Fitch Rates Colorado High Performance Transportation Enterprise PABs 'BBB-'

NEW YORK--()--Fitch Ratings assigns a 'BBB-' rating to approximately $20.4 million of series 2014 tax-exempt private activity bonds (PABs) to be issued by the Colorado High Performance Transportation Enterprise on behalf of Plenary Roads Denver, LLC, (PRD) for the US 36 and I-25 Managed Lanes Project (the project).

Additionally, Fitch assigns a 'BBB-' rating to the approximate $60 million Transportation Infrastructure Finance and Innovation Authority (TIFIA) subordinate project loan to Plenary Roads for Phase 2 of the US 36 (the Phase 2 Loan). As part of the Plenary Roads financing plan, the outstanding $55.4 million senior TIFIA loan to HPTE (original balance was $54 million), issued in conjunction with Phase 1 of the US 36 managed lanes (the Phase 1 Loan) and also rated 'BBB-,' will be assumed by Plenary Roads upon successful completion of Phase 1 of the project. Fitch therefore expects to affirm its existing 'BBB-' rating on the Phase 1 Loan upon successful completion of Phase 1 of the project as this loan was analyzed in conjunction with this financing.

The Plenary Roads managed lanes project funding sources will also include an approximately $20.6 million junior subordinate loan from Northleaf Capital which Fitch will not rate.

Final pricing for the PABs provided an all-in average interest cost of 5.94%. The interest cost is below the rate of 6.5% assumed when Fitch announced its Expects to Rate for the project. The interest rate on the Phase 2 Loan is 3.68%, which is 3 basis points (bps) higher than the rate assumed for the Expects to Rate. The net impact of the change in rates on project coverage is negligible.

PRD's base case financial model assumes overall corridor traffic grows at 1.7% based on historical employment growth in the Denver area. Fitch's Rating Case haircuts this assumption by a full percent in all years and also stresses PRD's expense assumptions annually by 10%. Under this scenario, debt service coverage on the senior PABs and parity Phase 1 TIFIA loan averages 2.7x, reaching a minimum of 1.8x. Including the TIFIA Phase 2 loan scheduled principal and interest payments, the minimum falls near 1.0x. The minimum coverage when including PABs debt service and only mandatory TIFIA payments is higher at 1.3x. Minimal use of the ramp-up reserve fund is required.

Fitch notes that there is an impending threat of a lawsuit from the 'Drive SunShine Institute' potentially challenging the environmental review process of the project. The project has received a Record of Decision (ROD) from the Federal Highway Administration (FHWA) as required by the National Environmental Policy Act (NEPA) approving the U.S. 36 Corridor Final Environmental Impact Statement (FEIS). Required subsequent reevaluations pursuant to NEPA have been obtained stating that no additional studies are needed relative to the environmental impacts of the project.

To the extent that any potential 'Drive SunShine Institute' lawsuit is filed, is successful, and materially impacts the concession agreement, it is Fitch's opinion that the rated project debt would be adequately covered from HPTE payments under an unlikely scenario that the Concession Agreement be terminated by the State after financial close or be subject to material adverse changes. HPTE payments are not subject to appropriation; however, to the extent such payments rely on supporting payments from CDOT, they would be subject to appropriation by the legislature.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Developing Corridor with Moderate Congestion: The asset serves as an important route connecting the currently tolled and operational I25 express lanes in downtown Denver to western suburbs and Boulder. As with other managed lane assets, forecast risk does exist, particularly as the tolling policy and pricing structure could change and there is some dependence on suburban development. The project includes development of a single, toll-paying managed lane in each direction on US 36. High occupancy vehicles (HOV) and Bus Rapid Transit (BRT) use could limit the desirability. Revenue Risk - Volume: Midrange

