NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an expected rating of 'BBB' to the estimated $285 million subordinated loan granted under the Transportation Infrastructure Finance and Innovation Act (TIFIA), entered into by the Texas Transportation Commission, the governing body of the Texas Department of Transportation (TxDOT). The Rating Outlook is Stable.
The rating reflects low construction risk with the most complex activities completed and liquidity support from TxDOT to mitigate potential cost overruns. The managed lanes (MLs) project benefits from its strategic location in a congested commuting corridor serving the Dallas-Fort Worth Metropolitan area. The rating also reflects risks associated with free capacity expansion, the lack of demand history, untested price sensitivity to tolls, as well as the inherent volatility and long-term forecast risk associated with ML projects. Revenue risk is partially offset by the TIFIA loan structural features such as a flexible debt service schedule and available liquidity. Under Fitch's rating case, which incorporates additional downside assumptions from the sponsor's relatively conservative forecast, TIFIA total coverage averages 1.66x overall, which is consistent with the 'BBB' rating level for MLs.
KEY RATING DRIVERS
Advanced Stage of Construction (Completion Risk - Stronger): Completion risk is largely mitigated by the project being approximately 75% complete, along with a fixed-price, date-certain contract with a joint venture (JV) comprised of experienced builders. The project is generally on budget and on time to meet its scheduled substantial completion date in May 2017. The five-year capitalized interest period following substantial completion provides a buffer against delay risk. Performance and payment bonds, retainage bond, parent guarantees and liquidated damage payments for delays and lane closures further mitigate completion risk, along with the strong support of TxDOT.
Congested Corridor, Fast-Growing Region (Revenue Risk: Volume - Midrange; Corridor Volume - Midrange, ML Characteristics - Weaker): The project's two reversible MLs along a 28-mile stretch should provide reasonable time savings based on current corridor peak-period traffic. Demand uncertainty remains due to the lack of operating history and exposure to competing alternatives, including the addition of general purpose lanes (GPLs). However, while the region is expected to experience continued robust economic and population growth over the medium term, the project is only modestly dependent on population growth. A familiarity with MLs in the area and tight free access policies are strengths, although the project's current pre-construction status and the addition of GPL capacity keeps the ML characteristics score weaker.
Dynamic Pricing, Soft Cap (Revenue: Price Risk - Midrange): The project uses a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. North Central Texas Council of Governments (NCTCG) MLs policy allows for revenue maximization up to a soft cap on toll rates of $0.75 per mile (2012 dollars) and rates may only be increased beyond this level if TxDOT is unable to manage ML speeds at or above 50 miles per hour. While the soft cap structure limits some of TxDOT's pricing flexibility, it may also help offset some political risk regarding rate increases in a scenario of high congestion.
New Asset, Sound Maintenance Plan (Infrastructure Renewal and Replacement - Stronger): Once completed, the managed lanes will be in new condition with minimal capital needs for some time. Renewal and replacement (R&R) expenditures will be paid from cash flows on a rolling five-year look-forward basis, partially mitigating asset reinvestment risk.
Flexible, Back-Ended Schedule (Debt Structure - Midrange): All debt is fixed rate and amortizing. The TIFIA structure includes flexible debt service terms between mandatory and scheduled payments, which is considered supportive of the project in early years, but could potentially lead to a backloaded debt service profile. Liquidity is adequate with the debt service reserve account sized to maximum annual mandatory debt service. The potential to raise additional senior- or parity-ranking debt results in TIFIA loan structural subordination and constrains the assessment to Midrange.
Adequate Financial Flexibility: Considered on a net pledge basis, DSCRs are maintained at healthy levels in most scenarios, supported by debt service flexibility and liquidity. The Fitch rating case shows average TIFIA total DSCR of 1.66x, which is consistent with the 'BBB' ML rating. TxDOT's base case forecast includes relatively conservative assumptions and Fitch's rating case assumes a one-standard-deviation downward adjustment to the main forecast drivers, resulting in an added level of conservatism considering the volatility of this asset class. Overall, the project's cash flow is relatively resilient to stresses. A low revenue growth breakeven CAGR of 2.53% post ramp-up under Fitch's rating case demonstrates cash flow resiliency and low dependence on growth.
Peer Analysis: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are congested during peak hours such as 95 Express Lanes LLC (rated 'BBB-'/Stable Outlook) and Riverside County Transportation Commission's (rated 'BBB-'/Stable Outlook) MLs. Both serve areas with relatively strong demographic characteristics and limited alternative routes, but have somewhat different congestion levels and varied exposure to toll free vehicles. IH 35E's one-notch rating differential is supported by its robust DSCRs and limited need for growth to support debt service.
