NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the implied 'A+' rating on the Golden Gate Bridge Highway & Transportation District (the district). The Rating Outlook is Stable.
Fitch's 'F1+' short-term rating on the $61 million in commercial paper (CP) notes reflects the district's own financial resources and market access as well as a liquidity facility provided by JPMorgan Chase Bank, N.A. (rated 'AA-/F1') in the form of a line of credit.
AFFIRMATION RATIONALE
The district provides vital transportation services for the Bay Area. While revenues mostly come from bridge tolls and operating grants, the affirmation reflects superior liquidity and management's proactive ability to raise tolls to cover expenses. Tolls are more than double bridge expenses which allow the district to provide the heavily used bus and ferry public transit services. Ferry and bus revenues alone would be insufficient to cover transit operations.
KEY RATING DRIVERS
REVENUE RISK - VOLUME: STRONGER
Mature Monopolistic Vehicular Bridge: Unique historic single structure provides the only northern bridge crossing from San Francisco and has a stable traffic base with limited declines through recent economic cycles. The elasticity profile of the bridge suggests resiliency to toll increases.
REVENUE RISK - PRICE: STRONGER
Powerful Rate Making Flexibility: The bridge serves critical regional transportation needs, and the mature traffic base provides significant rate-making flexibility. Proactive management has increased ferry and bus fares to address projected deficits while previously implementing a five-year bridge toll increase schedule that runs through fiscal 2018.
OPERATIONAL COST RISK - MIDRANGE: Given exposure to the deficit operations of the bus and ferry services, Fitch considers this risk factor score as midrange considering the historically reliable level of grant assistance received and surplus revenues from bridge operations which are sufficient to cover total annual costs and debt service of the system.
INFRASTRUCTURE/RENEWAL - MIDRANGE
Constant Maintenance Required: The bridge requires continual rehabilitation with most of the district's updated $1.75 billion capital plan to maintain the facility. The district is required to contribute $492 million, with the remainder (approximately 80%) expected to come from government grants, consistent with past practice, posing some renewal risk. Management states that non-urgent projects would be postponed if grant funding decreased.
DEBT STRUCTURE - MIDRANGE
Non-Amortizing CP Note Debt: Only interest (no principal) has been paid since issuance. Additionally, the debt will begin to amortize after the seismic retrofit project is completed. Hypothetical CP amortization starting fiscal 2020 was included in the Fitch base and rating cases.
Low Leverage High Liquidity Strengthen Metrics:
Fitch considers the district's economic rate-making flexibility in conjunction with formidable reserves a credit strength. Fiscal 2015 CFADS included an operating surplus of $15.5 million, $20.9 million of operating grants, and $2.4 million of interest income. Interest Coverage Ratio (ICR) was 862x without the operating reserve. The district has $200 million of Unrestricted Cash and Investments as of December 2015 with 453 days cash on hand.
Peers: Like other bridges in Fitch's portfolio, the Golden Gate Bridge provides a key regional transportation crossing. However, the district uses toll revenues to support public transit services. High levels of unrestricted cash and low levels of debt service due to the non-amortizing nature of the commercial paper debt provide negative leverage and high coverage. The bridge has medium traffic when compared to Triborough Bridge, Cameron County, and McAllen.
RATING SENSITIVITIES
Negative: Significant reduction in operating/capital grants and/or cash balances;
Negative: Failure to adjust tolls and control expenses to maintain healthy financial ratios consistent with past performance;
Negative: Significant traffic loss from economic factors or a one-time event such as an earthquake or terrorist attack.
Positive: The district's reliance on a single historic asset for the majority of operating revenue coupled with the vulnerability from an attack and/or earthquake, as well as funding uncertainty relating to the final phase of the seismic retrofit, restrict the likelihood of a higher rating at this time.
