CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Texas Transportation Commission's (TTC) $1.56 billion first tier debt at 'A-' on behalf of the Central Texas Turnpike System (CTTS, the system). Fitch has also affirmed the 'BBB' rating on $1.16 billion of CTTS's second tier debt. The Rating Outlooks on both liens are Stable.
KEY RATING DRIVERS
The ratings reflect CTTS's predominantly commuter traffic base with limited competition, low demonstrated traffic volatility, and relatively low toll rates. The ratings further reflect CTTS's considerable rate-making flexibility, with full legal flexibility to raise rates beyond inflation as necessary though the current policy solely tracks inflation given recent healthy traffic growth. CTTS's back-loaded debt structure is well-mitigated by the system's rapidly growing revenue profile, which should warrant only inflationary revenue growth to service debt on both liens. Although the system's traffic and revenue have greatly exceeded Fitch's forecasts over the past few years, the ratings are currently constrained by uncertainty related to the system's potential capital plans, which could potentially cause financial metrics to weaken should additional debt be incurred. The current differential between the first tier's and second tier's ratings is explained by the large difference in coverage and leverage metrics, with the first tier at 2.83x (1.97x net of operating costs) and 5.87x (8.41x net) and the second tier at 1.57x (1.10x net) and 11.07x (15.86x net), respectively.
Revenue Risk - Volume: Stronger
Multiple Segments, Strong Service Area: The system's largely commuter traffic base is supported by the aggressively growing Austin MSA, which has provided robust growth for the system and essentially no traffic volatility. Fitch views traffic diversion risk as low, given heavy congestion in the area coupled with the Texas Department of Transportation's (TxDOT) non-compete clause, which partially mitigates the risk of newly constructed facilities cannibalizing CTTS's traffic. Toll rates are lower than the average of comparable facilities, which affords some flexibility to raise rates if need be.
Revenue Risk - Price: Stronger
Considerable Rate-Making Flexibility: The bonds benefit from unlimited legal flexibility to raise rates in excess of inflation to prevent financial instability; however, the current toll escalation policy solely provides for inflationary toll increases given robust traffic growth. Positively, political interference thus far has been minimal, and CTTS has precedent of raising rates well beyond inflation prior to implementation of the current toll escalation policy.
Infrastructure Development & Renewal: Stronger
Gross Pledge Supports Maintenance Needs: TTC's pledge to support operating, maintenance and rehabilitation expenses, if necessary, provides certainty that necessary works will be undertaken regardless of CTTS's own performance. Future maintenance needs are anticipated to be minimal given the excellent condition of road as a result of its relative newness and minimal commercial exposure. Future expansionary projects could be possible in order to further relieve congestion in the area, though the magnitude and funding of these potential projects is currently uncertain.
Debt Structure: Midrange (First Tier and Second Tier)
Escalating Debt Service Profile: The system's first tier and total debt service profile through 2042 escalates 5.3% and 3.5% annually, respectively; however, refinance risk associated with CTTS's back-loaded debt structure is expected to be sufficiently mitigated by the system's strong revenue profile, leaving only modest dependence on toll revenue growth going forward. The debt benefits from being all-fixed rate and having a strong security package alongside cash-funded reserves.
Robust Financial Profile: CTTS's rating case average coverage levels on a gross basis are ample, at 2.83x for the first tier and 1.57x for the second tier. In comparison to Fitch's toll road criteria guidance for small networks, rating case five-year leverage is low for the first tier at 5.87x, though moderate on a total basis at 11.07x. Positively, the system has little dependence on growth, evidenced by a first tier toll revenue breakeven of -0.36% (2.52% net) and a total toll revenue breakeven of roughly 1.88% (4.28% net).
Peer Group: CTTS's peers include Central Florida Expressway Authority (CFX, rated 'A'/'A-'/Outlook Stable) and Metropolitan Highway System (MHS, rated 'A+'/Outlook Stable). CTTS's benefits from higher debt service coverage ratios (DSCRs) than CFX, though CFX has higher maximum annual debt service (MADS) DSCRs and a larger traffic base than CTTS. MHS's higher rating is explained by a higher MADS DSCR and lower toll rates than CFX and CTTS.
Positive: Continued traffic growth coupled with clarity on capital plan related debt which preserves the current financial profile could result in positive rating action.
