CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA-' rating on the Illinois State Toll Highway Authority's (ISTHA, or the authority) approximately $5 billion in outstanding toll highway senior revenue bonds. The Rating Outlook is Stable.
The rating reflects the essentiality of the tollway system, evidenced by its stable and growing traffic base since 1974 and demonstrated moderate price elasticity. It also reflects prudent debt management, as illustrated by its strong historical and projected debt service coverage ratios (DSCR). Total leverage should remain moderate and relatively stable as the authority presses ahead on its MOVE Illinois capital program, which is expected to require around $5 billion in total debt financing. Fitch notes that this is largely mitigated by a history of delivering capital programs on time and under budget, a very robust balance sheet position, and an approved 60% commercial toll increase that began being phased in in 2015, which complements the recent 88% passenger vehicle increase.
KEY RATING DRIVERS
Revenue Risk: Volume - Stronger
ESSENTIAL ROAD NETWORK WITH STABLE DEMAND: The tollway system provides critical transportation links that serve the Chicago and northern Illinois metropolitan area and provide key connections to interstate highways. As a result, toll transactions have grown in nearly every year since 1974; the five-year compound annual growth rate (CAGR) of 1.6% reflects recessionary effects, the operational interruptions of the Congestion Relief Program (CRP), and some elasticity to the recent passenger toll increase. The network benefits from a passenger vehicle base, comprised mostly of commuters, that accounts for 88% of total transactions.
Revenue Risk: Price - Stronger
MODERATE RATE-MAKING FLEXIBILITY: While ISTHA has full legal authority to adjust toll rates and has demonstrated in the recent past a willingness to implement significant increases when necessary, Fitch notes that future toll increases beyond those currently approved are uncertain. However, ISTHA's passenger car rates are very competitive, providing significant economic ratemaking ability as evidenced by the lower-than-expected 4.2% drop in traffic following the 88% passenger toll rate increase in 2012. Approved commercial toll increases aggregating 60% over current levels are being phased in over 2015-2017, with CPI-based increases thereafter.
Infrastructure Development/Renewal - Midrange
LARGE CAPITAL PLAN PARTIALLY DEBT FUNDED: ISTHA is in year four of its 15-year, $12.1 billion MOVE Illinois capital program. Funding is expected to come from $5 billion of new money debt issuances ($1.4 billion of which has already been issued) with the remainder from cash flow, supported by recent and future toll increases. Fitch notes that the authority has nearly completed its existing $5.7 billion CRP on time and under budget and MOVE Illinois is similarly proceeding according to plan.
Debt Structure - Midrange
REDUCED VARIABLE-RATE EXPOSURE: ISTHA has taken strides to reduce its variable rate exposure, which should drop to approximately 22% by the end of 2015 with the issuance of additional planned fixed-rate debt for the capital program over the course of the year. The authority's variable rate debt exposure is, in any case, 100% hedged with multiple counterparties, all rated at least 'A' category. Maximum annual debt service (MADS) is $400 million in 2030, but is estimated by the authority to increase to approximately $615 million after all Move Illinois borrowing is taken into account.
MODERATE LEVERAGE AND HEALTHY DSCR: The current tollway system's debt burden is large at $5 billion, and is expected to increase measurably to $7.6 billion in conjunction with the capital program. However, the authority's net debt-to-cash flow available for debt service (CFADS) is moderate at 5.2x for 2014 and is not expected to increase much higher than 6x as a result of the MOVE Illinois program. DSCR have historically been 1.8x or higher and Fitch's rating case projections indicate DSCRs could remain at or above 1.8x through the medium term. Strong liquidity of over 1,100 days cash on hand as of fiscal 2014 provides the authority with additional financial flexibility, although Fitch notes this will be partially drawn upon for MOVE Illinois funding.
The closest Fitch-rated large expressway network peers include Harris County Toll Road Authority ('AA'/Stable Outlook) and Central Florida Expressway Authority ('A'/Stable Outlook), despite a significantly larger annual volume and toll revenue base for ISTHA. The authority has higher coverage and lower leverage then Central Florida, but lower coverage and higher leverage and capital needs when compared to Harris County, largely explaining its rating relative to these peers.
--HIGHER CAPITAL SPENDING: Increased project costs or additional projects added to the MOVE Illinois program that materially increase leverage.
