'BBB-'

NEW YORK--()--Fitch Ratings expects to assign a 'BBB-' rating with a Stable Outlook to the Kentucky Public Transportation Infrastructure Authority's (KPTIA) proposed approximately $300 million Downtown Crossing project revenue bonds, first tier 2013 series consisting of $159.6 million first tier 2013A (current interest bonds), $67.5 million first tier 2013B (capital appreciation bonds) and $73.7 million first tier 2013C (convertible capital appreciation bonds). Additionally, Fitch expects to assign a 'BBB-' rating with a Stable Outlook to $452 million Downtown Crossing project notes, 2013 series consisting of $423 million tax-exempt 2013 series A and $28.4 million taxable 2013 series B and to the third tier toll revenue bond $452 million Transportation Infrastructure and Innovation Financing Act (TIFIA) loan 2013. The final ratings are contingent upon receipt by Fitch of final documents and legal opinions conforming to information already received and reviewed as well as the final pricing of the bonds.

The TIFIA loan will be executed at the time of the issuance of the Downtown Crossing first tier bonds and project notes however, the loan is not expected to be disbursed until 2017 to redeem the $452 million Downtown Crossing project notes. There are a number of conditions precedent for disbursement of the TIFIA loan to redeem the project notes and, while these conditions are largely administrative, Fitch notes the obligation to disburse funds is not a full guarantee and thus the rating on the project notes reflects the risks associated with the authority meeting all of the conditions precedent.

KEY RATING DRIVERS

Established Traffic Largely Offsets Greenfield Risk: The Louisville-Southern Indiana Ohio River Bridges (LSIORB) project involves expanding an existing Ohio River crossing to accommodate the I-65 interstate highway, constructing a new crossing/highway connection and the East End Bridge being constructed by Indiana that will help create a highway loop around Louisville. Congestion on the existing bridge is high, especially during peak hours; however, it is currently untolled and there remains uncertainty as to how traffic will be affected by the introduction of a toll. While the I-64 bridge and the U.S. 31 Bridge offer free alternatives, these facilities are expected to have very high congestion levels during peak hours leading to higher time travel.

Revenue Risk: Volume - Midrange

Pricing Flexibility Limited For Bi-State Project: The project benefits from unlimited tolling flexibility and the need for both the Downtown Crossing and East End portions of the project to generate sufficient revenue to cover all expenses and meet financial covenants. However, the bi-state nature of the toll approval process could result in delays to increases when requested. The covenant of the Kentucky Transportation Cabinet (KYTC) to seek an appropriation to cover any shortfall in operating expenses and renewal and replacement expenses partially mitigates this risk.

Revenue Risk: Price - Midrange

Escalating Debt Structure With Robust Financial Covenants: The Downtown Crossing portion of the project will be financed with 100% fixed rate amortizing debt. Financial covenants include a rate covenant set to cover senior lien debt service by 1.5x, any TIFIA debt service by 1.25x, and all obligations under the indenture by 1.0x. The indenture for the Downtown portion includes a 1.0x debt service coverage ratio (DSCR) requirement on all obligations, including renewal and replacement, and an annual engineering report to identify renewal and replacement needs. The rate covenant specifies that toll revenues must be sufficient to cover the State of Indiana's availability payment obligations with respect to the East End portion of the project. Structured reserves are adequate and include, amongst others: a cash-funded DSRF sized at maximum annual debt service (MADS) on a five year forward looking basis from toll revenues, and, a maintenance and replacement reserve.

Debt Structure: Strong

Infrastructure Renewal Program Adequate: While the Fitch rating case assumes lower levels of financial flexibility and the potential for shortfalls in renewal and replacement funding, KYTC covenants to budget and seek an appropriation at the next available opportunity from legally available highway funds an amount that will restore the general operations and maintenance (O&M) fund and maintenance and renewal (M&R) reserve fund to required levels.

Infrastructure Renewal: Midrange

Experienced Contractor But Significant Completion Risk: While the Downtown Crossing project will be constructed pursuant to a fixed price date certain contract, the project represents a complex water crossing and a complex interchange between three major U.S. interstates. Completion risk is partially mitigated by Fitch's view of the credit quality of the design builder, Walsh Construction Company (part of the Walsh Group), and its historical demonstrated track record of completing large scale projects on time and budget, as well as the commonwealth's back-up construction completion guaranty. Additionally, tolls are required to be implemented on the existing I-65 bridge no later than June 30, 2018 which would partially mitigate any completion delays on the new span.

Completion Risk: Midrange

RATING SENSITIVITIES:

--Construction delays beyond scheduled completion resulting in additional leverage may pressure the rating.

--Lower than anticipated financial flexibility due to greater traffic diversions and the higher price elasticity could lead to downward rating migration.

--Successful completion and sustained operating performance above Fitch's base case projections would likely result in a higher rating.

--A material change in TIFIA's ability to meet its disbursement obligation of loan proceeds under the loan agreement in order to redeem the Downtown Crossing project notes could impact the rating of the notes.

SECURITY

The first tier bonds are secured by a first pledge of, the trust estate consisting primarily of the authority's 50% share of the toll revenues derived from the downtown and east end crossings. The project notes are secured by a pledge of the trust estate, subordinate to the payment of principal of and interest on the first tier, second tier and third tier bonds. The TIFIA loan will be secured as third tier bonds. It is expected that principal on the series 2013 subordinate notes will be paid from a disbursement made to the authority at maturity, subject to the satisfaction of certain conditions under the TIFIA loan agreement.

