CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Foothill/Eastern Transportation Corridor Agency (F/ETCA), CA's $74.8 million senior lien toll road refunding revenue bonds series 2015A capital appreciation bonds (CABs) with a Stable Outlook.
In addition, Fitch has affirmed the following ratings:
--$2.256 billion senior lien toll road refunding revenue bonds 'BBB-';
--$198.05 million junior lien toll road refunding revenue bonds 'BB+'.
The Rating Outlook for all bonds is Stable.
The Foothill/Eastern corridor (F/ETC) is approximately 36-miles long, comprising of State Routes (SR) 241, 261, and 133 that provides a south-west connection to Interstate 5 (I-5), a toll-free road. California Department of Transportation (Caltrans) has title to the roads and is responsible for upkeep. F/ETCA's responsibilities are set out in a cooperative agreement between the two agencies and are limited to toll collection and staff expenses until 2053.
KEY RATING DRIVERS:
The 'BBB-' senior lien and 'BB+' subordinate lien ratings reflect the strength of the road's service area, its role as a congestion reliever, F/ETCA's demonstrated willingness to raise rates to meet bondholder covenants and a solid liquidity position combined with a moderate debt service profile - improved as a result of this refunding following last year's major debt restructuring - that leaves F/ETCA dependent on modest revenue growth over the long-term to service its obligations. The facility is vulnerable to prolonged adverse developments and/or capacity enhancements on nearby competing facilities such as I-5 as well as higher than average leverage of 17.5x. The differential between the senior and junior lien ratings reflects the subordinated position and the relative thinness of junior lien debt which is only around 9.2% of aggregate debt.
Revenue Risk Volume: Midrange.
Limited Traffic Profile: Traffic increases over the last decade have been constrained somewhat by nine mostly above-inflationary-toll increases since fiscal 2000, including the most recent in fiscal 2015 (effective July 1, 2014). Future traffic growth potential, reliant on residential development activity, is limited in part by the narrow corridor in which development can take place.
Revenue Risk Price: Midrange.
Price Sensitive Commuter Traffic: F/ETCA has limited economic rate-making flexibility as current toll rates are close to the revenue maximization point. The average toll rate is higher than peers at more than 30 cents per mile; however, Fitch believes inflationary increases will become achievable once again over time. A history of pro-active decisions by management to raise rates is a credit strength.
Infrastructure Development/Renewal Risk: Stronger.
Relatively New Asset: The F/ETC is less than 15 years old and does not currently have any material state of good repair needs. Caltrans has an obligation to maintain the physical assets and a covenant to budget for capital expenditures annually which provides some renewal protection. Importantly, as part of the agreement with Caltrans, the agency is not authorized to collect toll revenue on any segment of the corridor south of the existing terminus (Oso Parkway) beyond Jan. 1, 2040.
Debt Structure Risk: Midrange (senior lien) / Midrange (junior lien).
Back-Loaded, Long-Dated Debt: All debt amortizes at a fixed rate but is significantly back-ended. The 2013 restructuring extended debt maturity 13 years, stabilizing the financial profile. With this current refunding, the debt service profile grows at a lower 3.6% compound annual growth rate (CAGR) from fiscal 2015 to maximum annual debt service (MADS) of $226.7 million in fiscal 2039 (down from a 3.9% CAGR at $243.4 million). The agency has fully funded debt service reserves and an additional reserve mechanism that provides some mitigation against the escalating debt service profile. There are no cross default or acceleration provisions between the senior and junior liens, which protects the senior debt.
Metrics: F/ETCA is dependent on continued toll rate increases and traffic and revenue growth throughout the life of the debt to maintain coverage levels at or above 1.30x. In fiscal 2013, the debt service coverage ratio (DSCR) was 1.17x ignoring the effect of the escrow defeasance fund. Fiscal 2014 DSCR, reflecting the 2013 restructuring, was 2.14x for all obligations. The Fitch base case minimum combined DSCR is 1.23x in fiscal 2015, averaging 1.48x through 2053, in line with Fitch's stand-alone toll road criteria. High debt levels and low liquidity keep total leverage high at 17.5x.
