Fitch Affirms Kentucky Public Transportation Infrastructure Authority at 'BBB-'

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating for the Kentucky Public Transportation Infrastructure Authority's (KPTIA) approximately $275.7 million Downtown Crossing project revenue bonds comprised of the following:

--$174.9 million first tier 2013A (current interest bonds);

--$28.2 million first tier 2013B (capital appreciation bonds); and

--$81.5 million first tier 2013C (convertible capital appreciation bonds).

Additionally, Fitch has affirmed the 'BBB-' rating on the $452.2 million Downtown Crossing project notes 2013 series comprised of $426 million tax-exempt 2013 series A and $26.2 million taxable 2013 series B and to the third tier toll revenue bond $452.2 million Transportation Infrastructure and Innovation Financing Act (TIFIA) loan 2013.

The Rating Outlook is Stable for all debt.

RATING RATIONALE

The rating affirmation on the Downtown Crossing reflects construction progress that remains on budget and on schedule to meet total project substantial completion date in December 2016 for both the Downtown Crossing and East End portions. Nevertheless, the current rating reflects a degree of completion risk remaining given the complex nature of the project.

The toll road's essentiality to reduce high congestion between the two states undermines the moderate volume profile and high near-to-medium term projected leverage.

KEY RATING DRIVERS

Complex Project Mitigated by Experience and Completion Guarantees [Completion Risk: Midrange]: While the Downtown Crossing project will be constructed pursuant to a fixed price date certain contract, the project represents a complex water crossing and a complex interchange between three major U.S. interstates. In Fitch's view, completion risk is partially mitigated by the advanced stage of construction and by the experience of the of the design builder, Walsh Construction Company (part of the Walsh Group), whose credit quality does not pose a constraint on the project rating. The project is now 77% complete and on budget and on schedule, with just 13 months remaining before substantial completion. Liquidity is sufficient to address any liquidated damages and security includes 5% project contingency and the commonwealth's back-up construction completion guaranty, whose appropriation-backed debt is rated 'A+'/Outlook Stable. Additionally, tolls are required to be implemented on the existing I-65 bridge no later than June 30, 2018, which would partially mitigate any completion delays on the new span. Currently, revenue collection is expected by October 2016 in advance of the 2017 Kentucky Derby.

Established Traffic Largely Offsets Greenfield [Revenue Risk - Volume: Midrange]: The Louisville-Southern Indiana Ohio River Bridges (LSIORB) project involves expanding an existing Ohio River crossing to accommodate the I-65 interstate highway, constructing a new crossing/highway connection and the East End Bridge being constructed by Indiana that will help create a highway loop around Louisville. Congestion on the existing bridge is high, especially during peak hours. However, it is currently un-tolled. Additionally, there remains uncertainty as to how traffic will be affected by the introduction of a toll. While the I-64 bridge and the U.S. 31 Bridge offer free alternatives, these facilities are expected to have very high congestion levels during peak hours leading to higher time travel.

Pricing Flexibility Limited for Bi-State [Revenue Risk - Price: Midrange]: The project benefits from unlimited tolling flexibility and the need for both the Downtown Crossing and East End portions of the project to generate sufficient revenue to cover all expenses and meet financial covenants. However, the bi-state nature of the toll approval process could result in delays to increases when requested. The covenant of the Kentucky Transportation Cabinet (KYTC) to seek an appropriation to cover any shortfall in operating expenses and renewal and replacement expenses partially mitigates this risk.

Infrastructure Renewal Program Adequate [Infrastructure Renewal: Midrange]: The Fitch rating case assumes lower levels of financial flexibility and the potential for shortfalls in renewal and replacement funding. However, KYTC covenants to budget and seeks an appropriation at the next available opportunity from legally available highway funds, an amount that will restore the general operations and maintenance (O&M) fund and maintenance and renewal (M&R) reserve fund to required levels.

Escalating Debt Structure with Robust Financial Covenants [Debt Structure: Stronger]: The Downtown Crossing portion of the project will be financed with 100% fixed rate amortizing debt. The TIFIA loan matures in 2051 while the senior bonds are amortized through 2053. Financial covenants are strong including to the requirement to cover senior lien debt service by 1.5x, any TIFIA debt service by 1.25x, and all obligations under the indenture by 1.0x. Structured reserves are adequate and include a cash-funded DSRF sized at maximum annual debt service (MADS) on a five-year forward looking basis from toll revenues, and, a maintenance and replacement reserve.

