CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the Grand Parkway Transportation Corporation (GPTC), Texas' $200 million first-tier Grand Parkway System toll revenue bonds as well as its $841 million second-tier Grand Parkway System toll revenue Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Outlook for both is Stable. The TIFIA loan is expected to be drawn upon by December 2016 to refund existing subordinate-tier toll revenue bonds used to pay for a portion of the Grand Parkway project.
KEY RATING DRIVERS
SUMMARY: The ratings reflect the Grand Parkway System's anticipated traffic and revenue profile supported by the economically strong and growing Houston metropolitan statistical area (MSA). The moderate opening toll rate, which is comparable to similar systems in the area, mitigates price risk and elasticity to future toll increases. Nevertheless, with limited operational history, traffic forecast risk remains. As a new facility, major maintenance requirements are expected to be minimal and other maintenance needs are well-planned for. GPTC's liquidity is limited, and the system is dependent on transaction growth to meet its escalating debt service profile. The rating also reflects the ability of the second-tier TIFIA loan to spring to parity with the first-tier bonds.
Revenue Risk - Volume: Midrange
NEW HIGHWAY IN THE STRONG HOUSTON MSA: The project serves Harris and Montgomery counties in Texas. There is limited operational history; however, the Houston MSA has historically experienced strong demographic and economic growth, which is expected to continue. GPTC benefits from an approximately 96% passenger-vehicle traffic base, yet is subject to competition. Fitch views the current toll rate of $0.195 per mile to be moderate, leaving GPTC some economic rate-making flexibility.
Revenue Risk - Price: Midrange
REGIONALLY CONSISTENT TOLL POLICY: GPTC has adopted the toll policy currently utilized in Harris and Fort Bend Counties that features automatic annual toll increases of the greater of 2% or regional CPI-W. Further, the opening toll rate was pegged to Harris County's current rate.
Infrastructure Development/Renewal: Stronger
MANAGEABLE CAPITAL PROGRAM: As a brand-new facility, the completed project will likely require only minimal maintenance. The project also benefits from the Toll Equity Loan Agreement (TELA) backstop that makes funds available for O&M and major maintenance expenses should revenues be insufficient. Predevelopment work is underway on additional segments and future issuances are possible.
Debt Structure: Midrange (First-Tier and Second-Tier TIFIA)
ESCALATING DEBT STRUCTURE: Debt is fixed-rate and fully amortizing, but heavily back-loaded. First-tier debt benefits from a cash-funded debt service reserve fund (DSRF) while all debt benefits from a $100 million rate stabilization fund, among other funds under the indenture. The debt is supported by a gross pledge of system revenues; however, first-tier debt is exposed to possible future additional debt as well as to a springing lien as a result of a bankruptcy-related event for the potential TIFIA debt.
HIGH TOTAL LEVERAGE AND MINIMAL LIQUIDITY: Fitch's base case forecasts first-tier leverage to be low at 1.0x on a net revenue basis (i.e. net of operating expenses) and 0.7x on a gross revenue basis by 2019 once all segments are open and traffic has fully ramped up. Including the second-tier TIFIA loan, leverage is higher at 11x (net) and total system leverage is elevated at 33x (net). Fitch's base case projects strong first-tier debt service coverage of no less than 9.05x on a gross revenue basis (or 6.53x net of operating expenses). However, total coverage of 1.06x gross (0.77x net) results in limited liquidity build-up, if any, to offset an initially weak balance sheet position.
PEERS: Fitch-rated expressway comparables include nearby Fort Bend County Toll Road Authority (rated 'A+'/Outlook Stable) and Harris County Toll Road Authority (rated 'AA'/Outlook Stable). Both, however, are fully operational systems with demonstrated traffic histories and very strong financial profiles, partially accounting for the rating differentials.
Negative - Highway Utilization: Traffic levels that fall significantly short of expectations, especially in the opening years of the project could negatively affect the rating.
Negative - Capital Program: Additional leverage and/or senior O&M expenses related to future projects that materially dilute projected coverage ratios may weaken credit quality.
Negative - Reduced Financial Flexibility: Increased operating expenses or delays in implementing needed toll adjustments that affect the financial profile could pressure the rating.
Positive - Meeting Forecasts: Sustained traffic and debt service coverage ratio (DSCR) levels commensurate with Fitch's base case could lead to an upgrade.
SUMMARY OF CREDIT
GPTC presently has $200 million of Grand Parkway System first-tier toll revenue bonds and approximately $2.7 billion of subordinate-series toll revenue bonds outstanding. All of the subordinate bonds are TELA-backed except for the series 2014A bonds amounting to $733 million. The series 2014A bonds, along with a portion of the outstanding TELA-backed subordinate bonds, are anticipated to be refinanced in 2016 with proceeds from the second-tier TIFIA loan or future TELA-supported subordinate-tier toll revenue refunding bonds. The current plan of finance is consistent with Fitch's previous expectations.
Substantial completion for the project was reached March 29, 2016, approximately six months later than previously anticipated as a result of adverse and unexpected weather conditions in the Houston area. Based upon the most recently available quarterly construction report and dialogue with GPTC, construction costs appear to be in-line with the project's budget.
Segment G, the last to be completed segment, commenced tolling on April 4, 2016. This followed Segments F-1 and F-2 commencing tolling on February 15, 2016. The portion of Segment D in Harris County and Segment E have been open and tolled since Feb. 1, 2014. Despite the delayed opening of Segments F and G, for the six months fiscal YTD 2016 (year-end August 31), traffic has exceeded forecast by 18% due in part to unforeseen construction activity in the Houston area. Transactions for the period are 96% passenger vehicles and 4% commercial vehicles with the expectation of similar proportions going forward. The strong traffic levels have led to revenues exceeding forecast by 27% over the same period. Total operating expenses are 45% below budget primarily due to lower than expected toll operations costs and delays in the opening of Segments F and G. GPTC is still within the capitalized interest period and debt service has not been due to date. Given the limited operating history and relative outperformance thus far, Fitch has not updated its base and rating cases for this review. In addition, financing, revenue, and cost information for Segments H and I is not available at this time and therefore has yet to be incorporated into our analysis.
The first-tier toll revenue bonds are secured by, and have a first-priority lien on, senior net revenues derived from the ownership or operation of the toll road system and certain funds under the indenture. The second-tier toll revenue TIFIA loan is secured by, and has a second-priority lien on, senior net revenues.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)
Dodd-Frank Rating Information Disclosure Form