Fitch Affirms Riverside County Transp Commission, CA Sr Bonds & TIFIA Loan at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the Riverside County Transportation Commission, CA's (RCTC) approximately $176.7 million 2013 series A and series B senior lien revenue bonds. Fitch has also affirmed the 'BBB-' rating on the RCTC's approximately $421.1 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook is Stable.

The affirmations reflect satisfactory project progress to-date with Fitch's expectation that the SR-91 Express Lanes project will be delivered on schedule by January 2017 and broadly on budget. Although actual right of way (ROW) acquisition costs have run higher than initial forecasts, RCTC is responsible for delivering all necessary ROWs to the contractor and will assume all related cost increases, outside of available contingency funds, through a combination of Measure A sales tax funds, other available resources and project costs savings made elsewhere. Macroeconomic conditions of Riverside and Orange counties are showing signs of positive improvement and broadly consistent with Fitch's expectations at project financial close. In Fitch's view, prospects for the SR-91 corridor congestion to yield toll revenues in-line with Fitch original base case remain reasonable. The flexibility offered by the debt structure through the TIFIA loan provides added protection during ramp-up.

KEY RATING DRIVERS:

Moderate Completion Risk: The terms of the fixed priced design-build (DB) construction contract with Atkinson Contractors and Walsh Construction Company, including cost and schedule contingencies, are consistent with investment grade standards. Security package includes 100% parent guarantees and liquidated damages, which adequately mitigates completion risk. Project construction complexity is viewed to be straightforward and consists mostly of lane widening. Continued road operation during construction and relocation of certain existing infrastructure as well as the acquisition of ROW adds some complexity to the project. Completion Risk - Midrange

Demonstrated Traffic Volumes: The highly congested SR-91 corridor is the only major surface transportation facility connecting Orange County and Riverside County. The project represents an extension of existing express lanes already operating inside Orange County for 18 years and has an established traffic demand. Nevertheless, the expansion of free alternative competing general purpose lanes directly next to the express lanes, uncertainty regarding the future economic environment and further future corridor improvements, could all impact congestion levels in the corridor. Revenue Risk: Volume - Midrange

Some Price Certainty: RCTC tolling policy will permit relatively frequent toll adjustments to manage traffic throughput. Since many users are expected to be familiar with the toll rate structure in adjoining Orange County managed lanes, Fitch believes there will be some understanding of pricing power. Similar to other managed lanes, this project is vulnerable to compounded traffic and price declines during economic downturns. Revenue Risk: Price - Midrange

Infrastructure Risk is Well Managed: Upon completion, road capacity in each direction will increase from five to eight lanes. Renewal and replacement (R&R) expenditures are validated by an independent engineer providing comfort, as does a forward-looking R&R reserve. The existing toll facility agreement for the project provides a 16-year tail after debt maturity and should allow for a more flexible timetable for long term asset reinvestment. Infrastructure Renewal and Replacement - Midrange

Strong Features Mitigate Back-Loading: All senior lien revenue debt is fixed rate and amortizing, and the TIFIA structure allows for some flexibility between mandatory and scheduled interest payments. The aggregate debt service schedule is back loaded, with maximum annual debt service (MADS) occurring in 2049, and may be exacerbated by any necessary scheduled interest deferral. The additional bonds test (1.30x) and distribution test (1.30x) reference TIFIA scheduled debt service, which provides additional flexibility. All obligations must be met at 1.0x, including R&R expenditures. Debt Structure - Midrange

High Leverage, Adequate Coverage: The Fitch's rating case yields minimum debt service coverage, including senior and TIFIA mandatory, of 1.30x in the years between 2022 and 2049. Given the inherent TIFIA flexibility, adequate financial cushion to deal with weaker conditions exists on both liens of debt. The financial metrics indicate a minimum loan life coverage ratio of 2.05x in the sponsor case and 1.24x in the Fitch rating case. Leverage is initially very high and evolves down overtime, as would be expected immediately post-construction for such a facility.

RATING SENSITIVITIES:

--Unforeseen construction delays and cost overruns;

--Traffic and revenue performance at or below the Fitch rating case and/or operating and R&R expenses materially above expectations that cause financial flexibility to be reduced could lead to rating pressure.

--Traffic and revenue performance in line with or better than the sponsor case, with no additional debt issuances may positively improve financial metrics and flexibility.

SECURITY:

The senior lien revenue bonds and subordinated TIFIA loan are secured by a pledge of project net toll revenues derived from the operation of the project and the related senior and TIFIA debt service reserve funds. The priority of the TIFIA Loan springs to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.

CREDIT UPDATE:

The project's substantial completion date remains unchanged with construction anticipated to be completed in early January 2017. Pre-construction activity has commenced in March 2014 and major construction is expected to start by July 2014. Site preparations continue on schedule and all remaining environmental permit approvals are expected to be obtained by the end of 2014. Utility relocations and railroad crossing approvals are expected to progress on or ahead of schedule. RCTC is responsible for ensuring ROW availability to the contractor by specified dates to allow advancement of construction phases. As of April 2014, RCTC has acquired 128 out of 241 parcels and ROW is presently expected to be 100% available to the contractor by April 2015. While considerable work remains to complete the necessary ROW acquisitions, the board continues to support the eminent domain process and RCTC does not anticipate any significant delays in the schedule due to ROW.

Through April 2014, change orders as well as cost savings in other areas have modestly decreased the design-build contract value by approximately $300 thousand to $632.3 million. Other pending change orders are expected to result in additional cost savings north of $1.8 million mainly from value engineering changes. On the other hand, RCTC's direct project costs have exceeded the original forecast and are now estimated at $616.4 million, or approximately $95 million above the original projections. Major cost increases are attributable to ROW-related costs overruns and the recently executed toll system installation and integration contract. Based on revised estimates, total ROW acquisition costs are estimated at $225 million, or about $81 million more than originally budgeted. In addition, ROW-related legal and management costs are expected to exceed projections by about $12 million. To mitigate the impact of commission's cost increases, RCTC increased its contingency budget to $66 million from $62 million, which includes $31 million for ROW and $25 million for design-build costs (4% of the design-build contract). To the extent needed, additional funding is expected to come from available contingency funds, commission's sources, including equity contributions and Measure A sales tax revenues and cost savings.

The proceeds of the senior lien revenue bonds and the TIFIA loan, along with $462 million in sales tax bonds and about $216 million in RCTC and state funds are being used to fund the project. The project consists of the development, design, finance, construction, maintenance and operation of SR-91 Express Lanes in Riverside County. Expansion of the corridor includes extension of the two existing SR-91 Express Lanes from the Orange/Riverside County line approximately eight miles to the Interstate 15/SR-91 interchange in Riverside County. The project will also involve the construction of one new general purpose lane in each direction from SR-71 to I-15, ultimately providing two tolled Express Lanes, five general purpose lanes and an auxiliary lane in each direction. There will only be three points of ingress/egress: at the Riverside County/Orange County line; west of I-15; and, I-15, south of the SR 91. The project also includes future improvements (2035) including an additional general purpose lane and improvements to the SR91/SR71 interchange.

SR-91 originates in southern Los Angeles County at the Harbor Freeway (I-110), passes through northern Orange County, and terminates at the SR-60/91/215 interchange in Riverside County. Geographically constrained by the Santa Ana Mountains, the corridor is heavily congested and serves as an important commuter route linking a diverse employment base in Orange County with a relatively affordable housing base in Riverside County.

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

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=836553

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Zane Latham
Associate Director
+1-415-732-5612
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Zane Latham
Associate Director
+1-415-732-5612
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com