Peers: F/ETCA's closest peers in the standalone / small network toll roads portfolio with senior debt rated in the low BBB-category include San Joaquin Transportation Corridor Agency (SJTCA) and E-470 Public Highway Authority, both of which face initially high leverage and some dependence on revenue growth to ensure debt is fully serviced.
RATING SENSITIVITIES:
Negative: Weaker traffic growth than projected over a sustained period;
Negative: Toll rate increases that are materially below inflation for a sustained period;
Negative: A decision to increase leverage or reduce liquidity to support any extension projects without commensurate financial mitigants;
Positive: Sustained performance above Fitch's base case, with a resulting improvement in the Fitch calculated DSCR of 1.3x or higher on a combined basis, could result in positive rating action.
TRANSACTION SUMMARY:
The series 2015A bonds are expected to refund all of the outstanding series 1995 bonds and eliminate the 1995 Indenture. The sum of the CABs ($74.8 million) and the liquidated 1995 capitalized interest account will redeem the bonds in full and generate nearly $20 million in present value savings. The series 2015A bonds will be issued on parity with the outstanding series 2013 senior bonds. The refunding will also reflect the termination of the mitigation loan agreement with the F/ETCA's sister agency, SJHTCA, finalized in October 2014.
Traffic on F/ETC has fluctuated with the economy and has reacted to a series of toll rate increases. Fiscal 2014 traffic of 56.6 million is 16% below the peak reached in fiscal 2007 of 67.6 million. However, the effect of the recent traffic declines alongside toll increases has increased toll revenues. The agency has increased toll rates seven times since fiscal 2007 including the most recent increase in fiscal 2015 (July 2014). For the first six months of fiscal 2015 (through December), traffic is up 0.6%, as expected given conversion to all-electronic tolling in May 2014, and revenues are up 3% reflecting the increased tolls. Revenue has grown a combined 11% in fiscal years 2013 and 2014 to a new peak of $119.4 million in fiscal 2014, and toll revenues are over 12% higher than the peak last reached in fiscal 2007.
F/ETCA's traffic and revenue consultant, Stantec Inc. (Stantec), has not revised its T&R forecast since 2013 given that actual performance has, consistently since then, exceeded the forecast of that date. Applying the forecast growth rates to actual fiscal 2014 T&R results in a 4.5% gross toll revenue CAGR, which Fitch views as being reasonable in context of the toll road's historical revenue performance as well as continued regional population growth.
Fitch applied conservative assumptions to Stantec's T&R forecast in its base case resulting in an average DSCR through 2053 of 1.59x, with a minimum of 1.40x for senior debt, and an average of 1.48x with a minimum of 1.23x for junior debt. In the Fitch rating case, more conservative T&R projections were adopted reflecting the prospect of slower traffic growth (traffic CAGR of 0.45%). In this scenario, senior DSCR averages 1.43x with a minimum of 1.28x, while junior DSCR averages 1.32x with a minimum of 1.15x.
Fitch also undertook breakeven analysis, assessing the level of sustained revenue growth from fiscal 2014 revenue that would allow for all debt service obligations to be met using all available liquidity. The resulting breakeven revenue compounded annual growth rates of 1.79% and 1.91% on senior and junior liens respectively - below most long terms assumptions for inflation of 2.0-2.5% - further support the ratings, suggesting that F/ETCA will have relatively limited dependence on toll revenue growth primarily as a result of the strong cash reserve structure available
F/ETCA is a joint power authority with its sister agency, SJHTCA that was formed by the California legislature in 1986 to plan, finance, construct and operate Orange County's public toll road system. The F/ETC, fully open in 1999, is 36-miles long, comprising State Routes (SR) 241, 261, and 133, while SJTCA is a separate and distinct legal entity that manages the 15-mile SR 73 toll road. A common staff manages both agencies but the projects are governed by separate boards, are financed independently, and funds cannot be commingled.
SECURITY:
The bonds are secured by a pledge of net revenues and certain other pledged revenues such as development impact fees (DIF). F/ETCA has the right to withdraw DIF amounts in excess of $5 million annually to be used for any lawful purpose, including debt service.
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=978771
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