Fitch Rates Illinois Tollway's Series 2014D Toll Highway Revs 'AA-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned an 'AA-' rating to the Illinois State Toll Highway Authority's (ISTHA, or the authority) approximately $270 million series 2014D toll highway senior revenue refunding bonds. In addition, Fitch has affirmed its 'AA-' rating on ISTHA's expected $400 million series 2014C and approximately $4.7 billion outstanding toll highway senior revenue bonds. The Rating Outlook is Stable.

RATING RATIONALE:

The rating reflects the essentiality of the tollway, evidenced by the stable and growing traffic base since 1974 and moderate price elasticity, as well as its historical and projected strong debt service coverage. Total leverage will remain relatively high as the authority embarks on its MOVE Illinois capital program, which is expected to require around $5 billion in total debt funding. Fitch notes that this is largely mitigated by a history of delivering capital programs on time and under budget, a very robust balance sheet position, and an approved 60% commercial toll increase to be phased in beginning in 2015, which complements the recent 88% passenger vehicle increase.

KEY RATING DRIVERS:

Revenue Risk: Volume - Stronger

ESSENTIAL ROAD NETWORK WITH STABLE DEMAND: The tollway system's critical transportation links serve the Chicago and northern Illinois metropolitan area and provide key connections to interstate highways. As a result, toll transactions have grown nearly every year since 1974; however, the five-year compound annual growth rate (CAGR) is just 1% as a result of recessionary effects, the operational interruptions of the Congestion Relief Program (CRP), and some elasticity to the recent passenger toll increase. The network benefits from a commuter base accounting for 88% of total transactions.

Revenue Risk: Price - Stronger

MODERATE RATE-MAKING FLEXIBILITY: While ISTHA has full legal authority to adjust toll rates, Fitch notes that future toll increases beyond those currently approved are uncertain. However, ISTHA's passenger car rates are very competitive, providing significant economic rate-making ability as evidenced by the lower-than-expected 4.2% drop in traffic following the 88% passenger toll rate increase in 2012. Commercial toll increases aggregating 60% over current levels are approved to be phased in over 2015-2017, with CPI-based increases thereafter.

Infrastructure Development/Renewal - Midrange

LARGE CAPITAL PLAN PARTIALLY DEBT-FUNDED: ISTHA is in year three of its recently approved 15-year, $12.1 billion MOVE Illinois capital program. Funding is expected to come from $5 billion of new money debt issuances ($1.4 billion of which has been issued post 2014C bonds) with the remainder from cash flow, supported by recent and future toll increases. Fitch notes that the authority has nearly completed its existing $5.7 billion CRP on time and under budget.

Debt Structure - Midrange

DEBT STRUCTURE WITH VARIABLE-RATE EXPOSURE: With the $500 million new debt issued so far during 2014, nearly 27% of ISTHA's outstanding debt is variable rate (100% hedged with multiple counterparties, all rated at least 'A' category). However, this should decline to approximately 21% by 2015 with the issuance of additional fixed-rate debt for the capital program. Maximum annual debt service is $400 million in 2030 (post 2014C issuance), but is estimated by the authority to increase to approximately $615 million after all MOVE Illinois borrowing.

Financial Metrics

MODERATE LEVERAGE WITH PRESSURED FINANCIAL METRICS: The current tollway system's debt burden is large at $4.7 billion, and is expected to increase measurably to $7.7 billion in conjunction with the capital program. However, the authority's net debt-to-cash flow available for debt service is moderate at 4.4x for 2013 and is not expected to increase much higher than around 6.5x as a result of the MOVE Illinois program. Debt service coverage ratios (DSCRs) have historically been 1.8x or higher and Fitch's base case projections indicate DSCRs could remain at or above 1.8x through the medium term. Strong liquidity of 1,062 days cash on hand as of fiscal 2013 provides the authority with additional financial flexibility.

Peer Group

Closest Fitch-rated large expressway network peers include Harris County Toll Road Authority ('AA'/Stable Outlook) and Central Florida Expressway Authority ('A'/Stable Outlook), despite a significantly larger annual volume and toll revenue base for ISTHA. The authority has higher coverage and lower leverage then Central Florida, but lower coverage and higher leverage and capital needs when compared to Harris County, largely explaining its rating relative to these peers.

RATING SENSITIVITIES:

Negative:

--HIGHER CAPITAL SPENDING: Increased project costs or additional projects added to the MOVE Illinois program that materially increase leverage.

--LACK OF TIMELY TOLL ADJUSTMENTS: Failure to adjust tolls in the face of traffic and revenue underperformance or increases in operating expenses that result in weaker-than-expected coverage ratios.

--DEBT STRUCTURE RISKS: A rising interest rate environment could result in lower financial flexibility as the authority issues the remaining $3.6 billion (post-2014C bonds) debt-financed portion of its capital plan over the next eight years.

Positive:

Given the authority's sizeable, multi-year capital program, upward migration is not likely at this time.

TRANSACTION SUMMARY:

The authority is issuing fixed-rate refunding bonds in the amount of $270 million to refund the outstanding series 2006A toll revenue bonds for debt service savings. The refunding will affect Tollway fiscal years 2015 through 2024. The amortization structure of the refunding bonds will approximately match that of the refunded bonds, and savings are expected in each year with present value savings expected to exceed $25 million. Pricing is anticipated on or about November 25.

Despite an especially harsh winter 2013-2014, transactions for the 10 months year-to-date (YTD) through October are up 2.4% with corresponding revenues up 2.3% YTD through September. Although expenses are slightly over budget given additional winter costs, management still projects DSCR of 2.3x for 2014. Traffic, revenue, and coverage are all in-line with Fitch's base case forecast and Fitch's view on the credit remains unchanged from its April review. Fitch's base case still projects coverage to decline as the authority takes on additional debt, but to remain consistent with the current rating level.

For additional information, see 'Fitch Rates Illinois Tollway's Series 2014C Toll Highway Revs 'AA-'; Outlook Stable', dated Oct. 28, 2014, and 'Fitch Rates Illinois Tollway's Series 2014B Toll Highway Revs 'AA-'; Outlook Stable', dated April 23, 2014, available on the Fitch website, 'www.fitchratings.com'.

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

Applicable Criteria & Related Research:

--'Rating Criteria for Infrastructure and Project Finance', dated July 12, 2012;

--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated Aug. 20, 2014.

Applicable Criteria and Related Research:

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=925275

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1 312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman
Senior Director
+1 212-908-0755
or
Committee Chairperson
Chad Lewis
Senior Director
+1 212-908-0886
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Associate Director
+1 312-368-3171
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman
Senior Director
+1 212-908-0755
or
Committee Chairperson
Chad Lewis
Senior Director
+1 212-908-0886
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com