CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the Illinois State Toll Highway Authority's (ISTHA, or the authority) approximately $450 million series 2014B toll highway senior revenue bonds. In addition, Fitch affirms its 'AA-' rating on the ISTHA's approximately $4.2 billion outstanding toll highway senior revenue bonds. The Rating Outlook is Stable.
RATING RATIONALE:
The rating reflects the essentiality of the tollway, demonstrated by the stable and growing traffic base since 1974 and moderate price elasticity, as well as its historical and projected strong debt service coverage. Total leverage remains a concern as the authority embarks on its MOVE Illinois capital program, which is expected to require issuing a total of $5.1 billion in bonds (including the 2013A and 2014B issuances), yet Fitch notes that this is partially mitigated by a history of delivering capital programs on time and under budget, a very robust balance sheet position (nearly 3 years DCOH), and an approved 60% commercial toll increase to be phased in beginning in 2015, which complements the 88% passenger vehicle increase implemented in 2012.
KEY RATING DRIVERS:
ESSENTIAL ROAD NETWORK WITH STABLE DEMAND: The tollway system's critical
transportation links serve the Chicago and Northern Illinois
metropolitan area and provide key connections to interstate highways. As
a result, toll transactions have grown nearly every year since 1974;
however, the five-year compound annual growth rate (CAGR) is just 1.0%
as a result of recessionary effects, the operational interruptions of
the Congestion Relief Program (CRP), and modest elasticity to the recent
passenger toll increase. The network benefits from a commuter base
accounting for 88% of total transactions, although the recent passenger
toll increase and approved future commercial toll increases could
suppress demand in the near term.
(Revenue Risk: Volume - Stronger)
MODERATE RATE-MAKING FLEXIBILITY: While ISTHA has full legal authority
to adjust toll rates, Fitch notes that future toll increases beyond
those currently approved are uncertain. However, ISTHA's passenger car
rates are very competitive, providing significant economic ratemaking
ability as evidenced by the lower-than-expected 4.2% drop in traffic
following the 88% passenger toll rate increase in 2012. Commercial toll
increases aggregating 60% over current levels are approved to be phased
in over 2015-2017, with CPI-based increases thereafter.
(Revenue
Risk: Price - Midrange)
LARGE CAPITAL PLAN PARTIALLY DEBT-FUNDED: ISTHA is in year three of its
recently approved 15-year, $12.1 billion MOVE Illinois capital program.
Funding is expected from $5.1 billion of new money issuances with the
remainder coming from cash flow, supported by the recent and future toll
increases. Fitch notes that the authority has nearly completed its
existing $5.7 billion CRP on time and under budget.
(Infrastructure
Development/Renewal - Midrange)
DEBT STRUCTURE WITH VARIABLE-RATE EXPOSURE: Following the recent $500
million new issuance in 2013, nearly 31% of the ISTHA's outstanding debt
is variable rate. However, this should decline to approximately 22% by
2015 with the issuance of additional, future fixed-rate debt for the
capital program. Maximum annual debt service is presently $341.4 million
in 2030 but is estimated by the authority to increase to approximately
$625 million as a result of the MOVE Illinois borrowing.
(Debt
Structure - Midrange)
MODERATE LEVERAGE WITH FINANCIAL METRICS FACING PRESSURE: The current tollway system's debt burden is large at $4.2 billion, and is expected to increase measurably to $7.9 billion in conjunction with the capital program. However, the authority's net debt-to-cash flow available for debt service is moderate at an estimated 4.4x for 2013 and is expected to increase to the 6.5x range as a result of the MOVE Illinois program. Debt service coverage ratios (DSCRs) have historically been 1.8x or higher and Fitch's base case projections indicate DSCRs could remain at or above 1.8x through the medium term (excluding Build America [BABs] subsidies). Strong liquidity of 1,062 days cash on hand as of fiscal 2013 provides the authority with additional financial flexibility.
