NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the Buffalo & Fort Erie Public Bridge Authority, NY's, (the authority) approximately $30 million in Toll Bridge System Revenue Refunding Bonds. The Rating Outlook is Stable. The 2014 bonds are being issued to refund the outstanding series 2005 toll bridge system revenue refunding bonds, the unenhanced long-term rating of which is hereby affirmed at 'A' with a Stable Outlook in advance of the refunding.
The 'A' rating reflects the authority's continued strong financial performance despite sluggish traffic trends over the last decade. The authority's demonstrated ability to increase toll rates, to manage its operating cost profile, and to adhere to its board policies related to capital spending priorities and coverage levels are key rating factors. The capital plan is moderately large but is expected to be funded from the authority's substantial liquidity balances and excess cash flows over the next five years without the need for further toll increases.
KEY RATING DRIVERS:
IMPORTANT AND COMMERCIALLY DEPENDENT CROSSING: The Peace Bridge connects interstates in northern New York to the Queen Elizabeth Way in Ontario through to Toronto. It plays an important role in the U.S. and Canada's trading relationship and holds a leading market position for both passenger and truck traffic in the Buffalo-Niagara region. The traffic profile offers limited growth prospects and remains influenced by currency fluctuation, discretionary passenger trips, and to economic activity given the importance of commercial volume, which accounts for 70% of toll revenues. Revenue Risk --Volume: Midrange
MODERATE PRICE FLEXIBILITY: Past toll rate increases have not materially impacted the Peace Bridge's traffic profile. Wait times are the main competitive driver at the bridge crossings in the region, and the Peace Bridge currently maintains the highest inspection capacity between Buffalo and Fort Erie, Ontario. The authority plans to further enhance capacity with its capital improvement program (CIP) and does not foresee a toll increase within the next five years. Revenue Risk --Price: Midrange
DEVELOPING CIP: Of the authority's five-year $157.4 million capital plan, the majority 80% is envisioned to be funded from current fund balances and future excess cash flows. The remainder is expected to be generated from a potential debt issuance, but timing and scope could change. Projects include replacing the aging bridge deck, expanding U.S. inspection capacity, and renovating the U.S. commercial warehouse. Fitch views favorably the requirement in the bond resolution causing the authority to employ a consulting engineer to inspect the bridge annually. Infrastructure Renewal & Replacement: Midrange
STRONG AND CONSERVATIVE DEBT STRUCTURE: The series 2014 bonds are fixed rate and fully amortizing to a short-dated term of 2025, matching the refunded bonds. Security features include a 1.25x backward or forward-looking additional bonds test (ABT) and a fully cash-funded debt service reserve at maximum annual debt service (MADS). Debt Structure: Stronger
HEALTHY FINANCIAL PERFORMANCE: Fitch views positively the authority's history of conservative financial planning, the practice of maintaining high liquidity (2,340 days cash on hand), and strong track record of expense management. Current and expected debt service coverage remains above 2x and leverage is well below most toll bridge facilities.
REDUCED FINANCIAL FLEXIBILITY: Capital projects resulting in significantly increased leverage beyond current expectations and/or materially lower coverage of debt service could result in a lower rating.
TRAFFIC AND REVENUE UNDERPERFORMANCE: Significant declines in traffic and toll revenues for a sustained period could also pressure the rating.
The bonds are secured by a net pledge of toll revenues from the operation of the Peace Bridge.
The 2014 bonds are being issued to refund the existing variable rate series 2005 bonds. The letter of credit (LOC) securing the 2005 bonds and provided by U.S. Bank (currently rated 'AA-'/ 'F1+' with a Stable Outlook by Fitch) is expected to be drawn in an amount to redeem the 2005 bonds on July 1, 2014, and the proceeds of the 2014 bonds are being placed into escrow until July 1, when they will pay back U.S. Bank for the draw on the LOC.
Largely mirroring trends on other crossings in the region, the Peace Bridge has posted significant declines in passenger vehicle traffic since 2000. Key influences to this trend include increased inspection requirements since the events of Sept. 11, 2001; the strengthening of the Canadian dollar; the Severe Acute Respiratory Syndrome (SARS) epidemic; and the most recent recession. Further, the 2009 Western Hemisphere Travel Initiative significantly changed identification requirements to cross each border, reducing the likelihood of casual travel to and from the U.S. and Canada. Nevertheless, the Peace Bridge continues to account for the 40% of auto crossings and 65% of commercial cross-border traffic in the Buffalo-Niagara region.
