NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the North Tarrant Express Mobility Partners, LLC's (NTEMP) approximately $400 million senior lien revenue bonds issued by the Texas Private Activity Bond (PAB) Surface Transportation Corporation. Fitch has also affirmed the 'BBB-' rating on the NTEMP's approximately $650 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmations reflect construction completion ahead of schedule and broadly on budget. The ratings reflect the newly opened managed lanes (ML) project's location within a congested commuting corridor servicing Dallas-Fort Worth metropolitan area that is expected to continue to experience solid population and economic growth. Regional macroeconomic demographics and development in the area are broadly in line with Fitch's expectations at closing and early ML ramp-up performance continue to support Fitch's base and rating case assumptions for traffic and revenue. The ratings also reflect the inherent volatility and forecast risk associated with ML projects, although revenue risk is partially offset in the medium term by the flexibility afforded by the TIFIA loan structure and the project's liquidity position, currently at $73 million.
Strategic Location with Strong Commuter Base - Revenue Risk (Volume): Midrange
The North Tarrant Express Segments 1 & 2 (NTE 1&2) project is a key route connecting Fort Worth, TX area with the city of Dallas and Dallas-Fort Worth Airport. This strategic location is further enhanced by the solid economic profile of the service area, which has benefited from considerable population and employment growth over the last decade. It is Fitch's expectation that the completed free lane improvements will not materially impact demand for the new MLs. Nevertheless, forecast risk exists for this congestion relieving facility due to uncertainty as to the future economic environment and planned future corridor improvements that could all impact congestion levels in the corridor.
Uncertain Price Sensitivity - Revenue Risk (Volume): Midrange
After the initial six-month operating period, the ML facility will utilize a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. The comprehensive developer agreement allows for revenue maximization up to a soft cap on toll rates of $0.75 per mile (2009 dollars) and rates may only be increased beyond this level if the concessionaire is unable to manage ML speeds at or above 50 miles per hour, or if traffic volumes exceed 3,300 passenger car equivalent units per hour in the two lane sections and 5,100 in the three lane sections, implying a switch to throughput maximization at these levels. While the soft cap structure limits some of the concessionaire's pricing flexibility, it may also help offset some political risk in a scenario of high congestion. Fitch expects the project to generate the majority of its revenue during peak and shoulder peak periods when pricing power is the greatest. The project is not materially exposed to free access policies - discounts for high occupancy vehicles (HOV2+) are subsidized by Texas Department of Transportation (TxDOT). Still, there exists a significant uncertainty associated with price sensitivity to increasing toll rates, particularly in a prolonged weak economic climate.
Infrastructure Risk Mitigated by Tail - Infrastructure Renewal and Replacement: Midrange
The project contains adequate mechanisms to assess and address infrastructure requirements on an ongoing basis through the life of the debt. NTEMP will be required to fund capex needs from cash flow on a rolling five-year look forward basis. The 11-year tail after TIFIA debt maturity provides additional financial flexibility to meet handback requirements and partially mitigates asset reinvestment needs.
Fixed Senior Debt with Flexible TIFIA Loan - Debt Structure: Midrange
Debt is all fixed rate with a back-loaded aggregate debt service schedule. The covenant package is adequate with a senior debt service reserve fund (DSRF) equal to 10% of par and an equity lockup trigger of 1.20x. The TIFIA structure includes considerable flexibility between scheduled and mandatory principal and interest payments until year 26 following substantial completion when all TIFIA debt service becomes mandatory and as senior debt is fully amortized in 2039. A major maintenance reserve account (MMRA) of $20 million will provide additional liquidity against revenue shortfalls in the early years of operation.
Moderate Financial Flexibility and High Leverage: The project's leverage is high with an estimated $20.8 million in total debt per lane mile (senior debt plus TIFIA loan), despite significant public contributions and sponsor equity. The financial results, calculated at financial close, indicate a loan life coverage ratio of 1.6x in 2015 and a minimum project life coverage ratio of 2.2x, with both growing over time. The project is reliant on future revenue growth (in excess of inflation) to support its escalating debt structure, which may be exacerbated by any necessary TIFIA scheduled debt service deferrals.
Peer Group:
The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are highly congested, particularly during peak hours such as the neighboring LBJ Infrastructure Group LLC (LBJ), 95 Express Lanes LLC in Virginia (95 Express) and Riverside County Transportation Commission's (RCTC) MLs in California which also serve areas with relatively strong demographic characteristics and limited alternative routes. Despite some differences in tolling mechanisms, policy and lane configuration, Fitch believes all three facilities should, in the medium term, build up moderate-high pricing power and be in a position to levy relatively high toll rates of over $0.50 per mile (real) in peak periods, on average.
RATING SENSITIVITIES
Negative - Longer than expected ramp-up that stretches liquidity support, or post-ramp up traffic and revenue performance at or below Fitch's rating case on a sustained basis.
Negative - Operating costs consistently higher than expectation, or the incurrence of material additional capital investment charges to those currently anticipated.
Positive - Sustained traffic and revenue performance materially above Fitch's expectations with no additional debt issuance.
SECURITY
The bonds are secured by net toll revenues generated from the North Tarrant Expressway (NTE) managed lanes project.
CREDIT UPDATE
Senior bond and TIFIA loan proceeds have been used, along with approximately $570 million in public funds from TxDOT and equity of approximately $420 million from Cintra Infraestructuras, S.A, Meridiam Infrastructure Finance S.A.R.L and the Dallas Fire and Police Pension System to fund the construction of segment 1 and segment 2W of the project. Segment 1 construction consists of two MLs in each direction of Interstate Highway (IH) 820, and segment 2W construction consists of two MLs in each direction on State Highway (SH) 183 (both of which run east-west). NTEMP is a single purpose entity and was granted a winning a proposal by TXDOT to develop, operate, maintain, and toll the North Tarrant Managed Lanes project for a period of 52 years pursuant to a comprehensive development agreement.
The design-build contractor, Bluebonnet Contractors (BBC), initiated construction activity on Oct. 28, 2010, slightly ahead of the contract-specified date of Nov. 10, 2010 and construction was completed on Oct. 4, 2014, more than eight months ahead of scheduled completion date in June 2015. As of December 2014, final settlement has been reached on 390 of the 399 parcels, while final amounts are being negotiated on the balance. Although ROW acquisition costs have run higher than forecast, overall construction budget has been broadly met as a result of cost savings made elsewhere. TXDOT's written certificate of final acceptance was received in January 2015.
The MLs were constructed alongside GPLs and directly compete with these lanes for market share. By design, MLs are priced specifically to move traffic efficiently, thereby giving travelers an alternative to the free, congested, GPLs, and free-flowing conditions at 50 miles per hour or higher are maintained by adjusting the toll rate to manage travel demand. High-occupancy vehicles (HOV) with two or more passengers are expected to receive a discounted toll rate during peak periods until 2025, to be subsidized by TXDOT, and trucks pay a higher toll rate, based on shape.
In the first three months since opening, total revenues were approximately $6.4 million, averaging $2 million per month during this time period. Updated traffic analysis was not completed for this review, and Fitch remains comfortable as to the expected traffic demand for the MLs once ramped-up.
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 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=980518
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