Fitch Assigns Expected Ratings to San Joaquin Hills' Restructuring Debt; Existing on Watch Positive

SAN FRANCISCO--()--Fitch Ratings has assigned 'BBB-(EXP)' and 'BB+(EXP) expected ratings with Stable Rating Outlooks to San Joaquin Hills Transportation Corridor Agency (SJHTCA) proposed $761 million senior and $240 million junior debt. The debit is being issued to refinance approximately $1,137 million of the authority's existing $2,055 million senior debt.

Fitch has also placed the 'BB' ratings on the authority's existing debt on Rating Watch Positive. $1.038 billion of the existing debt will be maintained within the proposed new debt structure.

The 'BBB-(EXP)' senior lien expected rating reflects the effect of the smoother debt service profile following this debt restructuring that, along with robust cash reserving, will leave SJHTCA dependent on only modest revenue growth to service debt. The 'BB+(EXP)' junior lien expected rating reflects its subordination, leaving it more exposed to cash flow stress. The Rating Watch Positive placed on the existing senior debt reflects the potential upgrade for existing debt to be rolled into the new structure once the restructuring is complete.

SJHTCA operates a 15-mile tolled stretch of State Road (SR) 73 in Orange County, California, that provides congestion relief to the parallel interstates 5 and 405 and Pacific Coast Highway toll-free roads. California Department of Transportation (Caltrans) has title to the road and is responsible for its upkeep. SJHTCA's responsibilities are as set out in a cooperative agreement between the two agencies and are limited to toll collection and staff expenses until 2050.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange

Traffic Stabilizing Below Peak: SR73 serves as a congestion reliever to interstates 405 and 5. Annual transactions have remained broadly flat at around 25 million since fiscal year (FY) 2010, prior to which they had peaked at 31 million in FY2007. Continuing improvement in the local economy as evidenced by falling unemployment and recovering housing prices should support traffic stability and modest growth.

Revenue Risk - Price: Weaker

Limited Pricing Power: The cash toll rate of $0.43 per mile is among the highest among Fitch-rated US toll roads; Fitch believes SJHTCA will have limited pricing power for the next few years, although the ability to recover inflation should strengthen thereafter.

Infrastructure Development & Renewal: Stronger

Limited Capital Needs: Caltrans is responsible for renewal and maintenance of the road, with SJHTCA only responsible for administrative and toll collection functions. Its exposure to infrastructure risk is therefore limited.

Debt Structure: Senior - Midrange; Junior - Midrange

Escalating Debt Service Profile: Senior and junior debt is fixed rate and amortizing. However, it is somewhat back-ended, gradually escalating through FY2041. A strong cash reserve structure helps mitigate this, as does significantly reduced maximum annual debt service (MADS) as compared to the previous structure.

Metrics

Consistent with Criteria: Fitch rating case senior debt service coverage ratio (DSCR) (average 1.41x and minimum 1.22x) are in line with criteria guidance for standalone toll facilities in the BBB-category. The new debt structure requires significantly less revenue growth over time in order to fully service debt, with breakeven gross toll revenue compounded annual growth rates (CAGR) being 1.56% and 1.77% at senior and junior levels respectively.

Peers

New Structure Positions Issuer In-Line with Peers: Project metrics are broadly in line with standalone facility peers with senior debt rated in the low-BBB category, such as Foothills/Eastern Transportation Corridor Agency (F/ETCA) and E-470 Public Highway Authority.

RATING SENSITIVITIES

Negative - Inability to Increase Tolls: SJTCA being unable to implement inflationary toll increases without impacting traffic would have a negative rating effect.

Negative - Increasingly Volatile Demand Profile: traffic demand proving more volatile than expected would put ratings under pressure.

Positive - Consistent Financial Outperformance: although near term positive rating changes are unlikely, a sustained performance in terms of debt metrics above Fitch's base case could lead to upward rating pressure on senior lien debt.

TRANSACTION SUMMARY

The senior and junior series 2014 bonds are expected to refund all callable series 1993 and 1997 bonds, with non-callable series 1997 bonds remaining in place and supported by a sinking fund. The transaction is expected to close in November 2014. SJHTCA is restructuring its debt to improve credit stability, currently constrained by a sharp increase in annual debt service over the period 2025-2035 that has effectively left the authority in the position of needing to restructure its debt at some point between now and that time. The current proposed restructuring extends and smooths the agency's debt service profile, and should remove need for further restructurings in the future. It reintroduces a rate covenant of 1.30x on senior debt and introduces a new rate covenant of 1.10x on junior debt respectively.

SJHTCA's ability to service debt is supported by a strong reserving structure that envisages separate debt service reserve funds (DSRF) at the senior (funded up to 100% of maximum annual debt service) and junior (funded to the lower of 10% of initial junior debt par, 100% of MADS or 125% of current period debt service), a supplemental reserve account funded up to 50% of total MADS (unfunded at close) as well as a $15 million use and occupancy fund (fully funded at close) available, amongst other things, to help meet extraordinary maintenance costs.

Despite a 10.2% increase in average toll rates, FY2014 transactions were 26.5MM, 5.91% higher YoY, and gross toll revenue increased 16.5% to $117.1MM. FY2015 gross toll revenue is projected to be $122.2MM though transactions are forecast to decline 2.4% to 25.8MM. For the 2000-2014 period, gross toll revenue grew at a 6.77% CAGR. Despite this, 2014 transactions were essentially flat on 2000, with a transactions having experienced a CAGR of -0.05% over the period. However, over the same period average toll rates grew at a 6.82% CAGR. Over the intervening period, transactions have followed the general direction of the economy with declines in 2001, 2008, 2009, 2010, and 2013. Transactions peaked at 31.1 million in 2007 before since stabilizing at approximately 25.5 million annually. The overall stagnant performance in terms of transactions over the period is largely a result of the aggressive toll rate increases implemented, which have served to prime the revenue pump to the detriment of volume.

Ahead of the proposed restructuring, SJHTCA has obtained an updated T&R forecast from Stantec Inc. (Stantec), which envisages a gross toll revenue CAGR of approximately 3.2%, which Fitch views as being relatively conservative in the context of historical revenue performance on the toll road as well as continued regional population growth. Fitch has adopted Stantec's T&R forecast in its base case, which reflects more conservative assumptions with respect to ancillary violation, fee and interest earnings income. In the Fitch base case, the DSCR calculated excluding reserve drawings averages 1.55x, with a minimum of 1.34x for senior debt, and averages 1.33x with a minimum of 1.18x for junior debt.

In its rating case, Fitch has adopted a more conservative T&R projection reflecting the prospect of slower traffic growth (CAGR of 0.23%). In this scenario, senior DSCR averages 1.41x with a minimum of 1.20x, while junior DSCR averages 1.22x with a minimum of 1.15x. Further supporting Fitch's ratings is breakeven analysis, which suggests that, under the proposed new debt structure, SJHTCA will have only relatively limited dependence on toll revenue growth, reflecting the strong cash reserve structure available to support debt service. The breakeven gross toll revenue CAGRs at senior and junior levels respectively are 1.56% and 1.77%, considerably below most long term assumptions for inflation of 2-2.5%.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 20, 2014).

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=758708

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=892794

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Committee Chairperson
Cherian George, +1 212-908-0519
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Committee Chairperson
Cherian George, +1 212-908-0519
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com