SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned 'BBB-' and 'BB+' final ratings with a Stable Outlook to San Joaquin Hills Transportation Corridor Agency (SJHTCA) $1,099 million 2014A series senior debt and $293.91 million 2014B junior debt respectively. The debit is being issued to refinance approximately $1,460 million of the authority's existing $2,055 million senior debt, with financial close expected to occur on Nov. 6, 2014.
Fitch also maintains the 'BB' ratings on the authority's existing senior debt on Rating Watch Positive; $731.5 million of existing debt will be maintained within the new debt structure.
The 'BBB-' senior lien and 'BB+' subordinate lien ratings reflect the role of SR73 as a congestion reliever in the congested transportation corridor served by interstates 405 and 5, the demonstrated willingness to aggressively set toll rates to meet bondholder covenants, the likely growing ability to price despite near-term limitations, and the limited capital investment risk on this debt structure. These factors are weighed down by the significant leverage of 15x but that risk is mitigated by the smoother debt service profile following this debt restructuring that, along with robust cash reserving, will leave SJHTCA dependent on only modest revenue growth to service debt. The Positive Watch on the existing senior debt reflects the Fitch's expectation to upgrade existing debt that is being rolled into the new structure once financial close for the new debt issuances has been reached.
SJHTCA operates a 15-mile tolled stretch of State Road (SR) 73 in Orange County, California, that provides congestion relief to the parallel interstates 5 and 405 and Pacific Coast Highway toll-free roads. California Department of Transportation (Caltrans) has title to the road and is responsible for its upkeep. SJHTCA's responsibilities are as set out in a cooperative agreement between the two agencies and are limited to toll collection and staff expenses until 2050.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Traffic Stabilizing Below Peak: SR73 serves as a congestion reliever to interstates 405 and 5. Annual transactions have remained broadly flat at around 25 million since fiscal year (FY) 2010, prior to which they had peaked at 31 million in FY2007. Continuing improvement in the local economy as evidenced by falling unemployment and recovering housing prices should support traffic stability and modest growth.
Revenue Risk - Price: Weaker
Limited Pricing Power: The cash toll rate of $0.43 per mile is among the highest among Fitch-rated U.S. toll roads; Fitch believes SJHTCA will have limited pricing power for the next few years, although the ability to recover inflation should strengthen thereafter.
Infrastructure Development & Renewal: Stronger
Limited Capital Needs: Caltrans is responsible for renewal and maintenance of the road, with SJHTCA only responsible for administrative and toll collection functions. Its exposure to infrastructure risk is therefore limited.
Debt Structure: Senior - Midrange; Junior - Midrange
Escalating Debt Service Profile: Senior and junior debt is fixed rate and amortizing. However, it is somewhat back-ended, gradually escalating through FY2041. A strong cash reserve structure helps mitigate this, as does significantly reduced maximum annual debt service (MADS) as compared to the previous structure.
Metrics
Consistent with Criteria: Fitch rating-case senior debt service coverage ratio (DSCR; average 1.55x and minimum 1.34x) are in line with criteria guidance for standalone toll facilities in the 'BBB' category, with junior debt average and minimum rating case DSCRs of 1.33x and 1.21x, respectively, indicating the strong sub-investment-grade credit quality of this lien. The new debt structure requires significantly less revenue growth over time in order to fully service debt, with breakeven gross toll revenue compounded annual growth rates (CAGR) being 0.78% and 1.45% at senior and junior levels respectively.
Peers
New Structure Puts Issuer In-Line with Peers: Project metrics are broadly in line with standalone facility peers with senior debt rated in the low 'BBB' category, such as Foothills/Eastern Transportation Corridor Agency (F/ETCA) and E-470 Public Highway Authority.
RATING SENSITIVITIES
Negative - Inability to Increase Tolls: SJTCA being unable to implement inflationary toll increases without impacting traffic would have a negative rating effect.
Negative - Increasingly Volatile Demand Profile: traffic demand proving more volatile than expected would put ratings under pressure.
