CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on approximately $398 million in tax exempt private activity bonds (PABs), series 2010 issued by the Regional Transportation District (RTD) on behalf of Denver Transit Partners, LLC (DTP). The Rating Outlook is Stable.
Proceeds of the series 2010 bonds were loaned to DTP to pay a portion of the Eagle Project, critical to RTD's FasTracks regional transit network development plan, through a public private partnership concession for project design, build, financing, operation, and maintenance (DBFOM).
KEY RATING DRIVERS
The rating reflects the continued construction progress on the project with planned completion in 2016 which is well in advance of the project longstop date. Once operational the project will benefit and will receive a stable revenue stream from a high quality revenue off taker in RTD (sales tax 'AA+'/Outlook Stable, FasTracks 'AA'/Outlook Stable and COPs 'A'/Outlook Negative). In addition, the project's operations are backed by investment grade operator Fluor Corporation (long term Issuer Default Rating 'A-'/ Outlook Stable). Fitch will continue to monitor construction progress on all three lines.
ADEQUATE CONSTRUCTION PACKAGE, COMPLETION RISK: MIDRANGE
The project's construction contractor is a joint venture (JV) between Fluor Corp. and Balfour Beatty Rail, Inc., both well experienced with rail projects, and supported by joint and several performance and financial guarantees from its parents. The fixed price contract adequately mitigates construction risk through a 45% liability cap and sufficient liquidated damages to cover delay costs through to the backstop date. Nevertheless, the construction period is long and involves the relatively complex interfacing of the project facilities with RTD's wider transit network.
RESILIENT AVAILABILITY-BASED PAYMENT STRUCTURE, REVENUE RISK: MIDRANGE
DTP's indexed availability-based revenue stream from a high investment grade credit quality grantor provides a predictable and resilient revenue stream and is fully insulated from volume and price risk. The penalty deductions mechanism incentivizes the concessionaire and its operating contractor to provide adequate service; concession termination is limited to severe underperformance.
EXPOSURE TO OPERATIONS LIMITED, OPERATION RISK: MIDRANGE
The back-to-back pass through of operating and lifecycle expenses as well as penalty deductions associated with operational underperformance to an investment grade operating contractor for the term of the concession leaves the concessionaire well protected against operating risk. Nevertheless, the project is complex and could face significant implementation risk at the start of the operational phase.
INFRASTRUCTURE RISK WELL MITIGATED, INFRASTRUCTURE & RENEWAL RISK: MIDRANGE
A long debt free tail before concession expiry combined with relatively well-defined hand back provisions combined with the full pass-through of life cycle risk to a creditworthy operating contractor ensure that bondholders are well protected against hand back and life cycle risk.
MODERATE DEBT SERVICE COVERAGE, DEBT STRUCTURE: MIDRANGE
DTP's high leverage is typical for a project of this nature, and it results in a moderate DSCR profile, averaging 1.38x in the concessionaire's base case which is in line with investment grade guidance for availability based projects.
PEER ANALYSIS
Fitch-rated availability payment peers include Ohio River East End Partners and Goethals Bridge Development Group. All contractors benefit from parent guarantees, but only DTP and Goethals Bridge have joint and several agreements. DTP has the longest tail at four years which fits for the transit nature of the project in comparison to 10-24 months for the other road based transactions. DTP has the lowest minimum Fitch rating case DSCR at 1.08x while the roads boast slightly higher coverages from 1.1x-1.3x.
RATING SENSITIVITIES
Negative: Unsuccessful completion and integration of the Eagle Project on time and within budget;
Negative: A notable deterioration in project party relationships leading to a greater number of disputes being escalated;
Negative: Significant payment deductions during the construction and operating phases that reduce coverage levels below current projections for a sustained period;
Negative: Operating and capital expenditures during the operational period significantly higher than projected;
Positive: Conclusion of construction on time and to the revised budget followed by successful interfacing with the wider regional transit network and a smooth start to the operational phase could result in upward rating migration.
SUMMARY OF CREDIT
Significant progress continues on all three lines of the Eagle Project since Fitch's last review with revenue service still expected to begin in 2016 (East Corridor in April, NWES in July, and Gold Line in October). The DBJV is not required to achieve substantial completion on each part until the 2016 completion dates as part of the agreement between RTD and DTP after the airport station was added to the scope, but RTD funding will stop if parts of the project are not completed by updated expected completion dates.
There are no material adverse construction issues on any of the lines, and the revised revenue service commencement dates are still in effect after BNSF track relocation schedules were confirmed mid May. Revenue service is expected to begin in 2016 on April 22 for the East Corridor Line, on July 25 for the NWES Line, and on October 26 for the Gold Line.
No significant scope changes since Fitch's last review, and DTP and RTD have a good relationship with no escalated issues escalated. O&M and lifecycle compensation for the new airport station have been discussed, and the O&M draft report is with RTD for review. DTP is concerned with implementing positive train control (PTC) because it is a new technology. Two Force Majeure Events remain open from severe weather and flooding in 2014, but flooding has not impacted the project's critical path. None of the pending or executed change orders are expected to have an impact on the overall project schedule.
Denver does not have plans for additional sales tax authorizations. Fare increases are subject to change but typically occur every one to two years and increased 10% starting in 2015. Future fare increases include 10% 2015, 6% 2017, and 9% 2020. DTP's expansion plan is it in line with 2013 on time and within budget. Future COP issuances are also planned for rolling stock and bus fleet replacement. Fitch affirmed RTD's outstanding closed senior lien at 'AA+', the FasTracks bonds at 'AA', and the certificates of participation at 'A' (see Fitch's research report dated May 19, 2014 for additional details). The Outlook on both the senior lien and the FasTracks bonds is Stable, while the Outlook on the COPs is Negative.
The PABs are subordinate to RTD's outstanding senior/FasTracks bonds and other required deposits and are secured by RTD's base annual service (availability) payment stream funded with sales tax revenues. The payment source is not subject to any RTD appropriation risk because it is voter approved and included in Colorado's Tax Payer Bill of Rights (TABOR). The base annual service payment is sized to cover annual debt service at 1.35x and requires DTP to make the system available for use. The bonds mature in 2041, four years before concession expiry.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating Criteria for Availability-Based Projects (pub. 18 Jun 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosures
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