--LACK OF TIMELY TOLL ADJUSTMENTS: Failure to adjust tolls in the face of traffic and revenue underperformance or increases in operating expenses that result in a weaker DSCR profile than currently expected.
--DEBT STRUCTURE RISKS: A rising interest rate environment could result in lower financial flexibility as the authority issues the remaining $3.6 billion of debt relating to its capital plan over the next seven years.
Given the authority's sizeable, multi-year capital program, upward migration is not likely at this time.
Total transactions grew 2.7% in 2014, surpassing the budgeted 2.2% growth and on top of the 1.5% growth experienced in 2013, derived from both passenger and commercial vehicles. Passenger car transactions continued to rebound following the 4% decline experienced in 2012 as a result of the 88% passenger toll increase, and are forecast by the authority's traffic consultant, CDM Smith, to grow a cumulative 31% over the next six years as widening projects are completed and interchanges open. Commercial transactions grew a stronger 5.8% in 2014, building on the robust recovery experienced post-recession. However, CDM Smith forecasts slower cumulative growth of 17% through 2020 for commercial transactions as the authority phases in its 60% commercial toll increase over 2015-2017. Despite accounting for just 12% of total transactions, commercial vehicles account for nearly 35% of toll revenues and this percentage should grow as the 60% commercial toll increase is phased in.
As expected, DSCR is estimated to have dropped slightly in 2014 to 2.39x from 2.46x in 2013 as a result of increased operating expenses and debt service obligations from MOVE Illinois borrowings. However, DSCR remains robust and exceeded Fitch's base case projection of 2.22x.
Under Fitch's base case scenario, which assumes more tempered traffic growth than the authority's projections (Fitch assumed a 2.2% CAGR between 2014 and 2026), DSCR averages more than 2x and never drops below 1.85x assuming no further passenger car toll rate increases. Of note, this scenario includes another anticipated $3.6 billion in new money bonds for the MOVE Illinois program with a majority borrowed at a 5.5% rate, which Fitch believes is a relatively conservative rate assumption.
Fitch's rating case assumes greater price elasticity to the toll increases for commercial traffic as well as a less positive impact on transactions from MOVE Illinois capital improvements such that total traffic grows at a 1.6% CAGR between 2014 and 2026. Expenses are also assumed to grow at a slightly higher 4.5% CAGR as a result of system expansion. All additional MOVE Illinois debt service was modelled in identically to the base case. Under this scenario, DSCR remains above 1.6x and averages 1.96x assuming no further passenger toll rate increases.
Fitch also conducted breakeven analyses to determine what growth in revenue would be needed using 2014 CFADS, such that in all years coverage would be at least 1.0x including the depletion of any and all unrestricted cash and funds available for debt service. Both scenarios indicated very little dependence on future growth with revenue breakevens of under 1% in the base case and just over 1% in the rating case. This dependence on revenue growth is only necessary because of the authority's increasing operating expense profile modelled at 4% and 4.5% per annum in the Fitch base and rating cases, respectively, which causes CFADS to fall over time. Further, the breakeven revenue growths are likely overstated given that they are based off of 2014 CFADS, which does not include the benefit of the 60% commercial toll increase being phased in over 2015-2017. Fitch analysed what MADS coverage would be using projected 2017 CFADS from its rating case and the coverage is a strong 1.5x. The tollway's strong franchise strength taken together with its robust financial metrics and very limited dependence on growth remain commensurate with its 'AA' category rating.
ISTHA is a user-financed instrumentality and administrative agency of the State of Illinois, operationally independent from both the state and City of Chicago, which was created under the Toll Highway Act to provide for the construction, operation, regulation and maintenance of its system of toll highways. ISTHA is governed by an 11 member board of directors that includes the governor of Illinois, ex-officio, and the secretary of the Illinois Department of Transportation, ex-officio. Nine directors are appointed by the governor, with the advice and consent of the Illinois Senate, from the state at large with the goal of maximizing representation from the areas served by the tollway system, and with no more than five directors from the same political party. The tollway's accounting systems are organized and operated on an 'enterprise fund' basis and there is no recourse to the state.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 12, 2012;
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated Aug. 20, 2014.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges and Tunnels