Fitch Assigns Expected Ratings to Texas Transportation Commission's Refunding Debt

CHICAGO--()--Fitch Ratings has assigned Texas Transportation Commission (TTC), Central Texas Turnpike System's (CTTS) proposed $462 million first tier and $1,289 million second tier debt 'A-(EXP)' and 'BBB(EXP)' expected ratings, respectively. The Rating Outlooks are Stable. The debt is being issued to refinance approximately $686 million of the commission's existing $1,675 million first tier debt and fully refund its $1,113 million TIFIA loan.

Fitch has also placed the 'BBB+' rating for the commission's existing first tier debt on Rating Watch Positive. $989 million of existing debt will be maintained within the proposed debt structure.

KEY RATING DRIVERS

The system is supported by a strong and expanding service area that benefits from booming construction and technology sectors and an influx of young professionals, as well as a gross pledge of revenue supported by TTC's commitment to covering operating, maintenance and capital costs if needed. The system comprises both stable and congested urban segments with little meaningful competition, and growing but less predictable suburban segments. Although the escalating debt structure and periods of low debt service coverage ratios (DSCRs), have a constraining effect on the system's overall credit quality, legal, political and economic flexibility to raise toll rates if necessary provides considerable protection from downside risk. Only moderate reliance on revenue growth to break even further supports the ratings.

The Rating Watch Positive placed on existing first tier debt reflects the expectation that the rating assigned to this debt will be upgraded to 'A-' in line with newly issued first tier debt once financial close has been reached.

Revenue Risk - Volume: Stronger

Multi-Segment System in Strong Service Area: CTTS captures a diverse user base encompassing both commuter and long-distance traffic. While Loop 1 (19% of total traffic) faces competition from a parallel non-tolled alternative, the remaining three segments face limited direct competition. Lack of forecast certainty for CTTS arising from its relatively short demand history is largely offset by the strength of the Austin metropolitan statistical area (MSA), as characterized by employment growth of 3.2% over the past 12 months and an unemployment rate of 4%, well below state and national averages.

Revenue Risk - Price: Midrange

Considerable Rate-making Flexibility: Significant toll increases of 25% - 50% on each segment, implemented in January 2013, have not had a negative effect on traffic, as rates remain moderate in comparison to local and national peers. Similarly, Fitch does not expect annual toll indexation, introduced in January 2014, to have a significant negative impact on overall traffic in the near term because SH 130, the system's main segment, remains in the later stages of ramp-up. CTTS has demonstrated its willingness to raise tolls if necessary.

Infrastructure Development & Renewal: Stronger

New Infrastructure with Pledged Operations & Maintenance: TTC's pledge to cover the system's operating, maintenance and rehabilitation expenses, if necessary, provides certainty that asset condition will be maintained regardless of the system's own financial performance.

Debt Structure: Midrange (First Tier); Midrange (Second Tier)

Back-Loaded Structure Semi-Dependent on Growth: CTTS' total outstanding debt post-refunding will remain moderately dependent on continued toll revenue growth to meet an escalating debt service schedule. Total debt service from 2015, until MADS in 2038, grows at a compounded annual rate of 6%. No additional near-term future borrowing is expected and future put remarketing risk is minor.

Financial Metrics

Ample Coverage and Liquidity Support: Post-refunding, first tier leverage (incorporating current accreted value of CABs) will decrease from 13.1x to 8.4x while total system leverage will be 16.6x. The back-loaded debt structure is illustrated by total MADS coverage of 0.5x, which, while low, is mitigated by the extended length of time to MADS, resulting in modest Fitch-calculated revenue growth breakevens of 1.7% and 2.7%, respectively. Average first tier and total DSCRs in Fitch's base case are projected to be 3.4x and 1.5x, respectively. Additionally, strong liquidity support is further protection to weather periodic stresses to the system.

Peers: Although currently considered by Fitch as a small expressway network, CTTS' closest peers include large expressway networks such as Miami-Dade County Expressway Authority (MDX, rated 'A-' with a Stable Outlook by Fitch) and Central Florida Expressway Authority (CFEA, rated 'A' with a Stable Outlook), although it is less mature and has higher exposure to suburban segments than these facilities. Among Fitch's small networks portfolio, Colorado's E-470 Public Highway Authority (E-470, 'BBB-'; Positive Outlook) is among its closest peer, although CTTS has greater franchise strength, and its toll rates are more favorable. Relative to these peers, CTTS has comparable senior leverage but higher overall leverage.

