Fitch Affirms Orange County Transportation Authority, CA's 91 Express Lanes at 'A'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed Orange County Transportation Authority, California's (OCTA, or the authority) $109.13 million of (91 Express Lanes) senior lien revenue refunding bonds, series 2013 at 'A'. The Rating Outlook is Stable.

RATING RATIONALE

The 'A' rating reflects the Express Lanes' long operating history, solid long-term prospects for continued traffic growth, formulaically based toll setting policy, strengthening debt service coverage and liquidity, very low leverage, and no current plans for further debt issuances. These strengths are somewhat offset by heightened revenue and price volatility inherent to managed lanes, and concerns related to the anticipated 2017 opening of connecting managed lanes managed by Riverside County Transportation Commission (RCTC) and their potential impact on OCTA's utilization and competitive position. Fitch notes that OCTA's solid and growing debt coverage ratios (DSCR) heading into RCTC's project completion provide a sizable level of financial cushion in case of lower traffic and revenues.

KEY RATING DRIVERS

Revenue Risk: Volume - Midrange (Corridor Volume: Stronger; Managed Lanes Characteristics: Midrange)

Rising Congestion Driving Volume: Established traffic demand is evident, supported by commuters who traverse the corridor from their homes in Riverside County to the large employment market in Orange County. This is one of the most congested arteries in California and is likely to become even more so given long-term expectations of continued population and economic growth, particularly in Riverside County. Fitch views these strengths as somewhat offset by a history of significant demand volatility and concerns that RCTC's connecting managed lanes ultimately may compete with, rather than complement, OCTA's Express Lanes.

Revenue Risk: Price - Stronger

Solid Rate-Setting Track Record: The authority has a long and consistent record of implementing toll rate adjustments, up and down, based on formulas that consider inflation and traffic volume. The toll policy allows for frequent adjustments and the formulaic nature of the process somewhat insulates rates from political considerations.

Infrastructure Renewal and Replacement - Stronger

Affordable Capital Plan: The Express Lanes existing assets have been regularly maintained in good condition, and the authority annually updates its 10-year capital improvement plan (CIP), which is manageably sized at $43 million and will be funded on a pay-as-you-go basis. The authority, partnered with the Transportation Corridor Agencies, is considering an express lane connector to SR-241, with an estimated cost of $180 million. Management notes that the project funding would not include a parity debt issuance, though firm funding sources have not yet been formulated given the early stage of the planning process.

Debt Structure - Stronger

Rapidly Amortizing, Fixed Rate Debt: The Express Lane's debt is fully fixed rate with level debt service and a final maturity in 2030. Structural features are adequate, with a cash-funded debt service reserve fund, various other operating and maintenance related reserve requirements, and a satisfactory additional bonds test and rate covenant.

Healthy, Strengthening Financial Metrics: Rising traffic volume and toll rate hikes have improved already solid key financial metrics, with DSCR for fiscal 2016 registering a healthy 3.29x and very low leverage of -0.75x. The enterprise fund's unrestricted cash position is solid and currently available cash would be sufficient to cover total debt outstanding, though a moderate portion of reserves likely will be spent down on capital expenditures. Going forward, there is an expectation that a portion of excess toll revenues as well as funds on hand will be used to fund other SR-91 corridor projects.

Peer Analysis: A direct comparison with other Fitch-rated managed lanes is difficult because no other managed lanes have a similar operational track record. Closest peers include RCTC's SR-91 managed lanes (senior lien and TIFIA bonds rated 'BBB-', Stable Outlook) that will connect into OCTA's lanes once completed and have similar tolling mechanics, HOV policy and lane configuration. OCTA's higher rating reflects a lack of construction risk, given that its facilities have been in operation for nearly 20 years, and a demonstrated operational, financial, and traffic history.

RATING SENSITIVITIES

Negative:

--Unexpected and material deterioration of the system's operating or financial performance leading to DSCR below 2.0x on a sustained basis could lead to negative rating action.

Positive:

--A continuation of favorable traffic volumes and toll rates could support positive rating action in the future.

--To the extent the initial effects from the introduction of the RCTC connecting express lanes are not adverse to the existing traffic and revenue profile, preserving similarly high coverage levels, a higher rating may be warranted.

CREDIT UPDATE

The 91 Express Lanes, opened in 1995, are managed by OCTA as an enterprise fund under a long-term franchise agreement with the California Department of Transportation. The lanes span 10 miles, connecting the employment market of Orange County to the large and growing commuter base of Riverside County in Southern California. The bonds are payable from a senior lien net revenues of the authority's 91 Express Lanes.

PERFORMANCE UPDATE

Express lane traffic and revenue increased 5% and 13%, respectively, in fiscal 2016, compared to the 6.8% and 9.3% increases previous year, and above the 1.2% and 4.1% growth rates Fitch expected during the prior credit review. As a result, actual DSCR for fiscal 2016 increased to 3.29x from Fitch's prior estimate of 2.89x.

The authority enjoys high levels of liquidity, with a fiscal year end 2016 unrestricted cash position of $117 million. The board of directors is considering whether to authorize the utilization of excess toll revenues from the 91 Express Lanes to fund other SR-91 projects, which might decrease the liquidity cushion.

FITCH CASES

Fitch's base case forecast suggests that the Express Lane's DSCR will stay above 3x for the next several years, and then continue to grow. Average DSCR and maximum leverage for the remaining life of the debt are 4.61x and -0.31x, respectively. The base case assumes expenditure growth of 3% in most years and average annual toll revenue growth of 5.8%, reflecting ongoing traffic gains and inflationary toll rate hikes.

Fitch's rating case scenario is conservatively modeled off of the base case scenario and layers on two negative assumptions. First, it assumes that RCTC's connecting express lanes will have additional negative operational effects from the opening of the RCTC's road segment, resulting in a 15% traffic loss in fiscal 2018. Second, the rating case assumes that a recession occurs in fiscal 2019 resulting in a 10% reduction of tolled revenues compared with the base case, followed by a five-year full recover. For Fitch's rating case average DSCR and maximum leverage for the remaining life of the debt are 1.99x and 4.44x, respectively. Fitch recognizes that its rating case assumption runs contrary to expectations of the authority's traffic and revenue consultant, Stantec, who believes the connecting lanes will result in a traffic increase on the OCTA Express Lane segment. Although Fitch does not view Stantec's assumption as unreasonable, Fitch is currently taking a conservative approach on traffic and tolling revenues given the lack of validating data. Should traffic and revenues closely align to the sponsor assumptions or materially outperform Fitch's rating case assumptions after connecting to RCTC's express lanes, then positive rating action would be likely.

For more information, please reference 'Fitch Upgrades Orange County Transportation Authority, CA's 91 Express Lanes to 'A'; Outlook Stable' dated Dec. 11, 2015.

Additional information is available at '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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Contacts

Fitch Ratings
Primary Analyst:
Scott Monroe, +1-415-732-5618
Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst:
Tanya Langman, +1-212-908-0716
Director
or
Committee Chairperson:
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com