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Fitch Affirms Orange County Trans Auth's (CA) 91 Express Lanes at 'A-'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' long-term rating on Orange County Transportation Authority, California's (OCTA or the authority) approximately $124.6 million toll road revenue bonds (91 Express Lanes), series 2013. The Rating Outlook is Stable.

The affirmation reflects the Express Lane's 18 year operating history, recent recovery in traffic, and favorable long-term traffic demand. The authority's strong liquidity and low leverage provide added protection in the event of another economic downturn.

KEY RATING DRIVERS:

Congested Corridor Traffic: Established traffic demand is evident, particularly for peak-period travel within the SR-91 corridor - one of the most congested traffic arteries in Southern California. Total corridor traffic is approximately 285,000 per day with the express lanes carrying approximately 33,150 per day in fiscal year (FY) 2013, which represents approximately 12% of overall corridor traffic. Traffic and toll revenue levels have shown sensitivity to corridor improvements, fuel prices and economic activity. Over the past five years, the managed toll lanes have experienced traffic declines in aggregate of nearly 18% as a result of the recent economic downturn in the region and the addition of general purpose lanes to the corridor. Still, long term prospects are favorable for traffic demand given the expected time savings and limitations of alternatives routes.

Revenue Risk - Volume: Midrange

Toll Policy With Demonstrated Track Record: The authority has demonstrated a favorable track record of implementing its current toll policy that permits relatively frequent toll adjustments, both upward and downward, based on specific hourly traffic activity. Still, the peak period toll rates are among the highest in the country and may constrain traffic growth during stressed economic periods.

Revenue Risk - Price: Midrange

Debt Structure: The series 2013 bonds are fixed rate, fully amortizing, are secured by senior lien on net toll revenues, mature in 2030, and permit the OCTA to operate under an open lien indenture. Structural features include a satisfactory toll covenant and multiple reserve accounts.

Debt Structure: Stronger

Low Leverage and Favorable Financial Cushion: With the 2013 refunding, the tollway reduced its net debt to cash flow available for debt service from 2.4x in FY2012 to 1.2x following the refunding in 2013. At current traffic levels, maximum annual debt service coverage is robust at over 2.5x with no additional parity borrowings planned.

Well Maintained Corridor Infrastructure: The project has a favorable 18-year operating history with investments made in both the general purpose and express toll lanes over that period. The OCTA has a sound approach to assessing corridor needs, as exemplified by its annually published long term implementation plan and 20-year maintenance capital investment forecast. No borrowings are planned, however, some longer term projects for capacity enhancements or connectors to other roadways may necessitate more debt at that time. The 2065 extension to the franchise agreement provides significant flexibility to manage and finance infrastructure needs.

Infrastructure Development and Renewal Risk: Stronger

RATING SENSITIVITIES:

--Any material changes to traffic activity within the express lane corridor caused by the effects of regional economic conditions or improvements in general purpose lanes.

--Additional borrowings to support corridor improvements which lead to a measurable dilution in debt service coverage would likely lower the rating.

--A continued recovery of traffic activity within the express lane corridor or proven resiliency once RCTC is completed could lead to a positive rating action.

SECURITY:

The bonds are solely secured by a pledge of net revenues of the authority's 91 express lanes.

CREDIT UPDATE:

Annual express lane traffic levels are approximately 12 million representing 12% of total corridor traffic. While growth rates in usage were robust over the first decade of operation, toll transactions have declined in recent years primarily due to the effects of a softer economy and the completion of new general purpose lanes in late 2010.

The toll revenue framework for the SR-91 express lanes depends heavily on peak period congestion. While the tolled lanes of SR-91 represent an average 11%-13% of aggregate historical corridor volume, peak hour usage spikes to greater than 20% of total volume given the substantial time savings. Peak period toll rates for east-bound evening rush hour traffic have steadily risen over time, but modestly fell to $9.55 in 2013 in line with toll policy. These toll rates make the 91 express lanes among the most expensive toll facilities during peak period use in the country. Over the longer term, capacity improvements may affect toll rates in both peak and shoulder periods and result in reduced toll rates under the current toll policy. Lower rates may create new demand and neutralize some of the effect of the additional general purpose lanes.

FY2013 traffic and operating revenue increased 1.2% to 12.1 million and 3% to $39.5 million, respectively. Recent performance is positive with FY2014 expected traffic and operating revenue of 12.4 million, up 2.2%, and $41.24 million, up 4.3%, respectively.

Operating expenses increased 3% to $13 million during FY2013 in line with the annual 3% increase in the authority's operating agreement with Cofiroute. FY2014 operating expenses are expected to be approximately $14 million, 6.8% higher than the previous year. Increased expenses are primarily the result of bond issuance costs of approximately $700,000 and increased contracted and professional services related to a pavement study and the purchase of new electronic signage.

Despite increased expenses, the debt service coverage ratio (DSCR) continues to be above 2.5x with FY2013 coverage of 2.58x and expected FY2014 coverage being 2.54x.

The OCTA maintains unrestricted reserves of $53.7 million and total reserves equal to $91.7 million at FY2013 year-end providing 1,576 days cash on hand. With total funds equal to approximately 74% of debt outstanding, net debt to cash available for debt service is favorable at 1.2x, providing flexibility to deal with capacity expansion, adverse changes in economic conditions or travel patterns within the region.

Base and rating case forecasts conducted by Fitch indicate a continuation of strong coverage levels but with the potential for some narrower results reflecting both marginal changes in traffic trends as well as lower toll rates within the toll schedule.

Under Fitch's base case scenario which assumes compound annual traffic and revenue growth of 2% and 5.6%, respectively, along with moderate expense growth of 3%, coverage averages above 3.0x through bond maturity in 2030. Fitch's rating case scenario assumes 2.4% annual compound revenue growth and an increase in operating expenses. Under this scenario, coverage remains above 2.2x and averages 2.5x through maturity. Fitch notes that coverage levels produced under the stress case scenario are consistent with the current A- rating.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839148

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Contacts

Fitch Ratings
Primary Analyst
Zane Latham
Associate Director
+1-415-732-5612
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Tanya Langman
Associate Director
+1-212-908-0716
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com