Fitch Affirms Denver Union Station Project Authority's (CO) 2010 Senior Notes at 'A'

AUSTIN, Texas--()--Fitch Ratings affirms its 'A' rating on the following Denver Union Station Project Authority, CO (DUSPA) bonds:

--$145.6 million senior lien note, series 2010 (Denver Union Station Project).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on pledged revenues comprised of a $12 million annual payment from the Regional Transportation District, Colorado (RTD) and property, sales, and hotel tax revenue generated by development in a defined project area adjacent to the Denver Union Station (DUS) facility. RTD's $12 million annual payment obligation to DUSPA is derived from residual revenue from RTD's 0.4% sales and use tax (approved by voters in November 2004) and excess 0.6% sales and use tax revenue after payment of RTD's senior sales tax bonds; FasTracks bonds and parity debt; and concessionaire payments for its Eagle Project which begin in 2017.

KEY RATING DRIVERS

COVERAGE NOT DEPENDENT ON DEVELOPMENT REVENUES: The rating on the senior lien notes reflects solely the RTD portion of pledged revenue since the level of other pledged revenue is dependent on future development. RTD's obligation is evidenced by a bond, payment of which is subordinate to RTD's FasTracks sales tax bonds which are rated 'AA' by Fitch.

RATING DIFFERENTIAL REFLECTS LEGAL PROVISIONS: The senior lien notes are currently rated below Fitch's rating on the FasTracks bonds. This is due to the subordination to debt service payments to the Eagle Project concessionaire beginning in 2017 and the potential for further leverage that could dilute coverage on the senior lien notes.

BARRIERS TO ADDITIONAL DEBT: While additional debt is allowed by the indenture, the noteholder is somewhat protected by an additional bonds test (ABT) and the veto rights of any of the four parties involved in the financing - the Transportation Infrastructure and Finance Innovation Act (TIFIA) Joint Program Office, Railroad Rehabilitation and Improvement Financing (RRIF) Joint Program Office, City and County of Denver, and the RTD.

HIGH PROFILE TRANSIT PROJECT: DUS is an important project to the RTD, Denver, and other area municipal entities. Support is evidenced by voter approval for the project, the RTD's various successful steps required to proceed, other entities' revenue allocations, and the city's moral obligation pledged on a subordinate RRIF loan. DUS will serve as the new hub for the region's large and growing transit system.

RATING SENSITIVITIES

ADDITIONAL LEVERAGING: RTD'S aggressive expansion efforts and innovative financing arrangements could result in additional debt liens on parity with or ahead of DUSPA's position in RTD's current flow of funds. Such a move could result in negative rating action for DUSPA's senior lien note.

CREDIT PROFILE

DUSPA, a multi-agency non-profit corporation, was created in 2008 to finance and implement the DUS project. DUSPA agency members include Denver, the RTD, the Colorado Department of Transportation (CDOT), and the Denver Regional Council of Governments (DRCOG). DUSPA has no power to levy taxes, assessments, or condemn property by eminent domain. As a result, it is not subject to the Taxpayer Bill of Rights (TABOR) requirements.

HIGH PROFILE TRANSIT PROJECT

The DUS project serves as the new hub for Denver's transit system, linking RTD's existing light rail and bus network with its proposed FasTracks expansion. This includes 119 miles of new light rail and commuter rail, 18 miles of rapid transit bus service, 21,000 new parking spaces at rail and bus stations, and expanded bus service in all areas.

The $480 million DUS project includes: an underground bus terminal with 22 bays; a light rail station for current and future light rail lines; a commuter rail station (with eight tracks) that will also serve Amtrak; public plazas and spaces to integrate transit services, private development, and the 16th street (pedestrian) mall; and the renovation of historic Union Station. The project has been completed and opened in July 2014 within budget and on schedule.

The project was built on 19.5 acres purchased by RTD. From this tract, 13.5 acres are designated for the transit facilities and six acres are to be sold for private commercial and residential development. The project budget includes a regional bus facility ($201 million), passenger rail ($154 million), a light rail station ($67 million), and streets and plazas ($58 million). The funding sources include the senior lien TIFIA loan, or series 2010 note ($146 million), a subordinate lien RRIF loan ($155 million), grants ($103 million), and cash contributed by RTD and other sources ($76 million).

