CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the E-470 Public Highway Authority's (the authority) approximately $1.6 billion of outstanding senior revenue bonds at 'BBB'. The Rating Outlook for all of the bonds is Stable.
KEY RATING DRIVERS
The rating reflects E-470's continued strengthening financial and operational profile while also recognizing the road's smaller, standalone nature within a growing metro area. The heavily commuter-based traffic system has remained resilient despite recessions and continues to outperform forecasts. A proactive switch to annual toll rate increases combined with a relatively inelastic user base and strong traffic growth have led to toll revenues more than doubling since 2004. The asset is being maintained in excellent condition. Management has begun to reduce a sharply escalating debt service profile and worked to control capital as well as operating expenses. Leverage is moderate in the 9x range and consistent with the 'BBB' category. The debt service coverage ratio (DSCR) has rebounded and should remain around 1.6x in the near-to-medium term.
Revenue Risk - Volume: Midrange
ESTABLISHED TRAFFIC BASE: E470 is comprised almost entirely of commuters given its intersection with major highways into Denver as well as its direct access to Denver International Airport. Despite modest sensitivity to economic cycles, overall demand has proven largely inelastic and not constrained the revenue growth necessary to meet E470's growing debt service obligations. Most recently, fiscal 2015 traffic exceeded the fiscal 2014 peak and grew 12.4% to 74.6 million transactions. Transactions have grown at a compound annual growth rate (CAGR) of almost 4% since 2004, largely in line with Denver's population growth over the past decade. Denver's continued population growth will be vital to supporting E470's future transaction and revenue growth necessary to service its still increasing debt service obligations.
Revenue Risk - Price: Midrange
MODERATE RATE-MAKING FLEXIBILITY: Management is willing and able to raise tolls, and annual increases have been established through 2021 to meet rising debt service obligations. The current Mainline Toll Plaza passenger toll rates for license plate and electronic tolling customers are relatively high at $0.30 per mile and $0.37 per mile, respectively.
Infrastructure Development & Renewal: Stronger
MANAGEABLE CAPITAL IMPROVEMENT PLAN: E-470 has delivered projects on time and under budget and currently has no deferred maintenance. The 2016-2020 capital plan is modest at $193.8 million with another $447.9 million of projects being considered down the road (other widening, I-70 and I-76 interchanges). Most projects will be internally-funded in the medium term with no new debt likely in the next five years. Management has demonstrated a proactive approach to maintenance and budgets operating expenses annually for regular renewal and replacement expenses.
Debt Structure: Stronger
SMOOTHING DEBT SERVICE PROFILE WITH LIMITED REFINANCING RISK: Most outstanding debt is fixed rate, and the authority is following plans to reduce future obligations. However, absent additional refundings, E-470's annual debt service obligations will increase from approximately $97 million per year to over $128 million per year by 2025 and remain level thereafter. Nine percent of the outstanding debt remains subject to mandatory tender, and interest costs could be higher even though a failed tender would not trigger a term-out or a default. The $130 million debt service reserve fund which includes a $25 million surety is above the $118 million requirement and provides additional cushion.
Financial Metrics
MODERATE LEVERAGE AND STRONG LIQUIDITY: The authority's net debt-to-cash flow available for debt service (CFADS) of around 9x is comparable relative to Fitch-rated 'BBB' peers. Providing some financial flexibility, E-470's healthy liquidity, including over $69 million of unrestricted cash and reserves available for O&M equates to a Fitch-calculated 666 days cash on hand (DCOH) for fiscal 2015. Fiscal 2015 DSCR increased to 1.78x from 1.71x in fiscal 2014. Through fiscal year (FY) 2025, the Fitch base case forecasts DSCR to be no less than 1.5x with an average of 1.78x, while the Fitch rating case assumes more limited traffic growth resulting in a minimum DSCR of 1.47x with an average of 1.66x. A breakeven revenue growth on the Fitch base case of less than 0.8% affords additional comfort for the current rating despite the increasing debt service obligations.
