Fitch Affirms Brevard County, FL Space Coast Infra Agency Infra Improvement Revs at 'A'

NEW YORK--()--Fitch Ratings has affirmed its 'A' rating on approximately $38.7 million in Space Coast Infrastructure Agency (the agency) infrastructure improvement revenue bonds (I-95 Brevard County DBF Project), series 2012. The Rating Outlook on the bonds remains Stable.

KEY RATING DRIVERS

SOLID ABILITY & WILLINGNESS OF FDOT TO MEET OBLIGATIONS: Bond payments are derived from statutorily authorized payments to be made by Florida Department of Transportation (FDOT), subject to appropriation, pursuant to a design, build, finance (DBF) contract. Pursuant to section 334.30 of Florida Statutes, FDOT can enter into DBF contracts and other public/private partnerships for projects included in FDOT's work program. Fitch views the credit quality of the statutorily authorized payments to be made by FDOT pursuant to the DBF contract as 'A.'

STRUCTURED ARRANGEMENT LIMITS COMPLETION RISK: The bonds are structured similar to a receivable financing, with the bondholder isolated from the risk of the contractor failing to perform. The bonds are structured to have 1.0x coverage. Bond proceeds are only drawn down for FDOT approved work, ensuring that at any time the combination of bond proceeds, contract payments due from FDOT for approved work and structured liquidity is equal to the par amount of the bonds. A termination of the DBF contract and certain other events would lead to a mandatory tender of the bonds but there is no premium should these occur, meaning that available resources should always be sum sufficient to cover debt service.

MUTUAL PROJECT BENEFITS & WAIVER OF OFFSETS: While the structure of the transaction isolates bondholders from completion risk, the statutes that allow FDOT to enter into DBF contracts and FDOT's construction risk mitigation procedures indicate that the interests of all parties are aligned. The DBF approach allows for project acceleration without a short-term impact to FDOT's cash outlay. In addition, this particular financing structure includes a waiver of offsets by FDOT once work has been approved, minimizing leverage on the DBF contractor's balance sheet. In conjunction with these benefits, FDOT requires a surety bond sized to 100% of the contract price and will only be required to pay for work approved. While bondholders are not exposed to contract frustration or contract default, the proper alignment of interests between FDOT and the DBF contractor provides comfort.

RATING SENSITIVITIES

--Change in the credit quality of FDOT's Statutorily Authorized Obligations.

SECURITY

The bonds are secured by FDOT Contract payments and all funds held by the trustee pursuant to the indenture, including the project fund and the bond fund, which includes the reserve account and capitalized interest account. The contractor provided a $2 million letter of credit (LOC) in favor of the agency and the trustee that can be used to cover administrative expenses and other items in the event of a mandatory tender. The bonds are not secured by payments made by the surety.

CREDIT SUMMARY

The contractor, Lane Construction, has expressed that the I-95 DBF Project is progressing as scheduled and within budget. There was a change order request of $2.8 million increasing the contract amount to $120.8 million from $118 million. Lane Construction has been paid $62.6 million out of the updated contract value of $120.8 million, with $2.4 million withheld to date.

To accelerate projects, FDOT has allowed contractors to procure their own financing. However, the financial crisis significantly increased the cost of obtaining funding for contractors, slowing down progress. In addition, the gap between project completion and FDOT payment has also increased, making the cost to contractors prohibitive. To help alleviate this issue, FDOT entered into a DBF agreement with the contractor that commits to a set payment schedule subject to the amount being earned by the contractor and to future appropriation by the Florida Legislature where the project is scheduled in future years. The agency has agreed to advance funds to the project via the bond issue through the funding agreement with the contractor that pledges the future payments from FDOT in the DBF.

As long as the contractor fulfills its obligations to construct the project pursuant to a fixed-price date-certain design build contract, then FDOT agrees to pay FDOT contract payments pursuant to an agreed upon schedule, subject to appropriation. Bond maturities are structured to match this schedule. The contractor is required to have a surety bond that covers 100% of the project cost plus a cushion for a 25% increase.

Pursuant to the contract, the DBF contractor submits monthly draws to FDOT. Upon acceptance of the work and approval of the draw by FDOT, FDOT will make a contract payment pursuant to an agreed-upon schedule in the trust indenture and funding agreement. The scheduled payments are such that FDOT contract payments will first be used for interest payments and then to fund contractor draws for work completed. The gap in the schedule will be covered by bond proceeds and then FDOT contract payments will commence again and retire the bonds. Separately, the capitalized interest account will be used to cover interest on the bonds during the period when FDOT is not providing contractor payments.

A slow-down in construction progress will slow down FDOT payments while accelerated work will only be approved at a level equal to FDOT's cash availability schedule. Pursuant to sections 4.01 and 5.01 of the indenture, a default by the contractor and surety will result in a tender of the bonds, as will a reduction in the contract price exceeding $250,000 or 15 consecutive or cumulative months of failed FDOT work certifications. A LOC equal to $2 million has been provided to cover the use of bond proceeds for issuance costs, administrative expenses, and interest costs during the delay should this situation occur.

Bondholders are isolated from contractor risk through several features of the DBF contract, which includes by reference state of Florida DB specifications and also the DBF request for proposal (RFP) issued by FDOT. In particular, the trustee will not disburse funds in the FDOT contract payment account or the bond proceeds account of the project fund without an FDOT engineering certification that the work meets FDOT standards and has been accepted. There is no retainage under this framework as FDOT normally retains funds in the final quarter of payment. However, in the DBF arrangement, project completion will have already occurred well before. In addition, pursuant to the RFP which is part of the final DBF contract, FDOT indicates that once an approval has been granted, no offsets can be made against that payment. It can only be applied to the approval of future payments. Thus the trustee will only disburse funds for approved work and, pursuant to the RFP, section 337.145 of the State of Florida Statutes regarding offsetting payments is not applicable.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (June 12, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840759

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Contacts

Fitch Ratings
Primary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1-312-368-3187
Analyst
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Raymond Wu, +1-212-908-0845
Associate Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1-312-368-3187
Analyst
or
Committee Chairperson
Saavan Gatfield, +1-212-908-0542
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com