RATING SENSITIVITIES:
--HIGHER CAPITAL SPENDING: Increased project costs or additional projects added to the 15-year MOVE Illinois program, particularly for non-tollway system capital projects, that materially increases leverage.
--LACK OF TIMELY TOLL ADJUSTMENTS: Failure to adjust tolls in the face of traffic and revenue underperformance or increases in operating expenses could result in weaker than expected coverage ratios.
--DEBT STRUCTURE RISKS: A rising interest rate environment could result in lower financial flexibility as the authority issues the remaining $4.2 billion (post 2014B bonds) debt-financed portion of its capital plan over the next nine years.
SECURITY:
The authority's debt is secured by a pledge and lien on the net revenues of the tollway system. Net revenues are defined in the indenture as the annual revenue of the system less operating expenses. Revenues exclude transfers to the revenue fund from the construction fund and transfers to the trustee by the authority from the system reserve account, the improvement account, or the renewal and replacement account. The BABS direct payment subsidy is not treated as revenue under the indenture.
TRANSACTION SUMMARY:
The authority is issuing its second series of new money bonds in the amount of $450 million for the $12.1 billion MOVE Illinois, 15-year capital program. These bonds are fixed-rate with a final maturity of 2039 and are expected to price the week of May 5, 2014. Approximately $444 million will go towards project costs and $29 million will cash-fund the debt service reserve. The debt service profile is being structured to wrap around existing debt service, with an estimated $110 million being amortized thru 2034 and $340 million amortized 2035-2039. Fitch has known about this issuance and it has already been factored into prior analyses.
The authority achieved an estimated fiscal 2013 DSCR of 2.41x (excluding BABs subsidies), slightly down from the 2.84x coverage in 2012, but still markedly above the 1.70x-1.81x coverage seen in 2010-2011. This drop was expected given the increased debt service profile following the series 2013A issuance as well as an anticipated growth in operating expenses. Nevertheless, this performance slightly surpassed budgeted levels and was in line with historical results. Fitch's base case projects coverage to continue to decline as the authority takes on additional debt, yet remain consistent with the current rating level.
Passenger traffic rebounded in 2013, growing 1.2% after declining 4.2% in 2012 as a result of the 88% passenger toll increase. This was less than the 1.8% recovery forecast by the authority's traffic consultant; however, commercial traffic continued its strong performance, growing another 3.7% versus the 1.5% forecasted. Combined, overall transactions grew 1.5% versus the 1.8% growth projected to 816 million (just 2% off peak volume). As a result, toll revenues grew 2.3% to an estimated $943 million.
The traffic base and revenue mix remained nearly constant in 2013 following the shift in 2012 that resulted from the 88% passenger toll increase. Traffic volume remains approximately 90% commuter oriented and passenger vehicles now account for approximately two-thirds of toll revenue. This revenue paradigm will likely shift again, however, when the approved 60% commercial toll increase is phased in during the 2015-2017 period with CPI-based increases to commercial traffic thereafter. No future passenger toll increases are planned at this time; however, Fitch expects management to take action to maintain metrics commensurate with the current rating if necessary.
Operating expenses grew sizeably to $277 million (9.6%) in 2013, yet still remained under budget ($283 million) and followed several years of expense reductions and containment. Drivers were predominantly contractual services, payroll, insurance, and equipment, but increases were seen in most line items. Management has projected 2-3 more years of slightly elevated expense growth before levelling out in the 4% per annum range. Fitch similarly projects operating expense growth in the 4%-5% range through the forecast period, in line with the consulting engineer's projections.
The authority has recently embarked on the new MOVE Illinois program while progressing to near completion on its existing CRP (90% complete with a 2016 delivery target and no additional bonding). A second $450 million new money bond issuance related to MOVE Illinois is expected to close later this year (forth quarter) with the remaining $3.7 billion to be issued periodically over the next eight years.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 12, 2012;
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated 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=827551
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