Fitch Affirms Texas Transportation Commission Rev Rfdg Bnds at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB+' rating on the following Texas Transportation Commission (TTC), Central Texas Turnpike System (CTTS) bonds:

--$585.33 million first-tier revenue refunding bonds, series 2012-A;

--$225 million first-tier revenue refunding put bonds, series 2012-B; and

--$829.12 million first-tier revenue bonds, series 2002.

The Rating Outlook is Stable for all bonds.

KEY RATING DRIVERS

--Multi-Segment System in Strong Service Area: CTTS captures a diverse user base encompassing both commuter and long-distance traffic. While Loop 1 (19% of total traffic) faces competition from a parallel non-tolled alternative, the remaining three segments face limited direct competition. Lack of forecast certainty for CTTS arising from its relatively short demand history is largely offset by the strength of the Austin metropolitan statistical area (MSA), as characterized by labor force and employment growth of 2.6% and 3.2%, respectively, over the past 12 months and an unemployment rate of 4.7%, placing it well below state and national averages. Revenue Risk: Volume - Midrange

--Traffic Inelastic to Recent Toll Increases: Significant toll increases of 25%-50% on each segment (except SH 45SE) implemented in January 2013 have not had a profound negative effect on traffic, with FY2013 traffic actually growing 13.9% and revenue by 37.4%. Similarly, Fitch does not expect annual toll indexation, introduced January 2014, to have a significant negative effect on traffic, as rates appear moderate in comparison to local and national peers. CTTS rolled out all-electronic tolling (AET) during FY2013; the collection rate in the first year of AET for pay-by-mail (PBM) users was low at 45%. New collection and back-office processing contracts with Xerox Corporation, that begin first half 2014, may address some of these issues and Fitch will monitor progress closely. Revenue Risk: Price - Midrange

--New Infrastructure with Pledged Operations & Maintenance: The project has only been fully open since 2008 so significant major maintenance work is not scheduled until 2027-28. The system undergoes annual inspections conducted by TxMAP, and scores achieved to date reflect the age of the infrastructure. Additionally, the Texas Turnpike Commission (TTC) pledges to cover the TTA's operating, maintenance and rehabilitation expenses if needed. Infrastructure & Renewal Risk: Stronger

--Back-Loaded Debt Structure Dependent on Growth: The current accreted value of capital appreciation bonds (CABs) make up 32.65% of CTTS' current total outstanding debt and, as such, CTTS is dependent on continued revenue growth to meet an escalating debt service schedule. First-tier debt service from 2014, until maximum annual debt service (MADS) in 2037, grows at a compounded annual rate of 7.15%. No additional near-term future borrowing is expected and provisions exist to prevent the fully subordinated Transportation Infrastructure Finance and Innovation Act (TIFIA) loan from springing to first-tier status. Debt Structure: Midrange

--Ample Coverage and Liquidity Support: The system's debt service coverage ratio (DSCR) has been high for the rating category, at least 1.79x since 2009. Fiscal 2013 first-tier leverage (incorporating current accreted value of CABs), is slightly above average relative to peers at 13.1x, while first-tier MADS coverage is 0.62x. It is Fitch's view that, while dependent on growth, there is sufficient coverage cushion and strong liquidity support via fully funded debt service reserve and rate stabilization funds to weather stresses to the system.

RATING SENSITIVITIES

--Sustained traffic and revenue growth that demonstrate an increasing ability to support operating and lifecycle costs with toll revenues and a material improvement in MADS coverage above the current 0.62x level, coupled with a material improvement in pay-by-mail collection rates, would be viewed positively.

--Conversely, volatile traffic and/or revenue performance, or a failure to improve pay-by-mail collection rates, could put negative pressure on the rating.

SECURITY

The first-tier bonds are secured by a gross lien on revenues of the system. The covenant by the TTC, which governs the Texas Department of Transportation (TxDOT), to budget for operational costs that cannot be supported by toll revenues, and to pay for ordinary and capital maintenance on the project, provides significant support to both the bonds and the overall system.

CREDIT UPDATE

Fitch recognizes the system's growing financial self-sufficiency. In August and September 2012, the TTC adopted a number of changes to CTTS which were designed in aggregate to bring it closer to self-sufficiency, and to strengthen the CTTS financial credit. These included the adoption of an amended toll plan, conversion to AET, annual CPI-U-based toll escalations (without additional action required by TTC) and the addition of SH 45SE to the system. Long-term stability is forecasted as these positive changes are realized over the next several years.

Reflecting continued ramp-up, since 2008 total traffic across the system has grown at a compound annual growth rate (CAGR) of 9.2% while toll revenues have grown at a CAGR of 16.3%. The system's first toll increase occurred January 2013, with a subsequent CPI-U-based increase of 1.50% in January 2014. 1Q'14 (Aug. 31 FYE) revenue is up 47.7% year-on-year, to $33 million from $22.3 million; more than 20% higher than Fitch projected revenue.

First-tier DSCR in FY2013 was 3.02x while FY2014 DSCR is expected to be higher at 3.08x due to additional ramp-up and increased toll revenues. First-tier debt service rises annually from approximately $41 million in FY2014 to MADS, in FY2037, of $200.9 million. This back-loaded debt profile results in weak first-tier MADS coverage of approximately 0.62x but should continue to improve annually as long as revenue grows as projected.

With the implementation of AET, pay-by-mail transactions in FY2013 grew to 26% of total transactions (from 20% in FY2012). Along with this increase, the PBM collection rate decreased to 45% from 55%. However, there are several on-going efforts underway to improve the PBM collection rate including new collection and back-office processing contracts with Xerox Corporation, and marketing efforts to influence PBM customers to use TxTag transponders. Additionally, the number of active TxTags increased 15% during FY2013.

The bonds are issued by TTC, acting as conduit for the Central Texas Turnpike System of TxDOT.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance', (July 11, 2012);

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

Applicable Criteria and Related Research:

Rating Criteria for Toll Roads, Bridges and Tunnels

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

Rating Criteria for Infrastructure and Project Finance

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820057

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Charles Askew, +1-212-908-0644
Analyst
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Charles Askew, +1-212-908-0644
Analyst
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com