NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Mid-Bay Bridge Authority, Florida's (the authority) approximately $251.5 million series 2015 first senior lien bonds at 'BBB+' and its approximately $33.5 million series 2015 second senior lien bonds at 'BBB'.
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS
The ratings reflect a small standalone facility that serves as an important transportation link for commuters with exposure to leisure based traffic. A generally flat debt service profile leaves the authority dependent on modest revenue growth to meet all debt service obligations. The affirmation reflects the facility's solid financial performance with low elasticity to historical toll increases, the addition of a tolled limited access highway, and the responsibility of solely administrative expenses, as the Florida Department of Transportation (FDOT) is responsible for operating and capital costs. The affirmation further reflects Fitch's expectation that coverage will remain in-line with the assigned rating levels with 10-year average senior and total coverages of 1.64x and 1.46x in the rating case.
Revenue Risk - Volume: Weaker
Exposure to Leisure, Military: The Mid-Bay Bridge and Walter Francis Spence Parkway serve as important transportation links for commuters and tourists as well as a key emergency and natural disaster evacuation route. However, the system's traffic is dependent on local military and discretionary travel, with some exposure to competition. Sustained operations and personnel rotations at Eglin Air Force Base (Eglin AFB) somewhat offset this risk through the related need for road capacity. Limited demand elasticity to the fiscal 2016 toll increase indicates solid economic rate-making ability.
Revenue Risk - Price: Stronger
Strong Rate-Making Flexibility: The authority has unlimited legal ability to increase tolls as it sees fit, although its current plan does not envision toll increases. Some uncertainty remains as to the level of political support any additional toll increases would have within the surrounding community. Mid-Bay Bridge Authority's toll policy includes its intention to maintain at least 1.5x coverage on the first senior-lien bonds and 1.3x coverage on the second senior-lien bonds.
Infrastructure Development/Renewal: Stronger
Strong Infrastructure Renewal: A lease-purchase agreement with FDOT provides for a strong legal framework and an economic gross lien on toll revenue to bondholders, enhancing stand-alone credit quality. FDOT is obligated to cover operating expenses and renewal and rehabilitation advances for the life of the debt, which includes deeply subordinated repayment terms.
Debt Structure: first senior - Stronger, second senior - Midrange
Fixed-Rate, Multi-Tier Capital Structure: Debt is fixed-rate and fully amortizing, and is further supported by a $21.2 million debt service reserve fund (DSRF) and approximately $2 million general fund. The debt service profile is generally flat with a maximum annual debt service (MADS) requirement of $21.2 million in 2031, maturing in 2040. Rate covenants of 1.4x on the first senior lien and 1.2x on the second senior lien provide greater bondholder protection over the previous debt structure. Mid-Bay Bridge Authority's toll policy includes its intention to maintain at least 1.5x coverage on the first senior-lien bonds and 1.3x coverage on the second senior-lien bonds.
Financial Metrics
Elevated Leverage; Adequate Reserves: Elevated total leverage on a net debt/cash flow available for debt service basis at a Fitch calculated 11.7x is explained by the authority's use of excess revenue to reimburse FDOT for O&M and long-term obligations. Higher leverage is further explained by interest only payments made on the recently restructured debt in fiscal 2015, and is expected to evolve down to the 9x range in fiscal 2016. Coverage remained strong in fiscal 2015 due to interest only payments made by the authority. Total coverage is expected to evolve down in fiscal 2016 as debt service escalates, averaging 1.46x in Fitch's rating case from 2016-2025.
Peer Group: The system's peer group includes standalone toll roads with similar traffic levels such as Alligator Alley, FL ('A+'/Stable Outlook) and Chesapeake Bay Bridge & Tunnel District, VA (CBBT; 'A-'/Stable Outlook). Alligator Alley and CBBT exhibit similar financial profiles with higher coverage and lower leverage than Mid-Bay. However, Mid-Bay is susceptible to downturns from exposure to leisure based traffic and competition from the U.S. 331 Bridge expansion.
RATING SENSITIVITIES
Negative - Traffic Contraction: A decline in traffic levels from economic factors associated with tourism or the military base, or completion of the U.S. 331 Bridge expansion that has a material effect on coverage levels could pressure the rating.
