Fitch Affirms Laredo, TX's International Toll Bridge System Revs at 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A+' rating on the City of Laredo, Texas' approximately $41 million International Toll Bridge System revenue bonds. The Rating Outlook remains Stable.

RATING RATIONALE

The City of Laredo, TX International Toll Bridge System (system) serves as a vital international trade link within one of the fastest growing cities in the state of Texas. Despite economic pressures during the prior recession, the system remained resilient and has demonstrated an improving traffic and revenue profile. The credit also benefits from low leverage, a high debt service coverage ratio (DSCR) and a fixed rate debt structure.

KEY RATING DRIVERS

STRATEGIC LOCATION ON MAJOR TRADE ROUTE: The bridge system serves as a major North American Free Trade Agreement (NAFTA) gateway, providing a direct land route from Monterrey and Mexico City to major cities in Texas and along Interstate 35 to Minnesota and the Canadian border. However, traffic volume is susceptible to economic cycles and political decisions on both sides of the border. While overall crossings have historically been affected by heightened border violence and economic downturn, commercial traffic, representing approximately 65% of toll revenues, has remained resilient. Fiscal year (FY) 2013 traffic increased 2.3% with 9.4 million crossings. Revenue Risk: Volume - Midrange

STRONG ECONOMIC RATE-MAKING FLEXIBILITY: The system's economic and political rate-making flexibility is demonstrated by its historical track record of raising toll rates, its relatively competitive tolls and a moderate degree of demand inelasticity. Revenue Risk: Price - Midrange

MODERATE CAPITAL PROGRAM: The bridges are in relatively good condition and funding for any future enhancements is expected to be predominantly bond-funded. Approximately $8 million-$9 million in bonds is anticipated during FY2015 to fund the toll collection system and weigh-in motion upgrade components of the system's five-year $35.4 million capital plan. Infrastructure Development / Renewal - Midrange

CONSERVATIVE DEBT STRUCTURE: All outstanding debt is fixed rate with a 15-year maturity profile and a flat-to-declining debt service schedule. Debt Structure - Stronger

LOW LEVERAGE AND ROBUST COVERAGE LEVELS: The system's low senior lien leverage of 0.7 times (x) net debt/cash flow available for debt service and healthy total DSCR of 4.1x in FY2013 indicate significant cushion against volatility in traffic. The system makes deeply subordinated surplus revenue transfers to the city's general fund equivalent to about 50% of toll revenues, while still ensuring high senior DSCR and maintaining adequate liquidity, currently at about 361 days cash on hand. Fitch's Rating Case, which incorporates substantial multi-year near term shocks followed by no growth as well as additional future debt, demonstrates future stability, with total DSCR of 2.7x and total leverage of 0.8x in FY2018.

RATING SENSITIVITIES

--Negative rating action would be triggered by significant declines in crossings driven by a structural change in economic dynamics, or security concerns which could further restrict or slow border crossings;

--Declining operating margins paired with management's reluctance to raise tolls and inability to control operating and maintenance expenses could also put the rating under negative pressure;

--Meaningful additional leverage.

SECURITY:

The outstanding revenue bonds are secured by a senior lien pledge of net revenues on the toll bridge system.

CREDIT UPDATE:

Overall traffic levels declined at a compounded annual growth rate (CAGR) of 4.1% between FY2008 - 2013 as a result of the global economic downturn and border security concerns. However traffic grew 2.3% in FY2013 to 9.4 million, with commercial traffic up 2.9% to 1.8 million trucks improving the five year CAGR to 2.7%. Management has indicated that the bridges and surrounding areas have not experienced any direct cross-border violence; nevertheless, Fitch notes that violence on the Mexican side has affected traffic results. Through the first four months of FY2014 (through January), total traffic grew 0.9% compared to the same period in FY2013, with commercial traffic further increasing 4.7%. However, commercial traffic is susceptible to the health of the maquiladora industry, which can be volatile, especially given Mexico's recent tax reform that may potentially hinder the recovery of the maquiladora industry.

Despite heavy traffic declines, toll revenue remained flat over the period FY2008-2013 due to a toll increase implemented in FY2008 coupled with resilient commercial traffic, which made up 64% of total revenue in FY2013. During the first four months of FY2014, total revenue increased 17.5% due to another toll increase in October 2013, demonstrating the system's inelasticity to rate increases.

To mitigate traffic losses, the city has historically controlled the system's operating expenditures tightly, which have decreased at a 0.6% CAGR between FY2008 - 2013. FY2013 net revenue of $36.0 million generated a senior DSCR of 5.1x and a total DSCR of 4.1x. Included in the total DSCR are annual debt service payments associated with the system's outstanding $16.9 million subordinate SIB loans.

The bridge system facilitates deeply subordinated transfers to the City of Laredo's general fund. Because the city is dependent on these transfers, the system is designed to maintain high coverage of senior debt as well as moderate levels of liquidity through the utilization of the system's economic ratemaking flexibility. Partially mitigating liquidity risk is the fact that transfers are made after debt service, and city council caps the general fund transfers at 50% of toll receipts while requiring the maintenance of a 15% operating reserve. Should the system's surplus revenue become insufficient to accommodate such transfer, management indicated it would reduce operating and maintenance expenses before they would consider a toll increase. However, any deferral of the system's essential maintenance expenses would be viewed as a concern by Fitch.

The system owns the half of the bridges on the U.S. side of the border. The international toll bridge system is comprised of four bridges, one which primarily handles pedestrian and passenger traffic (Gateway to the Americas Bridge), two that handle a mix of passenger and commercial traffic (Juarez-Lincoln International Bridge and Colombia Solidarity Bridge) and one which handles 100% commercial traffic (World Trade Bridge).

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Jul. 11, 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 --- Effective Aug. 2, 2012 - Oct. 15, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684146

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826762

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Tertiary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Tertiary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com