Fitch Affirms Laredo, TX's Toll Bridge System Revs at 'A+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the existing 'A+' rating on City of Laredo, TX's approximately $41 million senior toll system revenue bonds and revenue refunding bonds. The Rating Outlook is Stable.

Laredo also has an additional $9.6 million in senior revenue bonds and $16.9 million in subordinate revenue bonds that Fitch does not rate.

RATING RATIONALE

The 'A+' rating on Laredo's International Toll Bridge System (the system) reflects its status as a vital international trade link within one of the fastest growing cities in the state of Texas. Despite economic pressures during the prior recession, the system remained resilient and has demonstrated an improving traffic and revenue profile. The credit also benefits from low leverage and a high debt service coverage ratio (DSCR).

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange

Strategic Location on Major Trade Route: The bridge system serves as a major North American Free Trade Agreement (NAFTA) gateway, providing a direct land route from Monterrey and Mexico City to major cities in Texas and along Interstate 35 to Minnesota and the Canadian border. However, traffic volume is susceptible to economic cycles and political decisions on both sides of the border. While overall crossings have historically been affected by heightened border violence and economic downturn, commercial traffic, representing approximately 64% of toll revenues, has remained resilient. Fiscal year (FY) 2014 traffic increased .3% with 9.4 million crossings.

Revenue Risk- Price: Midrange

Strong Economic Rate Making Flexibility: The system's economic and political rate-making flexibility is demonstrated by its historical track record of raising toll rates, its relatively competitive tolls and a moderate degree of demand inelasticity.

Infrastructure & Renewal Risk: Midrange

Moderate Capital Program: The bridges are in relatively good condition and funding for any future enhancements are expected to be predominantly bond-funded. $9.6 million of new senior bonds were issued in late 2014 to fund the toll collection system and weigh-in motion upgrade components of the system's five-year $35.4 million capital plan.

Debt Structure: Stronger

Conservative Debt Structure: All outstanding debt is fixed rate with a 15-year maturity profile and a flat-to-declining debt service schedule.

Low Leverage and Robust Coverage: The system's low senior lien leverage of 0.92 times (x) net debt/cash flow available for debt service and elevated total senior DSCR of 6.2x in FY 2014 indicate significant cushion against volatility in traffic. The system makes deeply subordinated surplus revenue transfers to the city's general fund equivalent to about 50% of toll revenues, while still ensuring high senior DSCR and maintaining adequate liquidity, currently at about 256 days cash on hand. Fitch's Rating Case, which incorporates substantial multi-year near term shocks followed by no growth, demonstrates future stability, with minimum DSCR of 4.66x through the projected period.

Peers: Cameron County and McAllen, TX are the closest peers; all three bridge systems maintain minimal net leverage and robust coverage levels, often exceeding 4.0x, in order to weather fluctuations in traffic levels as a result of safety concerns, related to border violence, and economic cyclicality. Laredo's higher rating reflects its location along I-35, a vital international trade link, and its resilient traffic and revenue performance during the last recession.

RATING SENSITIVITIES

Negative: Sizeable declines in passenger traffic or toll revenue, driven by drug cartel-related violence, and/or a considerable contraction of the manufacturing industry and cross-border trade.

Negative: Material changes in key financial metrics such as increased leverage due to future borrowing, or significant reductions in coverage or liquidity due to management's reluctance to raise tolls as planned/needed, or their inability to control operating and maintenance expenses.

Positive: Positive rating action is unlikely in the near term given the bridge system's history of volatile traffic levels.

CREDIT UPDATE

Overall traffic levels for the Laredo bridge system have declined at a compounded annual growth rate (CAGR) of 2.3% between FY 2009 and 2014, mostly as a result of global economic downturn fallout combined with border security concerns and rising gas prices. In fiscal years 2013 and 2014, total traffic increased 2.3% and 0.3% respectively. This shift in direction can be attributed to economic stabilization, a sharp decline in oil prices and a rollback of legislation that imposed tax hikes of Maquiladora industry activity (though uncertainty remains). FYTD 2015 (through May) transactions realized growth of 5.1%, continuing a demonstration of inelastic demand as tolls increased approximately $.90 during FY 2014 to an average of $5.76, over FY 2012-2013 historical toll averages of approximately $4.86.

The Fitch base case grows transactions and expenses at 4.9% and 4.2% respectively, in line with provided sponsor growth projections. Thereafter, transactions grow at 1.0% though FY 2019 and then assume a growth rate of 0.5% through the maturity of the debt. This scenario results in minimum senior debt service coverage of 5.9x and total minimum coverage of 4.93x through the projected period. The Fitch rating case assumes similar expense growth assumptions; however, implements a 10% decline in traffic in FY 2016 followed by a 5.0% decline in FY 2017, thereafter growing at a compounded annual growth rate of 0.5% through maturity. This scenario results in minimum senior debt service coverage of 4.66x and total minimum coverage of 3.88x through the projected period.

SECURITY

The outstanding revenue bonds are secured by a senior lien pledge of net revenues on the toll bridge system.

Additional information is available at '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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988603

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988603

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Associate Director
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Tertiary Analyst
Samuel Marsico
Analyst
+1-212-612-7810
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Associate Director
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Tertiary Analyst
Samuel Marsico
Analyst
+1-212-612-7810
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com