Positive - Revenue Growth: A material improvement in demand resulting in leverage stabilizing below 8x and total coverage levels averaging 1.7x could result in positive rating action.
CREDIT UPDATE
The addition of the Spence Parkway continues to bolster total Mid-Bay traffic and revenue, with fiscal 2015 traffic increasing 19% (to 10 million) and revenue increasing 14% (to $20.7 million). Total system traffic remains generally in line with Fitch's base case, while total revenue surpassed projections by approximately 4%. Fiscal year to date traffic through April 2016 has increased approximately 1%, with revenue up approximately 37%, from a toll increase implemented at the beginning of fiscal 2016. Year to date traffic growth despite the toll increase indicates relatively inelastic demand from the commuter base and leisure travelers. Traffic may remain volatile due to the discretionary travel associated with the system; however, Fitch believes key commuters from Eglin Air Force Base and the surrounding area partially mitigate leisure-based traffic volatility.
Revenue through April 2016 grew substantially as the authority implemented a toll increase beginning in fiscal 2016. Tolls remained flat for 2 axle/SunPass frequent users (41-or-more trips per month), however were raised by 50% for 2 axle/SunPass infrequent users, and 33% for all other remaining vehicles. New toll rates remain similar to other toll road transactions in Fitch's portfolio. The toll increase coincides with the authority's toll policy to manage coverage levels at a minimum of 1.5x on the first senior and 1.3x on the second senior lien. Despite no additional toll increases assumed in the sponsor's forecast, Fitch notes that the flexibility remains to raise tolls in the event of unexpected traffic declines.
The expansion of the U.S. 331 Bridge is expected to be completed in fiscal 2017. The expansion could have an impact on Mid-Bay traffic as it remains a toll-free option, located approximately 15 miles east of Mid-Bay. Motorists traveling west on Interstate 10 from east of the area are likely to use the U.S. 331 Bridge as it provides a free alternative without additional driving time. Motorists traveling east on Interstate 10 are less likely to use the bridge as it would require additional driving time. Fitch will continue to monitor the expansion of the U.S. 331 Bridge and its impact on Mid-Bay traffic.
In June 2016, a proposal was made by an authority board member to reduce the cash toll rate citing feedback from Destin business owners. The negative response from the surrounding community suggests the lack of support for the recent toll increase. The authority voted down the motion 4-1, but expects to revisit the toll schedule after a full fiscal year of data is received. Despite the legal ability to increase tolls in the future, the authority's political ability to increase future tolls remains unclear. A reduction in the toll rate without an offsetting traffic increase could negatively affect financial metrics and pressure the rating.
Fitch's calculation of debt service coverage was high in fiscal 2015 at approximately 5.7x, with total coverage including the second senior lien at approximately 5x. Metrics are expected to evolve down as the authority made interest only payments on the recently refunded debt in 2015. Leverage remained elevated at 11.7x, however is expected to fall to the 9x range in fiscal 2016 following the aforementioned toll increase.
The Fitch base case assumes average traffic growth of 1.5% through the 10-year forecast period ending in 2025, which results in average revenue growth of 1.5%, as average toll rates are held flat. Under this scenario, senior lien coverage averages 1.77x with a minimum of 1.7x, and total coverage averages 1.57x with a minimum of 1.51x. The Fitch rating case forecasts a near-term stress to the traffic base with only moderate recovery through 2025. In this scenario, senior lien coverage averages 1.64x with a minimum of 1.53x. Total coverage in the rating case averages 1.46x, with a minimum of 1.35x. Fitch does not project additional toll increases throughout the forecast period, but the authority retains the flexibility to increase rates should cash flow materially erode. Fitch also included a breakeven scenario to assess the level at which revenue could annually decline while maintaining 1x coverage, depleting all bond reserves. Based on Fitch's analysis, which assumes base case metrics, Mid-Bay is not dependent on additional revenue growth on either lien to service debt at the 1.0x level through 2040.
SECURITY
The first senior and second senior lien revenue bonds are all secured by a gross pledge of revenues of the authority, after administrative expenses only, including all funds and accounts established under the resolution, and related investment earnings. The second senior lien debt service repayment is subordinate to the first senior lien obligations.
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008196
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008196
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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