NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'BBB-' from 'BB', and removed from Rating Watch Positive the rating for the 1997A series San Joaquin Hills Transportation Corridor Agency (SJHTCA) toll revenue bonds. These bonds comprise:
--$176.8 million 1997A series capital appreciation bonds (CABs);
--$518.5 million 1997A series convertible capital appreciation bonds (CCABs).
Simultaneously, Fitch has affirmed the 'BBB-' rating on SJHTCA's 2014A series senior lien current interest bonds and the 'BB+' rating on SJHTCA's 2014B series junior lien current interest bonds. The Outlook on all ratings is Stable.
The upgrade and removal of the rating watch reflects SJHTCA's successful completion of its restructuring, with financial close for the issuance of the 2014 series senior and junior lien bonds having been reached on Nov. 6, 2014. Following completion of the restructuring, all senior lien bonds - both newly issued 2014 series and also pre-existing 1997 and 2011 series bonds rolled into the new structure - are rated 'BBB-' on a pari passu basis, with newly issued 2014 series junior lien bonds rated 'BB+'.
The 'BBB-' senior lien and 'BB+' junior 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.
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 Foothill/Eastern Transportation Corridor Agency (F/ETCA) and E-470 Public Highway Authority.
RATING SENSITIVITIES
Negative - Weak Pricing Power: SJHTCA 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 have refunded all callable series 1993 and 1997 bonds, as well as $914 million (maturity value) non-callable series 1997 bonds whose tender was accepted by SJHTCA. The remaining $695.3 million of non-callable series 1997 CABs and CCABs have been rolled into the new structure and are supported by a sinking fund. The transaction closed 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.
Please see 'Fitch Assigns Final Ratings to San Joaquin Hills' (CA) Restructuring Debt; on Positive Watch', published Oct. 29, 2014, for more details.
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=917715
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