CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the Pennsylvania Economic Development Financing Authority's (PEDFA) approximately $121 million capitol region parking system (the system) senior parking revenue bonds series 2013A. The Rating Outlook is Stable.
The rating reflects a modest size parking system serving Harrisburg's central business district and protected by strong non-compete covenants. Further, cashflows supporting the senior lien obligations are anchored by a long term lease with the Commonwealth providing at least 1.20x gross debt service coverage through final maturity. High initial leverage, minimal liquidity, uncertain long-term capital needs and funding, and the need for higher rates which may impact demand and economic rate-making flexibility constrain the rating.
KEY RATING DRIVERS
Dominant Position With Uneven Performance: The system covers virtually all on-street metered parking and a majority of the off-street public parking in Harrisburg. Strong non-compete covenants are expected to provide adequate market share protection and the high degree of governmental jobs should provide some degree of stability, including the Commonwealth contract. Still, Fitch notes that future growth in parking revenues is likely to mirror the tepid historical performance.
Higher Parking Rates Necessary: Contracted rate schedules provide for large increases in the initial years, followed by annual escalators thereafter. Rates currently remain competitive versus the national average but could become uncompetitive to the extent greater than inflationary rate increases were to be needed to support revenue underperformance or increased lifecycle cost investments.
Structural Features Have Weaknesses: All of the parking system debt is fixed rate and fully amortizing, but structural features are weak with limited requirements for liquidity and leverage protections. In addition, reserving for capital maintenance falls at the bottom of the cashflow waterfall which presents funding risks for on-going capital investments to the extent payments toward subordinate obligations depend on county guarantee support. Senior tenor is long with a 30-year final maturity.
Capital Plan Subject to Some Risk: Existing facilities are represented to be in satisfactory condition. However, there have been conflicting reports on the needs of the system. The authority's current 40-year capital program totals $115 million with an additional $22 million budgeted for periodic meter replacement and technology upgrades. Funded with bond proceeds, a $9 million reserve will defray initial meter upgrades and garage technology improvements and to achieve a state of good repair. Future funding of capital expenditures may rely on additional leveraging as internal funding is structurally dependent on excess cashflow following all other required deposits.
High Initial Leverage; Coverage Dependant on Growth: Senior leverage is initially high at approximately 10x net debt-to-cash flow available for debt service in Fitch's rating case, but migrates to a more modest 6x within 10 years. The system has an escalating debt service profile and requires aggressive revenue growth to cover increasing debt service obligations as well as the system's remaining capital needs. Based on a net revenue calculation, Fitch's rating case forecasts senior lien coverage to average a healthy 2.2x with a minimum coverage of at least 1.9x. Liquidity remains a concern with no unrestricted cash and a remaining $7.7 million capital reserve that remains at risk for full depletion in situations of modest revenue underperformance.
Peer Comps: Closest publicly Fitch-rated peers include Philadelphia Parking and City of Los Angeles Parking System (both rated 'A' category). These parking credits represent larger systems in stronger metropolitan statistical areas (MSAs) and are financially protected with much lower leverage and stronger liquidity.
--Greater than expected elasticity of parking demand to planned rate increases that materially impacts total revenues could cause rating migration;
--Upward cost revisions to system capital needs versus current estimates or inadequate asset maintenance and reinvestment may result in negative rating action;
--Transition difficulties among parties and/or operating costs that significantly exceed forecast could create downward rating pressure;
--Increased leverage that erodes financial flexibility could pressure the current rating level.
--Upward rating mobility is not likely at this time given the high leverage and low liquidity coupled with uncertain capital needs and funding.
Since lease inception, less than a full year of operations has transpired. Preliminary results through three quarters of fiscal 2014 indicate financial performance to reflect some start-up transitional developments. Actual year-to-date revenues are less than budget, but this is partially offset by operating expenses also coming in below budget. One of the main challenges in 2014 has been with enforcement revenue. Management has been working through some procedural issues with the local court system that have delayed processing of 35%-40% of tickets written, having a meaningful impact on revenues. However, final approval has just been secured that will allow collection of these fees and collections should follow more normal practices. Through three quarters, coverage is projected to be slightly under budget but still a robust 2.46x (net) on the senior bonds and debt service payments are current on series A,B,C bonds as well as on subordinate expenses.
The current capital reserve balance is approximately $7.7 million. Capital expenditures in 2014 included system wide multi-space electronic meters and miscellaneous capital repair with $1.7 million committed for the automated garage entrances and exit systems. The 2015 budget is under development, but will include $1 million minimum for concrete repair, cable replacement, electrical repair, painting and miscellaneous repairs. Desman Associates updated its parking system condition report and included an updated 10-year forecast of capital needs taking into account $3 million that the Harrisburg Parking Authority spent on the system prior to transaction close. These new estimates have been incorporated into Fitch's base and rating cases.
Management is still finalizing its 2015 budget and updated forecast, but has indicated that the updated forecast model and the underlying assumptions will closely mirror those from financial close of the lease. Meter revenues will be an exception as receipts are trending at approximately $600,000 per quarter, so Fitch lowered the annual figure to $2.4 million from approximately $2.9 million in its original model. Fitch's assumptions and model remain unchanged aside from the change to initial meter revenue and to capex spending through 2023 as noted above. The results of Fitch's base case show Fitch-defined senior net coverage averages 2.42x and never falls below 2.23x. Under Fitch's rating case scenario, Fitch-defined senior net coverage averages 2.20x and never falls below 1.92x. These debt service coverage ratios (DSCRs) include only senior expenses pursuant to the trust indenture's flow of funds and do not address subordinate expenses or capital needs of the system.
The series 2013A senior bonds are secured by a senior in payment gross pledge of the parking revenues (which are net of a 20% off-street parking tax to the city) generated by the capitol region parking system's facilities and meters.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance