SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating with a Stable Outlook on Harris County, Texas' (the county) outstanding senior lien toll road revenue bonds, including its $109.5 million of revenue refunding bonds, series 2012B-1 (SIFMA Index Bonds). The bonds are issued by the county on behalf of the Harris County Toll Road Authority (HCTRA).
The series 2012B-1 bonds are being remarketed, with the transaction expected to price on or about July 22, 2015. All senior bonds are payable by a first lien on revenues derived from the toll road system. The bonds are additionally secured by a debt service reserve fund, which has been funded with a combination of cash and sureties.
The affirmation of the 'AA' rating with a Stable Outlook reflects the authority's continued strong operational and financial performance, with very high debt service coverage ratios (DSCRs), robust liquidity, and low leverage. The authority's essential road network in a large and economically solid region with limited viable alternatives makes for a strong volume profile, while years of consistent toll rate increases demonstrate a willingness and ability to raise tolls to maintain a healthy financial profile. These strengths are modestly offset by a large capital plan that may require the authority to raise additional debt.
KEY RATING DRIVERS:
Revenue - Volume: Stronger
RESILIENT TRAFFIC DEMAND: HCTRA's toll road facilities provide vital transportation links with a strong monopolistic position in the Houston metropolitan area and an established and stable traffic demand profile. System traffic has increased almost every year since fiscal year (FY) 1998, supported by its continuing expansion in a large and rapidly growing metropolitan region.
Revenue - Price: Stronger
DEMONSTRATED RATEMAKING FLEXIBILITY: Toll rates remain moderate at between $1.45 and $1.75 per segment (excluding the ship channel bridge) depending on payment method. The authority's toll policy allows for annual increases at the greater of 2% or inflation, and it has shown willingness to implement these increases, doing so in four of the last five years.
Infrastructure & Renewal: Midrange
CAPITAL WORKS FUNDING POTENTIALLY LIMITED BY TRANSFER POLICY: The commissioners court annually budgets a subordinate county transfer of approximately $120 million. Although coverage of senior bond debt service is currently sufficiently high to fund these annual transfers while continuing to largely cash-fund capital expenditures, the transfer amount could be changed at any time and increases could leave the authority more dependent on additional debt for future projects.
Debt Structure: Stronger
VARIABLE RATE AND REFINANCING RISK WELL MITIGATED: Debt service declines in most years and principal amortizes moderately with 42% of debt retired over the next 10 years. The authority's residual variable interest rate exposure of around 15% of outstanding debt is fully hedged to term and, although counterparties are rated lower than the outstanding debt, HCTRA's negative mark-to-market on the swaps is partially collateralized.
STRONG FINANCIAL PROFILE: HCTRA's financial performance is very strong, with a Fitch-estimated fiscal 2015 net senior debt service coverage ratio (DSCR) of 3.6x. Fitch projects net senior and total DSCR in its base case of at least 3.7x and 2.7x over the next 10 years. Fitch estimates current net senior and total leverage at fiscal year end (FYE) 2014 to be 2.0x and 2.9x respectively. Significant financial flexibility is afforded by the authority's strong cash and reserve balances, resulting in net working capital of nearly $700 million at FYE 2014 (FYE 2015 data is not available).
RATING SENSITIVITIES
Negative:
--A substantial and unexpected deterioration of the authority's financial or operating profile could result in negative rating action. Although not anticipated, such deterioration could be caused by severe traffic reductions or much higher than projected expenditure growth.
--Excessive leveraging beyond the authority's historical targeted maximums of 5.0x senior gross debt to cash flow available for debt service (CFADS).
--A material reduction in the authority's debt service coverage profile that leaves rating case DSCR projections significantly below 2.50x for a prolonged period.
Positive:
--The authority's rating is constrained by its sizeable subordinate transfer to the county, and a large and growing capital improvement plan.
SUMMARY OF CREDIT
The authority manages a large and growing toll road system with a long operating history, 15 assets, and 127 miles of roadway that serve the Houston metropolitan region in Texas. The authority operates as a department of the county and coordinates with outside agencies including the Texas Department of Transportation (TxDOT).
CREDIT UPDATE:
The system performed well overall in fiscal 2015, with traffic and toll revenues rising by a substantial 9.5% and 10.7%, respectively. Continued traffic increases are fuelled by the county's (general obligation bonds rated 'AAA', Stable Outlook) high population growth rate, expanding employment base, and rapid new development, especially in unincorporated areas. The county is significantly concentrated in the energy industry, so the recent and significant decline in oil prices may slow down the region's growth levels and, by extension, toll road traffic volumes. Nonetheless, longer-term drivers of population and economic growth remain in place, and system-wide growth is bolstered by the ongoing launch of new expansionary road segments.
The authority commissioned a traffic and revenue consultant's report in October of 2014 that projects toll transactions to rise 4.7% and 3.4% in fiscal years 2016 and 2017, respectively. Severe flooding earlier in 2015 is projected to have no material effect on fiscal 2016 traffic volumes given that there were only minor and short-lived disruptions to roadway activity.
The authority adopted a policy of indexed toll increases in 2007, linked to the greater of 2% or inflation. Although the commissioners' court has delayed two rate hikes since policy adoption, most rate hikes have occurred on a fairly regular basis. Current rates are $1.75 cash or $1.45 EZ Tag, with some exceptions, placing the authority's assets amongst the lowest tolled within Fitch's rated portfolio. These low rates suggest the authority has significant economic flexibility to raise tolls further if necessary.
Audited expenditures increased significantly over the past two years, rising 10% annually in both fiscal years 2014 and 2015. Management notes that expenditure growth has been driven by traffic-driven expenditures such as patrols and account servicing and that operations and maintenance costs have declined as a percentage of gross toll revenues in each of the past five years.
The authority's capital improvement plan is sizeable, with 2016-2020 project costs projected at $2.4 billion. Although the authority anticipates that a portion of its capital plan will be debt funded, the degree and terms of any such debt financing have not yet been determined. Given the authority's strong financial metrics and managements' relatively conservative historical comfort levels regarding debt sizing, Fitch does not anticipate a degree of leveraging that would materially weigh down the rating from current levels. However, Fitch will assess the impact of any future leveraging when more information is provided.
Fitch's base case reflects steady 2% toll rate increases, combined with moderate but slowing traffic growth, falling from 2% starting in fiscal 2016 to 1% from 2021 onwards, giving limited credit to additional capacity coming online over coming years. Opex growth is assumed to remain at around 5% per annum. Fitch's rating case assumes a hypothetical recession that results in traffic contractions in 2016 and 2017 of 2% and 8% followed by a recovery of 3% annually for three years and 0.5% annually thereafter. Opex is assumed to increase at a very high 20% on a one-time basis in fiscal 2017, followed by 5% perpetual growth thereafter. Metrics in both scenarios demonstrate the resilience of the HCTRA credit, with senior net DSCR averaging 4.5x (3.7x net of depreciation) in the base case and 3.7x (2.9x) in the rating case, and total net DSCR averaging 3.6x in the base and 3.0x in the rating case. Fitch historically has considered DSCRs net of depreciation as a proxy for cash funding of maintenance capital expenditures given limited information with respect to expectations for this expenditure item.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 20 Aug 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708
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Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988127
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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