Fitch Rates Central Florida Expressway Auth's Senior Revenue Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to Central Florida Expressway Authority's (CFX) $142.1 million 2016A series senior lien refunding revenue bonds. Fitch has simultaneously affirmed its 'A' rating on the authority's outstanding $2.6 billion senior revenue bonds, including those issued by its predecessor authority, Orlando-Orange County Expressway Authority (OOCEA), and its 'A-' rating on its subordinated federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook on all ratings is Stable.

KEY RATING DRIVERS

The ratings reflect the essentiality of the CFX system to commuters in the Orlando area, coupled with a demonstrated willingness and ability to implement toll increases even during challenging economic times. They also reflect the system's robust operating and financial performance over the last year. The authority's sizeable capital plan will likely require additional borrowing, acting as somewhat of a constraint on the ratings. Nevertheless, CFX's strong track record in delivering capital projects indicates the plan is manageable. The fully subordinated position of the TIFIA loan behind senior bonds and its correspondingly slightly weaker debt metrics result in a one-notch rating differential.

Established Road System (Revenue Risk Volume - Stronger): CFX's roadway system is a critical component of the Orlando area's transportation network, supporting a largely commuter traffic base. Recent legislation creating the new agency (formerly OOCEA) expands the authority's jurisdiction to include Orange, Seminole, Lake, and Osceola Counties, providing a broader traffic base while also allowing for greater operating efficiencies. Fitch views current toll rates as moderate and considers CFX to have reasonable ratemaking flexibility.

Proven Ability to Manage Tolls (Revenue Risk Price - Stronger): CFX successfully implemented toll increases through the recent recession and, furthermore, implemented its first planned CPI-linked toll increase in July 2012 with limited impact on traffic. The board's approval of future CPI-linked increases at regular five-year intervals, with the next increase slated for 2017, is considered a positive.

Good Asset Condition, Manageable Plan (Infrastructure Development Renewal - Stronger): CFX has maintained its facilities to a high standard, with robust historical financial performance supporting a sizable portion of pay-as-you-go and debt-funded capital investment. CFX's current capital program is considerable, with 34% of funds going to the Wekiva Parkway project. However, the authority has a proven track record of delivering capital improvements, having recently completed the John Land Apopka Expressway and several capacity improvement projects. Under the terms of the 2014 interlocal agreement between CFX and the Florida Department of Transportation (FDOT), no additional parity bonds may be issued by CFX without FDOT's approval until lease purchase agreement related repayments have been fully repaid unless debt service coverage ratio (DSCR) on all obligations is above 1.45x, with the exception of consented borrowings for the Wekiva Parkway and I-4 projects. Furthermore, projects from Osceola County Expressway Authority have not yet transferred to the CFX; when they do, they will be considered 'non-system projects' and will not have claim to System Pledged Revenues under the bond resolution.

Some Exposure to Sureties, Swaps (Debt Structure [senior lien] - Midrange; Debt Structure [second lien] - Midrange): CFX's senior debt is currently 81.6% fixed rate, with the remainder in synthetically fixed mode. In addition, the majority of debt service reserve requirements are met with surety policies, with $162 million in the form of surety backing versus $58.6 million cash funded, and the authority has also established a $160 million cash reserve for debt management. The fixed rate, fully amortizing TIFIA loan does not feature a 'springing lien' mechanism, ensuring that it remains fully-subordinated to senior debt in all circumstances.

Relatively High Leverage: The system carries relatively high leverage, with net debt to cash flow available for debt service (CFADS) expected to remain no lower than around 6.0x over the next five years in the Fitch base case and around 7.0x in the Fitch rating case, reflecting CFX's high capital needs. The senior DSCR averages 2.04x on the senior lien and 1.99x on the junior lien in the Fitch base case, and 1.69x and 1.65x respectively in the Fitch rating case. Fitch's breakeven analysis suggests that CFX has very little dependence on revenue growth in order to service debt service based on its existing operating and financial profile.

Peers: Comparable peers include other large expressway systems such as Miami Dade Expressway (MDX; 'A-'/Outlook Stable) and Harris County Toll Road Authority (HCTRA; 'AA'/Outlook Stable). Both MDX and CFX service large, growing service areas in Florida, and have experienced significant expansion over recent years. Leverage on both systems is relatively elevated, commensurate with their ratings. HCTRA's higher rating reflects its significantly lower leverage, higher revenue and higher coverage.

RATING SENSITIVITIES

Negative: An inability to control expenses and manage its capital program would pressure the current rating.

Negative: Volatile traffic in light of deteriorating economic conditions or in response to toll increases, or increasing political pushback against the implementation of timely toll increases could lead to negative rating action.

Positive: Given the sizable capital program and expected future borrowing levels, upward rating action is unlikely at this time.