ANNUAL RTD PAYMENT ONLY FIXED PLEDGED REVENUE SOURCE

DUSPA issued two levels of debt in 2010 -- a $146 million TIFIA note and a $155 million RRIF note secured by a senior lien and a subordinate lien of pledged revenues, respectively. The senior lien notes are structured with a 30-year maturity.

In addition to RTD's annual $12 million payment, pledged revenues on both levels of debt include incremental property and sales tax revenues collected within the DUS project area and DUS metro district mill levies and Denver's lodger's taxes on hotel rooms within the project area. Development activity within the project area has exceeded original projections and Fitch expects development activity to continue. That said, Fitch considers the pace and scope of such development very speculative. As such, development-related revenues are not a rating factor for the senior lien note at this point.

COVERAGE NOT DEPENDENT ON DEVELOPMENT REVENUES

The senior lien note debt service has been sized not to exceed RTD's annual $12 million payment, which provides the basis for the investment grade rating. The senior note is structured with all principal and 92.5% of interest deferred through Dec. 1, 2014. Payments on the note extend through 2040 as does the funding agreement between RTD and DUSPA that obligates RTD to pay $12 million per year. The senior debt service reserve fund (DSRF) is equal to 50% of maximum annual debt service (MADS) but can be used to meet deficiencies in the payment of the subordinate RRIF note, leading Fitch to view the senior lien note as effectively without a DSRF.

RTD established a public-private partnership to design, finance, build, operate, and maintain key elements of the FasTracks project. RTD approved Denver Transit Partners (DTP) as the concessionaire in summer 2010. In August 2010, RTD issued $398 million in private activity bonds on behalf of DTP (rated 'BBB-' by Fitch). RTD's debt service payments to the private concessionaire, which start in 2017, are paid before the $12 million payment to DUSPA.

BARRIERS TO ADDITIONAL DUSPA DEBT, BUT RTD LEVERAGE A RISK

The flow of funds is standard. At the conclusion of the established construction period (Jan. 15, 2015), funds in a surplus fund may be used for the payment of city services and the prepayment of debt (contingent upon a coverage test). Additionally, the indenture requires that the subordinate RRIF note be prepaid in total ahead of any senior lien note prepayment.

Additional bonds are allowed by the indenture but are subject to veto by TIFIA, RRIF, Denver, and RTD, and are further contingent on an ABT requiring three successive years of 1.35x coverage of annual debt service by all pledged revenues. Notably, the senior lien note is not subject to accelerated repayment in the event of default under the RRIF obligation related to payment, covenant, misrepresentation, subordinate DSRF, or cross default.

RTD's own debt plans include the issuance of $160 million in COPs through 2018 for bus fleet replacement. Including RTD's Eagle P3 project to construct and operate $1.3 billion of its FasTracks capital plan, RTD's annual gross coverage of the DUSPA payment and FasTracks bonds is projected at 3.2x or higher through 2019. This projection is based on a zero sales tax revenue growth scenario and assumes that RTD does not issue additional FasTracks bonds.

The ABT for FasTracks bonds is solid at 2x. RTD also maintains a net revenue coverage policy of 1.2x for all debt obligations which Fitch considers an important credit feature. Diminished margins relative to this policy level or the establishment of another debt lien on parity or superior to DUSPA's position in RTD's flow of funds could result in negative rating action on DUSPA's senior lien note.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, and IHS Global Insight.

Applicable Criteria and Related Research

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944155

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Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings Inc.
111 Congress Avenue, Suite 2010,
Austin, TX 78701
or
Secondary Analyst
Daniel Adelman, +1-312-368-2082
Analyst
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jose Acosta, +1-512-215-3726
Senior Director
Fitch Ratings Inc.
111 Congress Avenue, Suite 2010,
Austin, TX 78701
or
Secondary Analyst
Daniel Adelman, +1-312-368-2082
Analyst
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com