NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the rating on the Richmond Metropolitan Authority's (RMA, the authority) approximately $94.8 million in outstanding expressway toll revenue bonds to 'A' from 'A-'. The Rating Outlook is Stable.
The upgrade reflects steady performance above Fitch's previous base case expectations and the lack of significant traffic growth needed going forward to service debt at a level consistent with peers currently rated 'A'. Fitch expects RMA will implement a modest toll increase around 2018 as debt service obligations reach maximum annual debt service (MADS) level. However, the authority would not require such an increase in order to meet capital and debt obligations over the next 10 years at debt service coverage ratios (DSCRs) that would remain consistent with an 'A' category rating in Fitch's base case scenario.
KEY RATING DRIVERS
--Stable Commuter History: The expressway system has a long operating history and mature traffic profile and serves a significant commuter base to and from the downtown Richmond metropolitan statistical area (MSA). Relatively stable employment and population trends supported a reasonable level of traffic resilience during the 2007-2009 downturn. Revenue Risk-Price: Midrange
--Moderate Price Risk: RMA maintains independent rate making flexibility to adjust tolls as needed. The lack of significantly viable economic alternative routes and relatively low tolls provide the RMA with moderate economic rate making ability. However, infrequent toll adjustments suggest some political unwillingness to implement increases. Revenue Risk-Price: Midrange
--Limited Debt Needs and Healthy Infrastructure: The authority exhibits a solid track record of maintaining its infrastructure, with 93.1% of the facility's lane miles rated 'good to excellent' by the authority's technical adviser, HNTB. Likewise, the engineer's report indicates no structural deficiencies on the bridges. The capital program is moderate and expected to be funded from excess cash flows for the foreseeable future. Infrastructure Development & Renewal: Stronger
--Conservative Capital Structure: RMA has no outstanding variable rate debt, and legal covenants compare adequately to those of peers. The 1.0x MADS requirement limits back-loading of debt. Debt Structure: Stronger
--Solid Financial Metrics and Liquidity: RMA's DSCR has increased from 1.4x amidst the recession to above 2.0x in fiscal 2012 and 2013, reflecting improving performance and the smoothing of its debt profile following the debt issuance in the fall of 2011. Coverage is expected to remain at current levels for the foreseeable future as the debt service profile does not require significant traffic and revenue growth. Leverage is moderate, with fiscal year-end net debt to cash flow available for debt service at 5.7x.
--Maintenance of DSCR within or above the 1.7x-1.8x range and generation of adequate cash flows to fund life cycle capital cost.
--Management or board decisions that lead to a weaker financial profile of the authority.
The bonds are secured by net toll revenues of the expressway system.
Expressway system traffic grew by 1.8% and 0.7% in fiscal years 2012 and 2013 respectively, and is highly correlated with employment in the Richmond MSA, a growing metropolitan area and regional center for employment and cultural amenities. The economy, which has traditionally been dominated by the government sector, has gained strength from education and health services, anchored by Virginia Commonwealth University (VCU). Recent relatively volatile employment growth is mitigated by RMA's lack of dependence on traffic growth, as evidenced by 2013 net revenue MADS coverage of 1.74x.
Fitch considers the demand profile to be stable going forward, while at the same time not offering significant growth. Fitch therefore views the authority's conservative approach to traffic forecasting as prudent.
Toll rates are relatively low at $0.09 per mile according to Fitch calculations. Fitch notes that the highest level of traffic on the facility is generated from Chesterfield County, where wealth indicators are markedly stronger than those exhibited by the city of Richmond. Increases in the toll rate can generate significant growth in revenues, as evidenced by the toll increase in fiscal year 2009 which led to a revenue increase of 26.4% in the midst of an annual traffic decline of 8.1%. Fitch notes that under a scenario in which tolls are not raised in 2018 as currently planned, the RMA still retains sufficient flexibility to meet the demands of the current expressway system at an 'A' category rating level.
