Fitch Affirms Toll Road Investors Partnership II's Revs at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed at 'BB+' the rating for Toll Road Investors Partnership II (TRIP II) Dulles Greenway project's approximately $1 billion in outstanding revenue bonds, series 1999 and 2005. The Rating Outlook is Stable.

The 'BB+' rating reflects Dulles Greenway's relatively high leverage and back loaded debt structure extending to 2056, combined with expected thin coverage and dependence on future toll increases despite already above average toll rates. Revenue risk is partially offset by the presence of healthy reserve balances as well as cash trap triggers and flexibility afforded by the debt structure. In Fitch's opinion, continual rate increases going forward, translating into sustained above-inflationary revenue growth, will be needed. The Virginia State Corporation Commission's (SCC) approved formulaic toll increases add more certainty through 2020; however, political risk surrounding the project's future tolling practices remains.

KEY RATING DRIVERS

Commuter Base Facing Competition in Solid Service Area: Dulles Greenway's metro DC service area supports strong inherent demand and has long term growth potential despite housing induced weakness experienced during the recent economic downturn. Dulles Greenway traffic, which is primarily commuter in nature and has experienced declines back to 2006, has in part been affected by improvements in alternative routes and a series of significant toll increases. Dulles Greenway continues to be subject to some risk from the expansion of free alternatives and implementation of mass transit. Revenue Risk - Volume: Midrange

High Tolls Limiting Ratemaking Flexibility: Congestion management and base toll rates per mile of $0.36 and $0.30, respectively, are among the highest relative to peers in Fitch's rated portfolio, and are likely to be considered high among those who take shorter trips. However, scheduled annual increases through 2020, with the most recent implemented in April 2014, have been approved by the SCC. While the negative effects on demand from toll rate increases to-date have been small, the economic rate-making ability of TRIP II is only moderate. The ability to maximize revenues in a prolonged weak economic climate may be more limited especially when the length of the debt profile and growing debt service obligations are taken into consideration. Revenue Risk - Price: Weaker

Infrastructure Renewal & Capital Works: Dulles Greenway is a relatively young asset with a manageable six-year capital improvement plan through 2019, with over 90% of the $14 million plan allocated to resurfacing. Based on projected levels of traffic and due to the lack of development activity, additional construction works under existing agreements are not expected to occur over the medium-term; the amounts and timing of these construction obligations are currently uncertain. Infrastructure Development & Renewal: Midrange

Back Loaded Debt With Flexible Amortization Structure: The debt service profile steadily increases to maximum annual debt service of $84.7 million at final maturity in 2056, reflecting mandatory redemptions. The debt structure provides flexibility to mitigate potential near-term shortfalls in revenue to meet planned debt service payments in the form of lower principal prepayments on the series 2005 debt and two triggers for cash trapping. However, a continued deferral of planned debt repayment would cause debt service obligations to balloon in the latter years of the project's life. Cash funded reserve balances, with more than $93 million in 2013, provide some added protection. Debt Structure: Midrange

High Leverage With Thin Debt Service Coverage: Leverage is high, in the high 15x range. The facility is dependent on continued toll rate increases and revenue growth through maturity to maintain minimum coverage levels at or above 1.25x. While the minimum debt service coverage threshold has been violated in recent years, a trend that is likely to continue in the near-to-medium term, the requirement to annually trap excess revenues when the threshold is breached somewhat mitigates this factor.

RATING SENSITIVITIES

-- The project's inability to sustain revenue growth at or above an annual rate of around 4% that results in debt service coverage levels at or below 1.10x for a prolonged period would pressure the rating;

-- Changes in the pricing regime resulting in reduced overall tolls and/or lower than expected toll increases would further constrain the project's financial flexibility;

-- O&M and improvement expenses materially above expectations that cause financial flexibility to be reduced;

-- Further capacity enhancements on competing free routes, or significant diversions resulting from the Dulles Metrorail project that reduces Dulles Greenway's value of time advantage would likely weaken credit quality.

SECURITY

The bonds are secured by a pledge of net revenues.