Negative: Material additional debt or sustained underperformance of traffic which decreases DSCRs below 1.7x and 1.5x on a gross first-tier and total basis, respectively, over a prolonged period could weaken credit quality.
SUMMARY OF CREDIT
Year-to-date fiscal year (FY) 2016 (ended Aug. 31), traffic and revenue growth for the nine months ended May has continued to be robust at 15.2% and 14.7%, respectively, showcasing rapid population and economic growth in the Austin area which has surpassed that of other large Texan cities such as Houston, Dallas, and San Antonio. Segments SH 130 and SH 45 SE have experienced the greatest amount of growth within the system, at 19.9% and 17.8%, respectively, which could be partially attributed to increased commercial use and more economic development within the area. SH 45N's traffic growth was slightly lower at 12.3% reflecting a more developed area, and Loop 1's traffic growth was the lowest at a still healthy 8.7%, reflecting some diversion of traffic as a result of construction on the Central Texas Mobility Regional Authority's (CTRMA) MoPac Improvement Project (a managed lanes effort); completion on the project is expected over the upcoming months. Fitch does not consider completion of the road to be credit adverse given Loop 1 is one of the smallest segments of the system with the remainder of components growing at an aggressive rate, which should result in minimal impact to CTTS's financial profile in the event slight traffic diversion occurs.
Over the full FY2015-FY2016 time frame, Fitch estimates that system traffic will have grown at least 26% cumulatively, resulting in revenue growth of a slightly higher magnitude given the CTTS's current toll escalation policy. Cumulative traffic and revenue growth is consequently expected to surpass Fitch's base case expectations by at least 18% and 16%, respectively. Outperformance is anticipated to result in stronger DSCRs of 3.5x-3.7x (2.4x-2.6x net) in comparison to 3.3x-3.4x (2.2x-2.3x net) forecast on the first tier, and 1.7x-2.2x (1.2x-1.5x net) in comparison to 1.6x-2.0x (1.1x-1.3x net) forecast on a total DSCR basis. The system's leverage profile is also expected to decline at a faster rate than original expected, in the 6.4x-6.9x (9.2x-10.3x net) range versus 7.1-x7.3x (9.9x-10.3x net) range for the first-tier and in the 12.3x-13.5x (17.6x-20.0x net) range versus 13.6x-14.3x (22.9x-26.5x net) range for all debt.
No material maintenance work is expected on the system over the near term given the facility's excellent condition as a result of its relative newness coupled with minimal commercial exposure. To the extent expansionary projects are deemed necessary and economically viable the system could potentially see lane expansion in the future as a means to relieve congestion within the Austin service area. No definitive plans are currently in place; therefore, cost approximations and sources of funding estimates are currently unavailable.
Fitch's base case assumes inflationary average toll growth, in line with the current toll escalation policy, alongside traffic growth which erodes from 4% to 2% through debt maturity in 2042, reflecting a growing but maturing system. Fitch's rating case assumes below inflationary average toll growth coupled with a near-term slow-down in traffic growth followed by traffic growth 20 basis points (bps) lower than the base case. Base and rating case 10-year average DSCRs are 3x (2.15x net) and 2.8x (1.97x net) for the first tier, and 1.68x (1.20x net) and 1.57x (1.10x net) total, respectively. Base and rating case five-year leverage is 5.16x (7.19x net) and 5.87x (8.41x net) for the first tier, and 9.76x (13.59x net) and 11.07x (15.86x net) for the second tier, respectively. Fitch rates metrics on a gross basis, though metrics are also considered on a net basis given Fitch's expectation that CTTS will be a self-sustaining system going forward.
In comparison to Fitch's toll road criteria for small networks, metrics for the first tier indicates compatibility with a higher rating level; however, additional leverage which could potentially be incurred as a result of expansionary capital expenditures remains a key credit concern. Should additional debt come online in upcoming years which is either offset by commensurate traffic and revenue growth or sculpted such that the current financial profile of both tiers under a rating case scenario is preserved or improved, upward rating migration is possible.
The first-tier bonds are secured by a gross lien on revenues of the system, where the second-tier bonds are secured by a gross lien on revenues of the system, though subordinate to the first-tier bonds debt service. The covenant by the TTC, which governs TxDOT, to budget for operational costs that cannot be supported by toll revenues, and to pay for ordinary and capital maintenance on the project, provides significant support to both the bonds and the overall system.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
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