Fitch Affirms Florida Municipal Loan Council Infrastructure Improvement Revs at 'A'

NEW YORK--()--Fitch Ratings has affirmed approximately $59.1 million in Florida Municipal Loan Council (FMLC) infrastructure improvement revenue bonds, series 2012 (9B Design Build Finance Project) at 'A'. 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 the 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. Payments by FDOT can be made over time, as long as obligations for such payments in total do not exceed 15% of total federal and state funding for the State Transportation Trust Fund (STTF).

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 resources should always be sum sufficient to cover debt service.

Mutual Project Benefits & Waiver of Offsets: While the structure of the transaction isolates the bondholder 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 does require 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

--Changes 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 also provides a $2.6 million letter of credit (LOC) in favor of the FMLC 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

Bond proceeds are used to accelerate the SR 9B road project within Duval County to connect US 1 to I-95 via an extension of SR 9B (the project). Infrastructure Development Partners (the 'contractor') has confirmed that project construction has not experienced any drawback or delays. Construction is approximately 45% complete, and is expected to be completed according to schedule. To date, the contractor has been paid $43.9 million of the total contract value of $95 million.

The project is relatively straightforward and consists of connecting US 1 to I-95 via an extension of SR 9B from US 1 to I-95. It also includes adding final interchanges between SR 9B and US 1 that were not part of the phase I project. The completed project will provide full connectivity to both US 1 and I-95. Delay risk is likely tied to inclement weather.

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 FMLC 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 agreement. 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 has 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 draw requests to the trustee. Upon FDOT acceptance of the work and certification of the earned amount, FDOT will make a contract payment pursuant to an agreed upon schedule in the trust indenture and funding agreement. The gap in the schedule will be covered by bond proceeds. The flow of funds requires FDOT contract payments to first be used for interest payments and then to fund contractor draws for work completed. The gap in the schedule, which in this case occurs early on, will be covered by bond proceeds and the capitalized interest account (first seven interest payments). FDOT contract payments will commence in 2013, covering interest payments and supplementing bond proceeds for contractor draws. FDOT payments from 2015 onward will be used to retire the bonds.

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 $2.6 million will be 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 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 becomes 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.

For additional information related to the credit quality of the FDOT contract payments, please see Fitch's press release 'Fitch Rates Florida DOT 9B Payment Obligation 'A' dated Aug. 17, 2012 available at www.fitchratings.com.

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=841191

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Contacts

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

Sharing

Contacts

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