CREDIT UPDATE

Traffic on the Dulles Greenway declined annually between 2006 and 2011, reflecting the combined effects of the economic downturn, the impact of improvements along competing Route 28 that enhance the attractiveness of the toll free alternative, and a series of significant toll rate increases. Traffic stabilized in 2012 and 2013, evidenced by a relatively flat performance in 2012 and 1.3% growth in 2013, despite 8% and 2.5% toll increases in 2012 and 2013, respectively. Data through March 2014 indicate that traffic is down slightly by 0.4% when compared with the same period in 2013, with some of this underperformance likely due to the winter weather conditions in the earlier months offset by stronger March results this year due to falling of the Easter holiday in April versus March of last year when traffic was lower.

As traffic on the Dulles Greenway is primarily driven by commuters, revenue performance will largely be dependent on elasticity of demand and the economic performance of the region. The unemployment rate of below 4% in Loudoun County is currently much lower than the national average. To date, the impact of the traffic declines has been more than offset by the impact of toll increases, resulting in growing toll revenues. In 2013, toll revenues grew by 3.5% to $74.6 million, a rate of growth consistent with the toll increases that took effect in January 2013.

The 2.5% toll increase in January 2013 was the first of those expected to occur annually through January 2020 pursuant to an SCC approved formula equal to the greater of the consumer price index plus 1%, real GDP growth, or 2.8%. The SCC may allow a greater increase if the following three criteria are met: an independent traffic and revenue study finds that tolls will be insufficient to meet minimum coverage ratios, proposed tolls will not materially discourage use of the roadway, and the proposed tolls provide the operator no more than a reasonable rate of return.

Year-over-year toll revenues through March 2014 were slightly down by approximately 0.3% as no toll increases were implemented over this period. In 2013, a member of the state legislature called for the SCC to review the Dulles Greenway's tolling practices with a request that they be lowered. Fitch notes that the investigation of Dulles Greenway's tolling practices is still ongoing and Fitch will continue to monitor events on this front. He also filed an objection to this year's toll increase and a request to delay the increase until 30 days after the General Assembly regular session in March. This has resulted in a two months delay of the 2014 planned toll increase; the final approval to increase toll rates has been issued on April 8 with an effective date of April 11 when the peak and non-peak tolls will increase to $5.10 and $4.20, respectively. This represents a 2.8% toll increase plus an additional three cent increase for payment of an increase in local property taxes to Loudoun County and the Town of Leesburg.

Fitch views favorably the scheduled toll hikes and the continued acknowledgement of the SCC that TRIP II should be allowed to raise rates to comply with covenants to bondholders as it adds certainty to the amount and timing of increases through 2020. Additionally, the inflationary nature of the increases moderate the political risk associated with future toll increases.

Debt service coverage for fiscal 2013 was 1.09x (based on the mandatory redemption schedule). In years where debt service coverage falls below the minimum coverage ratio of 1.25x, excess cashflows must be trapped in the early redemption reserve fund for one year. In the event debt service coverage falls below 1.15x, excess cashflows are required to be trapped for three years. An early redemption reserve is required to be maintained at a minimum of $42.35 million and given cash trapping in prior years, the reserve grew to hold approximately $47.34 million by fiscal 2013. Additionally, a senior debt service reserve fund (DSRF) is present, funded at $84.7 million with $39.7 million in cash and the balance represented by an MBIA surety. Together, the DSRF and early redemption reserve provide adequate liquidity to support any shortfalls in the medium term. Total Dulles Greenway liquidity as of December 2013, inclusive of the reserves noted above and the operating reserve funded at 50% of O&M costs, was approximately $93.6 million which serves as an added mitigant to near term risk.

Fitch's base case assumes traffic growth of less than 1% from 2013 and in this scenario actual debt service coverage based on the mandatory redemption schedule would remain below the minimum coverage level requiring continued trapping of cash in the near term but then grows to over 1.25x in 2019 without regard to the effects of the early redemptions pursuant to the Seventh Supplemental Trust Agreement, and per that calculation Dulles Greenway will not be able to make distributions to investors as. Fitch notes that the flexibility of the debt structure allows for lower scheduled debt service payments, which provides some relief in the near term but only increases the burden in the back end. Under a rating case that contemplate flat to declining traffic, coverage ratios drop to just about 1.0x over an extended time period. Should this traffic profile play out and be viewed as more permanent, negative rating action would be likely.

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 -- 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=826882

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Tanya Langman, +1-212-908-0716
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Tanya Langman, +1-212-908-0716
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com