RATING SENSITIVITIES

Negative:

--Pricing Flexibility: Inability to raise toll rates as forecast;

--Traffic and Revenue Performance: Volatile traffic and/or revenue performance could negatively pressure the rating.

Positive:

--Given CTTS' escalating debt service profile and elevated leverage, further positive rating actions (other than resolution of the Rating Watch Positive on existing first tier debt) are considered unlikely in the near term.

TRANSACTION SUMMARY

The first and second tier series 2015 bonds are expected to refund all callable series 2002-A capital appreciation bonds (CABs), portions of the non-callable series 2002-A CABs, the series 2012-B put bond and the 2002 TIFIA Bond issued under the TIFIA Loan Agreement. The transaction is expected to close in early February 2015. CTTS is refinancing its debt for economic savings while also lowering MADS via a smoothing of the aggregate debt service profile.

Total fiscal 2014 traffic was up 6.4% over fiscal 2013, at 109 million transactions, following 13.9% growth in fiscal 2013. In terms of toll revenue, fiscal 2014 was up 23.8% over fiscal 2013, reaching $131 million, following 39.7% growth in fiscal 2013. Although total toll transactions increased over the last two years, the larger than normal revenue increases are largely attributable to the aforementioned toll rate increases.

Concurrent with the 2015 transaction, Stantec Inc. undertook a new traffic and revenue study. Given better than forecasted traffic performance since Stantec's original study prepared in 2002, Stantec continues to revise its study to reflect most recent actual traffic performance trends. Fiscal 2013 and 2014 total transactions were 15.4% and 17.6% higher, respectively, than forecast in its 2012 study despite the January 2013 toll increase, and total operating revenue for fiscal 2013 and 2014 was 11.25% and 14.3% higher, respectively, than the 2012 forecasts. Total annual transaction forecasts in the 2014 Study are approximately 15-20% higher than the 2012 Update while total annual revenue forecasts are broadly in line. The 2014 Study assumes compounded annual growth rates (CAGR) for traffic of 2.8%, from 2015-2042, and for total revenue of 5.9%.

The Fitch base case reflects a traffic CAGR scenario of 2.5% from 2015-2042 that, coupled with moderated toll increases, results in a total revenue growth CAGR of 4.7%. Projected average and minimum DSCRs over the life of the debt are 3.4x and 1.8x, respectively, for the first tier; and 1.5x and 1.3x, respectively, at the aggregate level. Important to note, however, is the amortization structure wherein the second tier amortizes the bulk of its principal from 2031-2034 and 2037, resulting in very high first tier DSCRs that skew average coverage metrics - removing these years from the calculation, average first tier DSCR is closer to 2.5x.

The Fitch rating case uses a slightly moderated traffic growth CAGR of 1.8%, which includes a traffic stress and recovery scenario beginning in year 10, reflecting capacity expansion on competing roads, resulting in a total revenue growth CAGR of 3.9%. Projected average and minimum DSCRs over the life of the debt are 3.1x and 1.4x, respectively, for the first tier; and 1.3x and 1.2x, respectively, at the aggregate level. Stripping out periods of higher second tier amortization, the average first tier DSCR would be closer to 2.3x.

Although the aggregate ratios are at the low end of criteria guidance for the 'BBB'-category, Fitch notes the rating case scenario developed reflects a very conservative operating environment. Furthermore, the breakeven analysis demonstrating that the second tier debt could be fully repaid in a scenario of 2.7% total revenue CAGR and first tier debt being fully repaid in a scenario of 1.7% total revenue CAGR, is considered reasonable given the strength of the MSA, lack of direct competition as well as the ability to raise tolls above inflation if necessary. These breakeven figures also illustrate the value that the liquidity provisions included in the structure provide in mitigating the escalating nature of the debt profile as well as tight coverage levels in the rating case.

SECURITY

The first-tier bonds are secured by a gross lien on revenues of the system. The covenant by the TTC, which governs the Texas Department of Transportation (TxDOT), to budget for operational costs that cannot be supported by toll revenues, and to pay for ordinary and capital maintenance on the project, provides significant support to both the bonds and the overall system.

For further information please refer to Fitch's forthcoming Pre-Sale Report to be published early January 2015.

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=958815

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Charles Askew
Associate Director
+1-212-908-0644
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
Fitch Ratings
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Charles Askew
Associate Director
+1-212-908-0644
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com