CREDIT UPDATE
Bridge traffic is resilient to toll increases having grown 3.29% fiscal 2014 and has continued to increase 0.4% fiscal 2015 alongside the $1 toll rise effective April 2014 and a $.25 hike in fiscal 2015. Fiscal year to date 2016 (four months through October) bridge traffic is up 1.27%. Fitch believes that traffic levels will continue to grow alongside future toll increases as tolls are raised $0.25 in July 2016, $0.25 in 2017, and $0.50 in 2018 due to the Bridge's vital regional connection. Fiscal 2015 ferry traffic increased 2.8%, and bus total patronage decreased 5.2% for total throughput of 6 million.
Fiscal 2015 revenues increased 10% to $176.3 million mainly due to increases in traffic and tolls. Total vehicle revenues increased 15% followed by increases in bus fare revenues (3.3%), and ferry ride revenues (7.1%). Toll revenues more than double bridge operational costs and were 73% of total operating revenues. The remaining 30% of operating revenues came from the transit system. Surplus revenues are used to fill the district Reserve Fund for operations and maintenance if toll revenues fall short. Fitch believes revenues should continue to increase from stable traffic levels and scheduled toll increases.
As expected, the transit system produces nearly two thirds of overall expenses while bus expenses increased 1.4% and ferry expenses increased 1.5% in fiscal 2015. The district is looking at fuel alternatives for buses and is pushing clean diesel use. Hybrids are being used on some local routes, but CNGs perform poorly on hills, and trips are too long for electronic buses. Total fiscal 2015 OpEx was flat while management projects system costs moving forward to grow at a compounded annual growth rate of 3.2% through fiscal 2022.
The district relies heavily on operating grant assistance which has averaged $20 million over five years and should continue at historic levels. The district's 10-year capital program has grown from $1.4 billion in fiscal 2013 to $1.6 billion in fiscal 2014 with current outlays now projected to total $1.74 billion. Of that amount, approximately $1 billion will go to the bridge itself for maintenance and upkeep but no new debt is anticipated to be issued. Seismic improvements are in process to retrofit the Bridge to withstand an eight on the Richter Scale, and the bridge roadway itself will be rehabbed in 2020.
Fitch's cases assume a hypothetical CP note amortization beginning fiscal 2020 after seismic retrofit project is completed. Projected payments are based on $1.4 million in the first year with increases of $100,000/year for remaining four year period of the projection per the indenture.
Fitch's base case assumes flat traffic and toll increases in line with management's scheduled hikes through fiscal 2018, thereafter rising moderately through fiscal 2024. Expenses grow approximately in line with historical rises and management's projections. Under this scenario the district is fully able to meet obligations while cash balances decline to $90 million by fiscal 2024. Coverage including amortization of the CP notes averages 76.3x with a minimum of 10.8x in fiscal 2024.
The Fitch rating case assumes the same toll schedule as the base case, however, traffic declines 5% in fiscal 2017, thereafter rising 1.5% in fiscal 2018 with flat growth through the projected period. Costs are elevated through fiscal 2024 with a compounded annual growth rate of 4%. This results in coverage (including hypothetical amortization) averaging 61.3x while cash balances are completely depleted by the end of the projected period.
While the district has a proven track record of receiving grants for operations and capital program purposes, Fitch considered a sensitivity scenario where capital grant projections were cut in half from the base case. Under this scenario, without any modification to capital spending outlays, the district would need to significantly raise toll rates to maintain positive cash balances and reserves while fully covering obligations. However, pricing would not exceed other similar assets rated by Fitch.
SECURITY
The CP notes are secured by district payments and a J.P. Morgan Chase Bank letter of credit which was renewed May 30, 2014 and is effective through June 30, 2016. Both series are remarketed at maturity by the CP program's two dealers: Morgan Stanley (Series A), and Goldman (Series B), and the notes program expires on July 12, 2030. The district plans to begin to amortize the CP notes after completing seismic retrofit program which is anticipated to be 2021.
Additional information is available at www.fitchratings.com.
Applicable Criteria
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999464
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999464
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.