Fitch Affirms Kentucky Public Transportation Infrastructure Authority at 'BBB-'

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating for the Kentucky Public Transportation Infrastructure Authority's (KPTIA) approximately $275.7 million Downtown Crossing project revenue bonds, consisting of the following:

--$174.9 million first tier 2013A (current interest bonds);

--$27.5 million first tier 2013B (capital appreciation bonds); and

--$73.3 million first tier 2013C (convertible capital appreciation bonds).

Additionally, Fitch has affirmed the 'BBB-' rating to $452.2 million Downtown Crossing project notes, 2013 series consisting of $426.0 million tax-exempt 2013 series A and $26.2 million taxable 2013 series B and to the third tier toll revenue bond $452.2 million Transportation Infrastructure and Innovation Financing Act (TIFIA) loan 2013.

The Rating Outlook is Stable for all debt.

The rating affirmation reflects construction progress that is currently on schedule to meet the substantial completion date in 2016 for both the Downtown Crossing and East End portions. Nevertheless, the current rating reflects a degree of completion risk remaining given the complex nature of the project.

The toll road's essentiality to reduce high congestion between the two states undermines the moderate volume profile and high near-to-medium term projected leverage.

KEY RATING DRIVERS

Established Traffic Largely Offsets Greenfield Risk: The Louisville-Southern Indiana Ohio River Bridges (LSIORB) project involves expanding an existing Ohio River crossing to accommodate the I-65 interstate highway, constructing a new crossing/highway connection and the East End Bridge being constructed by Indiana that will help create a highway loop around Louisville. Congestion on the existing bridge is high, especially during peak hours. However, it is currently un-tolled. Additionally, there remains uncertainty as to how traffic will be affected by the introduction of a toll. While the I-64 bridge and the U.S. 31 Bridge offer free alternatives, these facilities are expected to have very high congestion levels during peak hours leading to higher time travel.

Revenue Risk: Volume - Midrange

Pricing Flexibility Limited for Bi-State Project: The project benefits from unlimited tolling flexibility and the need for both the Downtown Crossing and East End portions of the project to generate sufficient revenue to cover all expenses and meet financial covenants. However, the bi-state nature of the toll approval process could result in delays to increases when requested. The covenant of the Kentucky Transportation Cabinet (KYTC) to seek an appropriation to cover any shortfall in operating expenses and renewal and replacement expenses partially mitigates this risk.

Revenue Risk: Price - Midrange

Escalating Debt Structure With Robust Financial Covenants: The Downtown Crossing portion of the project will be financed with 100% fixed rate amortizing debt. Financial covenants are strong including to the requirement to cover senior lien debt service by 1.5x, any TIFIA debt service by 1.25x, and all obligations under the indenture by 1.0x. Structured reserves are adequate and include a cash-funded DSRF sized at maximum annual debt service (MADS) on a five year forward looking basis from toll revenues, and, a maintenance and replacement reserve.

Debt Structure: Strong

Infrastructure Renewal Program Adequate: The Fitch rating case assumes lower levels of financial flexibility and the potential for shortfalls in renewal and replacement funding. That said, KYTC covenants to budget and seek an appropriation at the next available opportunity from legally available highway funds an amount that will restore the general operations and maintenance (O&M) fund and maintenance and renewal (M&R) reserve fund to required levels.

Infrastructure Renewal: Midrange

Complex Project Mitigated by Experience and Completion Guarantees: While the Downtown Crossing project will be constructed pursuant to a fixed price date certain contract, the project represents a complex water crossing and a complex interchange between three major U.S. interstates. Completion risk is partially mitigated by the experience and credit quality of the design builder, Walsh Construction Company (part of the Walsh Group), as well as the commonwealth's back-up construction completion guaranty. Additionally, tolls are required to be implemented on the existing I-65 bridge no later than June 30, 2018 which would partially mitigate any completion delays on the new span.

Completion Risk: Midrange

Peer Analysis: Post construction completion, North Carolina Turnpike Authority (NCTA) (Triangle Expressway) and Elizabeth River Crossings (ERC) ?-both rated 'BBB?'/Stable--serve as adequate peers. NCTA shares similar tolling flexibility with a gross pledge on revenues given operating support from NCDOT. ERC's operating profile is similar from a coverage and leverage perspective and the asset has similar characteristics given it's a water crossing in a congested urban area with limited alternatives.

RATING SENSITIVIES

Negative:

--Construction delays beyond scheduled completion resulting in additional leverage or delays;

--Lower than anticipated financial flexibility due to greater traffic diversions and the higher price elasticity

--A material change in TIFIA's ability to meet its disbursement obligation of loan proceeds under the loan agreement in order to redeem the Downtown Crossing project notes;

Positive:

--Successful completion and sustained operating performance above Fitch's base case projections;

CREDIT UPDATE

The Downtown Crossing construction is 43% while East End is 40% complete (WVB East End Partners rated 'BBB' with a Stable Outlook by Fitch). Design process is above 95% for both portions. KPTIA expresses that the project remains on budget and traffic tolling is expected to begin a few months ahead of the scheduled January 2017 date. For the Downtown Crossing, the I-65 SB Collector Distributor of the Downtown portion has been completed and river towers construction is underway (underwater portion completed). KPTIA expects the remaining I-65 construction to finish next year with the deck construction commencing as river towers are completed. Major construction milestones for the East End portion include the Southbound tunnel bore break through and completion of the main span pier foundations in the river.

KPTIA had expected to have a toll integrator on board in November to begin implementation of the toll system on all three bridges but an apparent conflict of interest led to cancelling the procurement. This may shorten the planned period for public outreach once the tolling system opens. However, it is not expected to have an impact on the project opening before the substantial completion date. The Transportation Cabinet is working toward finding a new provider but no additional costs are anticipated.

While annual DSCRs are projected to be solid, the Downtown portion of the project will have a net debt to cash flow available for debt service (CFADS) ratio of 14.7x in the base case and 23.1x in the stress case in the near-term, but projected to moderately decline over the medium-term.

Fitch's Rating case projected first tier debt service coverage are at an average of 3.18x and minimum coverage of 2.5x while the 3rd Tier (TIFIA loan) gross debt service coverage ratios are an average of 1.59x and minimum of 1.16x, respectively.

SECURITY

The first tier bonds are secured by a first pledge of, the trust estate consisting primarily of the authority's 50% share of the toll revenues derived from the downtown and east end crossings. The project notes are secured by a pledge of the trust estate, subordinate to the payment of principal of and interest on the first tier, second tier and third tier bonds. The TIFIA loan will be secured as third tier bonds. It is expected that principal on the series 2013 subordinate notes will be paid from a disbursement made to the authority at maturity, subject to the satisfaction of certain conditions under the TIFIA loan agreement.

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

Applicable Criteria and Related Research:

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

--'Rating Criteria for Availability-Based Projects' (June 18, 2013).

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 Availability-Based Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944095

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Contacts

Fitch Ratings
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
or
Tertiary Analyst
Matthew Chou, +1-415-732-7576
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Chad Lewis, +1-212-908-0886
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Casey Cathcart, +1-312-368-3214
Associate Director
or
Tertiary Analyst
Matthew Chou, +1-415-732-7576
Analyst
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com