Financial Metrics: Debt Service Coverage Ratios (DSCR) and Loan Life Coverage Ratios (LLCR) are solid. Project leverage is initially elevated at 14.7x in the near-term base case, but gradually declines in the mid-term.

RATING SENSITIVITIES

Negative: Construction delays beyond scheduled substantial completion date resulting in additional leverage or delays.

Negative: Lower than anticipated financial flexibility due to greater traffic diversions and higher price elasticity.

Negative: A material change in TIFIA's ability to meet its disbursement obligation of loan proceeds under the loan agreement in order to redeem the Downtown Crossing project notes.

Positive: Successful completion and sustained operating performance exceeding Fitch's base case projections.

CREDIT UPDATE

The Downtown Crossing and East End remain on budget and on schedule to meet substantial total project completion date in December 2016. The Downtown and East End Crossings are now 77% complete (WVB East End Partners rated 'BBB'/Stable Outlook). Design process is 100% for the Downtown Crossing and 88% for the East End portion. According to KPTIA tolling is expected to begin in October 2016, a few months ahead of schedule. The Downtown Bridge extends from bank to bank, all 88 stay cables have been installed, and I-65 NB construction is complete. Traffic is expected on the bridge by December 2015, four months ahead of schedule.

Renovations to the adjacent JFK Memorial Bridge are scheduled to begin in January 2016 and include a new floor system expected to extend the useful life of the bridge by 35 years. Overcoming a rock fall event in September 2014 that had delayed excavation, the East End Crossing has completed 100% of its excavation and remains on schedule for its October 31, 2016 target completion date. Decking is currently underway on the Kentucky approach bridge and NB Harrods Creek bridge is expected to be completed by year end.

A delay in procuring a toll integrator was resolved in May 2015 with the procurement of Kapsch, an international provider of intelligent transportation systems. The Kentucky Transportation Cabinet and the Indiana Finance Authority are currently working with Kapsch to develop a set of business rules pertaining to tolling rates and operations. The rules are expected to be finalized by year end. The all-electronic tolling network, called RiverLink, is currently scheduled to collect toll revenues on all three bridges beginning October 2016. The states have launched a public outreach campaign to encourage drivers to set up pre-paid transponder accounts, which allow for more cost efficient collections. Full E-Z Pass Group membership is also being sought by the states.

In the Fitch Base case, as revenue begins to stabilize post ramp-up, coverage on the senior lien is projected to be strong, averaging just over 3.0x. Leverage is expected to be in the 12x range, moderately declining in the medium term to the 8.0x range.

Fitch's Rating case, over the same term, projects a senior lien average debt service coverage of 2.5x. The 3rd Tier (TIFIA loan) gross debt service coverage ratio average is 1.34x.

The Louisville-Southern Indiana Ohio River Bridges Project involves expanding an existing Ohio River crossing to accommodate interstate highway and constructing a new crossing/highway connection that will help create a highway loop around Louisville. The two-state project consists of two portions that function as one system: the Downtown portion owned by the Commonwealth of Kentucky and the East End portion owned by the State of Indiana, rated separately 'BBB'/Outlook Stable.

SECURITY

The first tier bonds are secured by a first pledge of the trust estate consisting primarily of the authority's 50% share of the toll revenues derived from the downtown and east end crossings. The project notes are secured by a pledge of the trust estate, subordinate to the payment of principal of and interest on the first tier, second tier and third tier bonds. The TIFIA loan will be secured as third tier bonds. It is expected that principal on the series 2013 subordinate notes will be paid from a disbursement made to the authority at maturity, subject to the satisfaction of certain conditions under the TIFIA loan agreement.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Availability-Based Projects (pub. 14 Oct 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871036

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870170

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Contacts

Fitch Ratings
Primary Analyst:
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison,
Chicago Illinois 60602
or
Secondary Analyst:
Emma Chapman, +1-312-368-2063
Associate Director
or
Tertiary Analyst:
Robert Hirtle, +1-212-908-9132
Analyst
or
Committee Chairperson:
Seth Lehman, +1 212-908-0755
Senior Director
or
Media Relations:
Sandro Scenga, New York, Tel: +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Casey Cathcart, +1-312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison,
Chicago Illinois 60602
or
Secondary Analyst:
Emma Chapman, +1-312-368-2063
Associate Director
or
Tertiary Analyst:
Robert Hirtle, +1-212-908-9132
Analyst
or
Committee Chairperson:
Seth Lehman, +1 212-908-0755
Senior Director
or
Media Relations:
Sandro Scenga, New York, Tel: +1 212-908-0278
sandro.scenga@fitchratings.com