As a result of legislation passed in March 2014, to be effective as of July 1, 2014, the composition of the authority's board has changed. Five members from each jurisdiction--the city of Richmond, Chesterfield County, and Henrico County--will comprise the board, altering the current structure under which a majority six of the 11 members served from Richmond. As always, one board member will be appointed from the Commonwealth of Virginia's Commonwealth Transportation Board (CTB). Also, under an agreement reached between the RMA's board and the city of Richmond, control of the RMA's parking decks has passed to the city, and the Diamond, home to the Richmond Squirrels baseball team and previously operated by the RMA, will also revert to city ownership at the end of this year. Though the parking decks and baseball facility have never had any recourse to the expressway system's revenues, Fitch views as a positive that these assets are no longer under the authority's purview as, historically, debt service obligations related to these facilities have been supplemented by the city of Richmond.
Fitch views equal representation on the board and the 2011 repayment by the authority of a long-time subordinate accreting loan obligation of the RMA to the city as credit positives. However, it remains to be seen what new projects or priorities the new board will emphasize over the medium-to-long term. The 'A' rating on the authority's expressway system revenue bonds assumes that it will balance any new projects undertaken for other regional transportation priorities with the maintenance of its currently projected sound financial profile.
The RMA's financial flexibility as measured by a variety of indicators is strong. Netting out unrestricted cash and investments and debt service reserve funds, the expressway system's fiscal year 2013 leverage was 5.7x net senior debt to cash available for debt service. When only considering current unrestricted cash and investments, the authority's days' cash on hand of 225 as at fiscal year 2013 was relatively low. However, when all unrestricted resources in the excess balances fund and repair and contingency fund are considered, the amount of cash is equivalent to 601 days on hand of the current fiscal year's projected operating expenses and capital expenditures.
DSCR in 2013 in excess of 2.0x exceeded Fitch's base case expectations, due to slightly higher than anticipated traffic growth and operating expenses that came in under budget.
Fitch's current base projections assume slow but sustained traffic growth and an increase in tolls by $0.10 in 2018, as Fitch understands is planned by the authority. Operating costs increase 4.0% after a budgeted 12.1% increase in fiscal year 2014. The 4.0% growth rate matches closely the previous 10-year historical compound average growth rate of 4.3%, a period during which the scope of the system increased by over 10%. Operating costs per lane mile have increased 3.1% over the same timeframe. Fitch notes that the assumed 14% toll increase is less in magnitude than the 40% increase that was implemented in 2009 to maintain healthy financial margins during the recession. DSCR remains in the 2.0x range through the forecast until debt service drops off materially in 2023. Leverage slowly migrates downward to 2.8x in 2023.
Fitch's rating case assumes a repeat of the recession in 2018, the year that debt service ramps up to $14.9 million from the current $12.9 million and that the authority increases tolls as planned. Traffic growth declines by 8.1% and 1.9% in 2018 and 2019, respectively, and exhibits the similar modest recovery that has taken place since 2011. In addition, expenses are stressed at 100 basis points (bps) above the base case assumption in all years, growing 5% from 2015. Resulting DSCR reaches a minimum of 1.7x for four years before increasing to 2.5x in 2023 when the debt burden eases. Leverage decreases steadily to 3.4x by 2023.
Fitch ran a sensitivity scenario off its base case in which it assumed the authority issues $100 million in debt over the next four years for projects outside the current scope of the expressway system, assuming no revenue uplift from the addition of any such facilities. The new debt is assumed to amortize at a level profile from 2019. Coverage drops to 1.4x for four years before increasing back to the 1.8x range. Leverage, though escalating to above 7.0x when the debt is issued, still migrates down to 2013 levels by 2023. Under such a scenario, the RMA's current revenue bonds could experience some downward rating pressure, though Fitch considers it unlikely that the rating would fall below the 'A' category.
RMA's three facilities (Powhite Parkway, Downtown Expressway, and Boulevard Bridge) have been operating since the 1970s. RMA is a commuter-oriented system, connecting Chesterfield County (64% of trip origins) and Henrico County (8%) to downtown Richmond and the dense northwestern part of the city. The RMA, a political subdivision of the Commonwealth of Virginia, was created in 1966 to provide and operate an urban expressway system that would make downtown Richmond more accessible to surrounding areas. The authority retains the ability to toll and operate the facility while any bonds are outstanding.
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
Rating Criteria for Toll Roads, Bridges and Tunnels