RATING SENSITIVITIES
Negative: Financial performance that is materially and persistently below Fitch's rating case of approximately 1.60x, which could be caused by lower than expected traffic volumes or pricing power, or additional debt absent commensurate revenue growth, could lead to negative rating action.
Positive: While positive rating action is not anticipated in the near term, given continued construction and needed ramp-up, traffic performance persistently above the sponsor case resulting in strong sustained financial performance could lead to positive rating action.
TRANSACTION SUMMARY
The Interstate Highway 35E Managed Lanes Project is being undertaken by TxDOT along a 28-mile section of the highway starting at the IH 35 split in Denton, TX and stretching south to IH 635, the northern part of the Dallas beltway. IH 35E connects fast-growing residential areas in Dallas County and Denton County with employment centers throughout the region and downtown Dallas. The project is wholly owned and operated by TxDOT. The financing of this project is ring-fenced from TxDOT's other activities. A delayed debt payment by TxDOT would, however, trigger a bankruptcy-related event, causing the TIFIA loan to spring to senior.
The project's scope includes the design and construction of two reversible MLs, additional GPLs, the new southbound Lake Lewisville Bridge and other complementary facilities. The project serves to improve the connection between Dallas with north-western suburbs of Carrolton, Lewisville and Denton, running through Dallas and Denton counties. The region as a whole has experienced rapid population growth over the past 40 years, with Denton County in particular one of the fastest growing areas. IH 35E is the only direct route connecting Denton and Dallas and is one of the most congested corridors in Texas with three stretches featured in the Top 100 Most Congested Roads in Texas (6th, 18th, 22nd in 2015). However, most of the corridor coterminous with the project only experiences high congestion levels during its peak periods.
The project is being constructed by AGL Constructors, a Texas joint-venture between Archer Western Contractors, LLC, Granite Construction Incorporated and Lane Construction Corporation. The three JV partners are jointly and severally obligated to support the contractor if required. Additional security package features include payment and performance bonds and a retainage bond in the amount of 4% of the contract price. The performance and payment bonds are sufficient to cover the premium associated with the contractor replacement, but do not provide liquid security to cover immediate costs following a contractor default. Given the substantial financial commitment thus far from TxDOT, it would be well incentivized to step in and provide funding to continue with construction if necessary while waiting on payments from performance bonds if necessary.
Similar to other ML projects, TxDOT will use dynamic tolling on the IH 35E MLs, with rates set to manage traffic flow to ensure a minimum speed of 50mph in accordance with the regional ML tolling policy set and governed by the NCTCOG. Toll rates will be subject to a 'soft' cap of $0.75/mile (2012 dollars) which may be breached if necessary to meet performance requirements (50mph travel speed in MLs, per NCTCOG policy). A 50% discount will be given to high occupancy vehicles with three or more passengers and motorbikes during peak hours until 2024, after which no discount will apply. The average truck rate will be 3.5x the single occupancy vehicle rate. The MLs will have all electric, open-road tolling. Vehicles without active transponders will be video-tolled. Toll processing will be handled by North Texas Tolling Authority under the tolling services agreement.
The Sponsor case assumptions include a $10.29 per hour peak, $11.18 per hour off-peak and $10.59 per hour median value of time (VOT, both 2012 dollars) for passenger vehicles, with trucks assumed to have a VOT 3.5x greater; employment growth of 1.9% and 3.7% per annum for Dallas and Denton Counties, respectively, and population growth in the same area of 1.1% and 2.7%, respectively.
Fitch views the resulting AADT corridor growth of 1.45% up to opening year and 1.34% post-opening year as reasonable. Additionally, the mean VOT of $10.96 per hour is conservative as compared to the range seen by Fitch across its portfolio.
Based on the demand and pricing uncertainty, Fitch's rating case is derived from applying one standard deviation (1 SD) downward adjustment to the sponsor's population and employment assumptions. The 1 SD adjustment results in an overall 48% decline in population from the sponsor to the rating case and employment growth is reduced by 64%. Annual population growth would be lower than the lowest annual growth recorded between 1990 and 2011. Given these conservative assumptions, the rating case reported an average scheduled DSCR of 1.66x from opening year through TIFIA maturity. The breakeven revenue growth rate from the first fully ramped-up year of 2.53% and the breakeven downward adjustment to the rating case revenue curve from first fully ramped-up year of 26.8% both provide an indication as to the project's ability to withstand further stress beyond the rating case.
SECURITY
The TIFIA loan is secured by project gross revenues and restricted accounts. Should any additional senior debt be raised, the TIFIA loan will be subordinated to the lien securing the bonds, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with any senior debt.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
https://www.fitchratings.com/site/re/886038
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