Toll Rates Provide Limited Pricing Power: Maximum toll rates at project opening are somewhat high relative to rates on comparable assets and could limit PRD's ability to impose real toll increases over the life of the concession in periods of economic stress. In addition, the requirement that toll rates during some periods of the day are no less than the Regional Transportation District's (RTD) express bus fare may limit PRD's ability to maximize revenue if toll elasticity is greater than projected. Revenue Risk - Price: Weaker

Fixed Rate Debt with Structural Protections: All senior and subordinate project debt will be in fixed-rate mode with no refinance risk. The proposed PABs will have a fixed payment schedule while the two TIFIA loans are structured to have flexible amortization profiles through mandatory and scheduled payments as well as interest deferrals for the first five years of operations. Equity distribution triggers, additional bonds tests, and other covenants are viewed as adequate for the Investment Grade rating level. Leverage on the senior and subordinate liens is favorably reduced by the presence of the junior subordinate loan from Northleaf Capital. Debt structure: Mid-range

Adequate Financial Flexibility: Cashflow analysis indicates a good capacity for the project to withstand sensitivities of both lower than projected traffic growth in the corridor and higher expenses over the life of the concession. Under such a Fitch rating case scenario, debt service coverage ratios (DSCRs) can maintain a minimum of 1.3x on TIFIA mandatory payments and PABs principal and interest. Liquidity in the form of a $6 million ramp-up reserve and a separate cash reserve provide additional flexibility, particularly for underperformance in the early years following project completion.

Limited Construction Complexity and Experienced Contractors: Construction elements are relatively straight-forward, consisting of expansion of a facility within an existing right of way, with moderate risks associated with maintenance of operations in the GPLs during construction. The Design Build Joint Venture (DBJV) is comprised of Granite Construction Co. and Ames Construction Co., both experienced contractors currently building Phase 1 of the project. The security package is viewed as adequate with sufficient resources to cover expected debt service payments through the defined Full Service Commencement Long Stop Date in the event of delays. Completion Risk: Midrange

Well Contained Infrastructure Risk: Upon completion, the project will consist of one express lane and two general purpose lanes in each direction, essentially increasing the one-way road capacity by a third. PRD will be contracting with Transfield Services, Limited, for operating and maintenance (O&M) and renewal and replacement (R&R) services in addition to funding maintenance reserve on a five-year forward looking basis. The financings provide a 22-year tail period following the PABs debt maturity, and 15- and 16-year cushions remain following maturity of the Phase 1 and 2 loans, respectively, further mitigating asset reinvestment risk. Infrastructure Renewal and Replacement - Midrange

RATING SENSITIVITIES

Significant Construction Problems: Inability to complete either phase of the US 36 managed lanes on time and within budget may lead to a downgrade.

Higher Leverage: Additional project borrowings resulting in negative pressure on projected debt service coverage ratios could erode credit quality.

Weaker Performance: Inadequate level of managed lane transactions due to lower overall corridor demand, toll sensitivities, changes in economic conditions, or other operational constraints that result in compounded adverse financial impacts below Fitch's rating case projections could result in a downgrade.

SECURITY

The PABs and Phase 1 TIFIA Loan will be secured by a first priority lien on Plenary Roads net revenues. The Phase 2 TIFIA Loan will be secured on a second lien basis with a springing lien to senior upon standard bankruptcy related events as defined in the TIFIA loan agreements. A junior loan obligation from Northleaf Capital will be subordinate to the TIFIA 2 loan.

For a complete review of Fitch's analysis of the project please refer to Fitch's press releases 'Fitch Expects to Rate Colorado High Performance Transportation Enterprise Proposed PABs 'BBB-'' dated Feb. 13, 2014 and 'Fitch: US36 and I-25 Managed Lanes Traffic and Revenue Analyzed,' dated Feb. 20, 2014.

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

Applicable Criteria and 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=821775

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Contacts

Fitch Ratings
Primary Analyst
Charles Askew, +1-212-908-0644
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Director
or
Committee Chairperson
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Charles Askew, +1-212-908-0644
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Director
or
Committee Chairperson
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com