Peers
E-470's closest Fitch-rated peer is the Central Texas Turnpike System (CTTS; 'A-/BBB', Outlook Stable). CTTS has greater franchise strength and lower toll rates. However, CTTS has higher overall leverage, and Fitch forecasts a DSCR average of 1.6x in the base case. CTTS benefits from a gross pledge of toll revenues, as the Texas Department of Transportation pays all operations and maintenance expenses subject to appropriation. Conversely, E-470 operates independently of the Colorado Department of Transportation (CDOT). E-470's total revenue breakeven growth rate is more favourable than CTTS.
RATING SENSITIVITIES
NEGATIVE: A material decline in near-to-medium term traffic and revenue growth due to heightened sensitivity of demand to future toll increases.
NEGATIVE: O&M expense growth in excess of forecasts that results in lower than forecast debt service coverage levels and more limited financial flexibility.
POSITIVE: Positive rating action is unlikely in the near term due to regional housing pressures which could restrict traffic volumes as well as rate-making flexibility.
SUMMARY OF CREDIT
Traffic continues to grow despite annual toll increases, demonstrating relatively inelastic demand. Transactions grew for a sixth straight year in 2015, rising above its pre-recession level to a new peak of approximately 74.6 million transactions, and year-to-date (YTD) transactions are up another 9.62% through March 2016 to 17.4 million transactions. As a result, net toll revenue for 2015 grew 15% to $173 million from $150.4 million in 2014. YTD through March, net toll revenues are up 14% over the same period in 2014 to $40.9 million given the substantial traffic increase coupled with the effect of the implemented annual toll increase.
The authority persistently manages costs alongside innovative system upgrades and increases toll revenues. CFADS continued to rise in 2015, increasing 13% to $197.7 million, following 16% growth in 2014, and 11% growth in 2013. Fitch notes that E-470's escalating debt service profile necessitates growth of this magnitude; however, the authority has made considerable progress in smoothing its debt service profile and intends to do more with planned near-and medium-term refundings. The authority is planning on a full cash call to defease approximately $11.2 million of principal in September 2016 but is forecasting increased operating expenses over FY2016 from installing new cameras to help to decrease revenue lost from unbillable transactions (over half of which are caused by unreadable licence plates).
Fitch notes that C-470 should help E-470 traffic by improving access and developing the northwest side of the Denver MSA, continuing to make local roads obsolete. Fitch also doesn't view RTD as a traffic or competitive threat because E470 goes around the Denver metropolitan statistical area (MSA) while RTD's transit services travel to and from the Denver MSA. Furthermore, RTD's BRT services on US-36 ML's and I-25 ML's further help road traffic.
However, financial flexibility will be pressured if traffic does not continue to grow, price elasticity of demand trends higher, or expenses are not prudently managed, and higher than anticipated toll increases may be necessary to maintain healthy coverage levels and remain in the rating category. Furthermore, traffic and revenue growth is constrained by increasing housing prices throughout the Denver area, increasing the shortage of affordable housing. Fitch will continue to monitor all modes of traffic patterns as well as housing development to analyse overall transportation patterns.
Through FY2025, Fitch's base case reflects a 2.2% transaction CAGR and a 4.9% revenue CAGR which results in a sustained period of DSCR average of 1.78x and a minimum DSCR at 1.55x. Fitch's rating case assumes limited traffic and revenue growth at 1.2% and 3.8% respective CAGRs which results in a minimum DSCR level at 1.47x and an average DSCR at 1.66x as coverage gradually rises through maturity which is in line with the peers rated 'BBB'. The Fitch-calculated revenue growth breakeven of 0.56% would be required in order to meet 1x DSCR which is reached in 2028. While the authority is levered at nearly 9x, leverage still would remain within the 'BBB' category as well, and the authority does not anticipate any near-term debt issuances to fund capital needs. Successful implementation of the authority's debt management plan along with sustained traffic growth and expense management justifies the affirmation at 'BBB'.
SECURITY
Senior bonds are secured by a pledge of toll revenues, excess vehicle registration fees (after vehicle registration fee bond debt service), highway expansion fees, and interest earnings after paying operating expenses.
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
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