The last toll increase occurred in 2007, and the previously contemplated 2012 toll increase has been indefinitely deferred as it is not needed for the foreseeable future because of the flexibility afforded by the authority's high liquidity position. While one would expect some competitive risks, the four Niagara bridges, including three operated by the Niagara Falls Bridge Commission (NFBC) located between 22 and 30 miles to the north, appear to complement each other in serving the needs of the region. Toll rate differentials and toll changes in the past have done little to alter market share and suggest that moderate rate-making flexibility continues to be maintained. This is of importance given the dependence on higher yield commercial traffic.
Recent news reports citing the potential for the NFBC to undergo a significant capacity expansion at the Lewiston-Queenston Bridge will be monitored for actual developments. Historically, the two bridges have worked more in a complementary fashion. The Peace Bridge is also aiming to expand U.S. inspection capacity in its capital program.
The current capital plan of $157.4 million is expected to be funded 45% from current liquidity (in excess of $100 million at FY 2013), 36% from excess cash flows after the payment of debt service, and 19% from a potential bond issuance in 2017. Included in the program is a project addressing the re-decking of the bridge and replacement of some of the older structural steel below the deck. The project will occur over the course of three off-peak construction seasons to minimize traffic disruption during busier months.
Other projects are the renovation of the U.S. commercial warehouse facility and the expansion of U.S. inspection capacity. The extent of the latter project depends on the results of the pre-inspection pilot program currently in place on the Canadian side of the border, designed to test the efficiency of U.S. inspection capacity in Canada without increasing congestion on the U.S. side, and whether this project is placed into service on a permanent basis. This development would require a broader agreement between the governments of the U.S. and Canada.
The authority's current capital plan is down from the CIP developed earlier in 2010 of $680 million, which included the construction of an additional bridge span parallel to the Peace Bridge. Delays and a rescission notice by Federal Highway Administration have reduced the likelihood that this project is built in the near-to-medium term. Current traffic projections do not necessitate such a project, and the Peace Bridge's elected preferred alternative to replace the existing deck as opposed to merely rehabbing it render the decision to proceed with building a second bridge more unlikely than in the past.
Total revenues, including toll revenues, duty free, and rental income, grew to $33.2 million in 2013 from $26.0 million in 2003, a CAGR of 2.5%. This reflects a toll increase in 2007 after which toll revenues grew for consecutive years in 2007 and 2008 before a recessionary drop of 9.7% in 2009. Total revenues recovered after the recession somewhat quickly, surpassing the previous 2008 peak in 2011. Since 2003, debt service coverage has averaged close to 5.0x, including some savings generated with the refinancing in 2005. Its minimum over that timeframe was 2.8x in 2003. Going forward, the authority forecasts modest total revenue growth through 2018 of 0.3%, including declines in each of the next two years, with coverage on the 2014 bonds at a minimum of 4.4x.
Fitch notes that current traffic levels can generate sufficient cashflow to maintain high debt service coverage levels. Fitch considers the authority's forecast of very limited traffic growth as prudent given recent history. Overall, the Peace Bridge projects tolled auto traffic to increase by 0.2% through 2025 and total tolled truck traffic to increase by 0.7% as the economy grows steadily and experiences no shocks or recessions.
Fitch's base case adjusts the traffic sponsor's forecast through 2025 down to a 0.3% decline annually through 2025 on average, reflective of continued modest declines in auto traffic and steady growth on the commercial side. Resulting coverage through 2025 does not fall below 3.8x on the 2014 bonds and 2.5x including the potential $30 million issuance in 2017. Fitch's rating case assumes more near-term pressure on traffic as it is assumed diversion from the Peace Bridge is greater than projected during construction of the bridge overlay. Fitch also stresses expense assumptions in its rating case. Resulting debt service coverage on the 2014 and future bonds reaches a minimum of 1.75x when the 2014 bonds mature.
Both cases assume a level amortization beginning immediately in 2017, and, in both cases, leverage does not rise materially above 1.0x on a net basis.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 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
Rating Criteria for Toll Roads, Bridges and Tunnels