TRANSACTION SUMMARY

The KPTIA expects to issue approximately $300 million Downtown Crossing project revenue bonds and $452 million Downtown Crossing project notes to fund a portion of the costs associated with the Downtown Crossing segment of the LSIORB Project. In addition to the Downtown Crossing segment, the LSIORB project includes the East End project - for more information, see 'Fitch Rates Indiana Finance Auth's Proposed PAB's 'BBB'' available at www.fitchratings.com. A $452 million TIFIA loan is expected to be executed at or near final close with the expectation that loan funds will be disbursed to pay the 2013 project notes at maturity.

The total cost of the Downtown Crossing segment, including financing costs and reserves, is currently estimated to be approximately $1.3 billion and is expected to be funded from the proceeds of the series 2013 bonds and notes, $250 million of federal highway trust funds, and $280 million of proceeds from project notes issued by the Kentucky Asset/Liability Commission that are secured by certain federal highway trust funds. The Downtown Crossing segment consists of three principal components including the procurement, financing and construction of a bridge across the Ohio River, from downtown Louisville, Kentucky to Jeffersonville and the reconstruction and reconfiguration of the existing Kennedy Bridge as well as the modernization of the existing Kennedy Interchange and the reconfiguration of the Indiana approach to the Downtown Bridge.

Upon completion, the KYTC will own the improvements on the Kentucky side of the Ohio River while Indiana Department of Transportation will own the improvements in Indiana, while KPTIA will be responsible for O&M and M&R. Fitch notes the importance of this back-up pledge from KPTIA.

Fitch reviewed the sponsor's case and developed its own base and rating cases in accordance with its published criteria for toll roads to understand the project's ability to handle combined downside scenarios. The Fitch base case provides a view of expected performance. The rating case is the benchmark used to evaluate the potential volatility of performance and establish the credit quality of the first tier bonds and notes as well as the TIFIA loan.

Fitch's base and rating cases assume a number of sensitivities related to near-term regional economic conditions, greater than anticipated shift to toll free facilities and lower assumed average toll rates based on a different traffic composition. The base case assumes a 1% growth in corridor volumes, approximately 41% of assumed total corridor traffic (compared to the traffic and revenue consultant's assumed 43% capture rate) and a 5% haircut to the average toll rate. The rating case assumes 0.5% annual growth in corridor volumes, approximately 37% of assumed total corridor traffic, and a 10% haircut to the average toll rate.

Under the base case, post ramp-up (2022) traffic grows at a compound annual growth rate (CAGR) of 0.75% from 2023-2033 and 0.50% from 2034-2049, remaining flat after that through 2054, ultimately resulting in 36 million annual transactions during the projection tail period, below current traffic levels. Toll rates are assumed to grow at 2.5% per year as stipulated under the bi-state development agreement and, as toll collection will be all electric, this should be seamless to implement. Fitch assumes toll violations result in a 5% loss in gross revenue through 2022 with the rate declining to 4% over the long term. Tolling O&M is in line with other facilities but was increased by Fitch by 5% in the first year, with O&M costs growing at a rate of 3.5% annually thereafter.

In this scenario, gross DSCR never falls below 2.5x, while TIFIA interest DSCR begins at 1.40x, demonstrating increasing flexibility over time. TIFIA interest and principal is above 1.3x with growing flexibility. Net DSCR is also robust - senior DSCR is generally above 2.0x while TIFIA principal and interest DSCR is low around 1.14x early on but grows somewhat, leveling off around 1.20x. Renewal and replacement costs are generally met.

Similar to the base case, Fitch assumes in its rating case that toll violations result in an 6% loss in gross revenue through ramp-up declining to 5% through 2030 and to 4% over the long term. Tolling O&M is assumed to be 10% above the sponsor's estimate in the opening year, growing at 3.75% annually thereafter. Post ramp-up traffic grows at a CAGR of 0.75% from 2023-2028 and 0.50% from 2029-2038, 0.25% from 2039-2050 and flat after that through 2054, ultimately resulting in 36 million annual transactions. Toll rates are assumed to grow at 2.5% per year.

In this scenario, gross DSCR never falls below 2.0x, while TIFIA interest DSCR begins at 1.10x during ramp-up, generally ranges between 1.30x and 1.50x then on, and TIFIA principal and interest DSCR post ramp-up remains above 1.25x. Net coverage ratios are adequate - senior DSCR is generally above 1.40x-1.60x through 2040 while TIFIA principal and interest DSCR remains below 1.0x for the life of the debt, implying that toll rates would have to be increased to meet the 1.0x rate covenant or that the commonwealth would be required to support M&R, particularly in the back-end.

The assumed operating profile has solid financial metrics but high overall leverage. While annual DSCR is projected to be solid under the Fitch base and Fitch rating cases, the Downtown Crossing portion of the project will have an opening year net debt to cash flow available for debt service (CFADS) ratio of 14.7x in the base case and 23.1x in the stress case - although projected to decline reasonably quickly, these levels of leverage are considered high for a project of this nature.

KPTIA was established as an 'independent de jure municipal corporation and political subdivision of the commonwealth constituting a governmental agency and instrumentality of the commonwealth.' Toll revenue is collected by KPTIA and immediately transferred to a cash management trustee and then split on behalf of Kentucky and Indiana. Toll rate increase decisions will be made pursuant to the bi-state development agreement and thus could be subject to political delay. The rate covenant that includes the Indiana side at 1.0x to cover all availability payments somewhat mitigates these risks.

Additional information is available at www.fitchratings.com.

Applicable Criteria & Related Research:

--'Rating Criteria for Infrastructure and Project Finance'(July 12, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels'(Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810377

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Director
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com