Positive - Consistent Financial Outperformance: although near-term positive rating changes are unlikely, a sustained performance in terms of debt metrics above Fitch's base case could lead to upward rating pressure on senior lien debt.
TRANSACTION SUMMARY
The senior and junior series 2014 bonds are expected to refund all callable series 1993 and 1997 bonds, as well as $914 million (maturity value) non-callable series 1997 bonds whose tender has been accepted by SJHTCA. The remaining $731.5 million of non-callable series 1997 capital appreciation bonds (CAB) and convertible capital appreciation bonds (CCAB) will be rolled into the new structure and supported by a sinking fund. The transaction is expected to close on Nov. 6, 2014. New senior and junior lien bonds have been issued at a premium to yield 3.65%-4.45% and 4.55%-4.80% depending on tenor, respectively.
SJHTCA is restructuring its debt to improve credit stability, currently constrained by a sharp increase in annual debt service over the period 2025-2035 that has effectively left the authority in the position of needing to restructure its debt at some point between now and that time. The current restructuring extends and smoothes the agency's debt service profile, and should remove need for further restructurings in the future. It reintroduces a rate covenant of 1.30x on senior debt and also introduces a new rate covenant of 1.10x on junior debt.
SJHTCA's ability to service debt is supported by a strong reserving structure that envisages separate debt service reserve funds (DSRF) at the senior level (funded up to 100% of MADS) and junior level (funded to the lower of 10% of initial junior debt par, 100% of MADS or 125% of current period debt service), a supplemental reserve account funded up to 50% of total MADS (unfunded at close), as well as a $15 million use and occupancy fund (fully funded at close), among other things, to help meet extraordinary maintenance costs.
Despite a 10.2% increase in average toll rates, FY2014 transactions were 26.5 million, 5.91% higher YoY, and gross toll revenue increased 16.5% to $117.1 million. FY2015 gross toll revenue is projected to be $122.2 million though transactions are forecast to decline 2.4% to 25.8 million. For the 2000-2014 period, gross toll revenue grew at a 6.77% CAGR. Despite this, 2014 transactions were essentially flat on 2000, with transactions having experienced a CAGR of -0.05% over the period. However, over the same period average toll rates grew at a 6.82% CAGR. Over the intervening period, transactions have followed the general direction of the economy with declines in 2001, 2008, 2009, 2010, and 2013. Transactions peaked at 31.1 million in 2007 since stabilizing at approximately 25.5 million annually. The overall stagnant performance in terms of transactions over the period is largely a result of the aggressive toll rate increases implemented, which have served to prime the revenue pump to the detriment of volume.
Ahead of the proposed restructuring, SJHTCA has obtained an updated T&R forecast from Stantec Inc. (Stantec), which envisages a gross toll revenue CAGR of approximately 3.2%, which Fitch views as relatively conservative in the context of historical revenue performance on the toll road as well as continued regional population growth. Fitch has adopted Stantec's T&R forecast in its base case, which reflects more conservative assumptions with respect to ancillary violation, fee and interest earnings income. In the Fitch base case, the DSCR calculated excluding reserve drawings averages 1.70x, with a minimum of 1.42x for senior debt, and averages 1.46x with a minimum of 1.21x for junior debt.
In its rating case, Fitch has adopted a more conservative T&R projection reflecting the prospect of slower traffic growth (CAGR of 0.23%). In this scenario, senior DSCR averages 1.55x with a minimum of 1.34x, while junior DSCR averages 1.33x with a minimum of 1.21x. Further supporting Fitch's ratings is the breakeven analysis, which suggests that, under the proposed new debt structure, SJHTCA will have only relatively limited dependence on toll revenue growth, reflecting the strong cash reserve structure available to support debt service. The breakeven gross toll revenue CAGRs at senior and junior levels, respectively, are 0.78% and 1.45%, considerably below most long-term assumptions for inflation of 2%-2.5%.
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' (Aug. 20, 2014).
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=758708
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=911034
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