TRANSACTION SUMMARY

CFX is issuing its $142.1 million 2016A series senior lien refunding revenue bonds in order to advance refund a portion of outstanding 2007A series senior lien revenue bonds for debt service savings. Proceeds, net of issuance costs, underwriter fees and the acquisition of a surety to support the sold bonds, will be placed into escrow, with such funds drawn upon as necessary to service the 2007A bonds before they become callable, and then to prepay such bonds once callable. Once funds have been placed into escrow, such funds will become the sole security for the 2007A bondholders, and CFX obligations with respect to such 2007A Series bonds will be fully discharged.

On June 20, 2014, Florida Governor Rick Scott signed Senate Bill 230 into law, establishing CFX. All operations, governance and control of its predecessor agency, Orlando-Orange County Expressway Authority (OOCEA), were transferred to CFX and jurisdiction was expanded to include the construction, maintenance, and operation of toll roads in Orange, Seminole, Lake, and Osceola Counties. All assets, liabilities, duties, responsibilities and obligations of OOCEA, including obligations under OOCEA's amended and restated master bond resolution, became obligations of CFX. CFX, pursuant to SB 230, must continue to operate and maintain the system in accordance with the bond resolution and the lease purchase agreement entered into between CFX and FDOT.

CFX's network comprises five main expressways in and around Orlando, FL, which provide vital commuter links into, across and around the metropolitan area. Its system currently totals 766 lane miles, including ramps, although it is expected to continue growing over years to come in order to meet the needs of the growing metropolitan area. The population of Orange county grew to 1.25 million in 2014, at an compounded annual rate of 2.3% since 2010, and the population of the whole seven county Central Florida region reached 4.0 million in 2014. Furthermore, employment in Orange county and the surrounding region grew at rates of 3.5% and 2.9% respectively over the period 2010-2014. The region is expected to continue growing over coming years.

Transactions and toll revenue across CFX's system both increased by 9.4% in fiscal year (FY) 2015 (ending June 30) with growth during the first seven months of FY2016 at 12.1% and 10.6% respectively. This growth has been largely spurred by continuing land development across the metropolitan area, as well as the strong local economy supported in part by its robust tourism sector. Some traffic has also been induced on the system by continuing expansion, most notably in recent times from a new connection with the Florida Turnpike. CFX last implemented a programmatic CPI-linked toll increase in 2012 and is not expected to implement another such increase until 2017. Operating costs in FY 2015 were 5.1% up on the prior year reflecting the authority's expanding operations; during the first seven months of FY 2016, Fitch understands that costs have been managed at a level 12% below budget, largely driven by maintenance contract prices being agreed at levels below expectation.

The authority's current $1.2 billion capital plan includes its portion of the Wekiva Parkway extension, work on the I-4 / SR 408 interchange and other projects and, during 2015, CFX raised a $193 million, fully subordinated TIFIA loan to finance a portion of its responsibilities with respect to Wekiva Parkway which, when operational, will complete the beltway around Orlando. Fitch understands that the project is currently on budget and on schedule to open in 2018. Fitch further understands that CFX is currently undertaking its annual review of its capital plan, and the revised plan will be announced shortly.

CFX's projections reflect net toll revenues growing at a CAGR of 3.9% through 2025, supported by programmatic five-yearly toll increases, the opening of Wekiva Parkway in 2018 and organic traffic growth on the system as a result of growth in the region. Operating, maintenance and administrative costs are forecast to grow at a rate of 6.5%, largely driven by a ramp up in operations ahead of the opening of Wekiva Parkway. New money debt is assumed in line with prior expectations. In this scenario, senior lien DSCR averages 2.04x, with a minimum level of 1.77x, while second lien DSCR averages 1.99x with a minimum of 1.59x. Fitch views this scenario as reasonable and has adopted it as the Fitch base case.

In forming the Fitch rating case, Fitch has assumed a reduction in net toll revenue of 2.5% in 2017 as a result of a traffic shock in that year, with modest revenue growth of 1% in the following year, with assumed continuing economic weakness offset by the opening of Wekiva Parkway and the programmatic toll increase. Traffic and revenue is then assumed to experience a muted recovery 2019-2022, with revenue growing at 3.0% per annum, before reverting to base case revenue growth rates over the remainder of the projection to 2025. Operating costs, net of contributions from Florida Department of Transportation under the Lease Purchase Agreement, are assumed in line with the base case through 2018 despite a weaker economic profile over this period, and assumed to grow 0.5% faster than in the base case over the remainder of the projection. In this scenario senior DSCR averages 1.69x, falling no lower than 1.55x, while second lien DSCR averages 1.65x with a minimum value of 1.54x, in both cases commensurate with current ratings. Fitch estimates the breakeven revenue growth rate, based on the Fitch base case operating profile and current debt service expectations, to be 0.03%, demonstrating a lack of dependence on revenue growth.

Fitch understands that the authority is currently reviewing its capital plan and future debt needs, and will monitor developments in this regard as more information becomes available.

Additional information is available on 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

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Contacts

Fitch Ratings
Primary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 1000
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 1000
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Greg Remec
Senior Director
+1-312-606-2339
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com