Fitch Affirms Riverside County Transportation Commission, CA's Sr. Bonds & TIFIA Loan at 'BBB-'

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the Riverside County Transportation Commission, CA's (RCTC) approximately $176.7 million 2013 series A and series B senior lien revenue bonds. Fitch has also affirmed the 'BBB-' rating on the RCTC's approximately $421.1 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook is Stable.

The affirmations reflect Fitch's expectation that despite the slight delay projected, the project will be delivered broadly on schedule and budget in January 2017. Although right of way (ROW) acquisition costs have run higher than initially forecast, RCTC will cover related cost increases through a combination of Measure A sales tax funds, other available resources and project costs savings made elsewhere. Macroeconomic conditions in Riverside and Orange counties are broadly consistent with Fitch's expectations at closing and, in Fitch's view, prospects for the SR-91 corridor congestion to yield toll revenues in-line with Fitch base case at closing remain reasonable. The flexibility offered by the debt structure provides added protection during ramp-up.

KEY RATING DRIVERS

Completion Risk - Midrange

Moderate Completion Risk: The terms of the fixed priced design-build (DB) construction contract with Atkinson Contractors and Walsh Construction Company, including cost and schedule contingencies, are consistent with other investment grade projects. An adequate security package, including 100% parent guarantees and liquidated damages, further mitigates completion risk. Project construction is viewed to be straightforward and consists mostly of lane widening. Continued road operation during construction and relocation of certain existing infrastructure as well as the acquisition of ROW adds some complexity to the project.

Revenue Risk: Volume - Midrange

Demonstrated Traffic Volumes: The highly congested SR-91 corridor is the only major surface transportation facility connecting Orange County and Riverside County. The project represents an extension of existing express lanes in Orange County with 19 years of operating history and established traffic demand. Nevertheless, the expansion of free alternative competing general purpose lanes directly next to the express lanes, uncertainty regarding the future economic environment and further future corridor improvements, could all impact congestion levels in the corridor.

Revenue Risk: Price - Midrange

Some Price Certainty: RCTC tolling policy will permit relatively frequent toll adjustments to manage traffic throughput. Since many users are expected to be familiar with the adjoining Orange County managed lanes, Fitch believes there will be some understanding of pricing power. Similar to other managed lanes, this project is vulnerable to compounded traffic and price declines during economic downturns.

Infrastructure Renewal and Replacement - Midrange

Infrastructure Risk is Well Managed: Upon completion, one way road capacity will increase from five to eight lanes. R&R expenditures are validated by an independent engineer providing comfort, as does a forward-looking renewal and replacement (R&R) reserve.

Debt Structure - Midrange

Strong Features Mitigate Back-Loading: All debt is fixed rate and amortizing, and the TIFIA structure allows for some flexibility between mandatory and scheduled interest payments. The debt service schedule is back loaded, with maximum annual debt service (MADS) occurring in 2049, and such back loading will be exacerbated by any scheduled interest deferral. The additional bonds test (1.30x) and distribution test (1.30x) reference TIFIA scheduled debt service, which provides additional flexibility. All obligations must be met at 1.0x, including R&R expenditures.

High Leverage, Adequate Coverage: The Fitch's rating case yields minimum debt service coverage, including senior and TIFIA mandatory debt service, of 1.30x in the years between 2022 and 2049. Given the inherent TIFIA flexibility, adequate financial cushion to deal with weaker conditions exists on both liens of debt. The financial metrics indicate a minimum loan life coverage ratio of 2.05x in the sponsor case and 1.24x in the Fitch rating case. Leverage, while initially very high, should evolve down over time, as would be expected immediately post-construction for such a facility.

Peer Analysis: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are highly congested during peak hours, particularly the neighboring Orange County Transportation Authority (OCTA, 'A-'/Outlook Stable) SR-91 managed lanes that will connect into RCTC's lanes once completed and have similar tolling mechanics, HOV policy and lane configuration. OCTA's MLs have an established traffic base, tested through economic cycles and capacity expansions with a healthy 3.7% 12-year CAGR through 2014 and average tolls in excess of $0.50 per mile in peak periods.

RATING SENSITIVITIES

Negative:

--Unforeseen construction delays and cost overruns;

--Traffic and revenue performance at or below the Fitch rating case and/or O&M and R&R expenses materially above expectations that cause financial flexibility to be reduced.

Positive:

--Traffic and revenue performance in line with sponsor case, with no additional debt issuances may positively improve financial metrics and flexibility.

CREDIT UPDATE

As of April 30, 2015, the value of work completed was $644.4 million or approximately 46% of the total project cost, which remains on-budget with respect to the 2014 revised forecast. This reflects $245.6 million of design-build costs (39% of the revised $632 million budget) and $354.8 million of commission costs (57% of the revised $617 million budget). The project's current schedule reflects an approximate six-day delay to the Jan. 9, 2017 substantial completion date, which Fitch does not view likely to have a material impact. Construction is 29% complete as of June 2015 and ongoing works include 14 of 32 bridges, roadway segments, and retaining and sound walls. The bridge and wall designs will be completed by the end of June 2015 and full project design completion by the end of July.

Site preparations continue on schedule and all major environmental permit approvals have been obtained. Utility relocations and railroad crossing approvals are expected to progress on or ahead of schedule. RCTC is responsible for ensuring ROW availability to the contractor by specified dates to allow advancement of construction phases. As of March 2015, all 197 contractually required parcels had been acquired and the DB has received all but one of the packages (to be delivered by the end of June), and additional parcels have been requested by the DB contractor primarily for mitigation and additional properties. While work remains to complete the additional requested ROW acquisitions, the board continues to support the eminent domain process and RCTC does not anticipate any significant delays in the schedule due to ROW.

There have been no changes to the revised total project cost forecast, as updated in 2014, of approximately $1.4 billion. Through April 2015, change orders as well as cost savings in other areas have modestly decreased the design-build contract value by approximately $500 thousand to $632.1 million, largely due to design and value engineering changes.

Major cost increases were attributable to ROW-related costs overruns and the toll system installation and integration contract. Based on revised June 2015 estimates, total ROW acquisition costs are estimated at $233 million, or about $89 million more than originally budgeted. To further mitigate the impact of commission's cost increases, RCTC increased its contingency budget to $72 million from $66 million, which includes $23 million for ROW and $25 million for design-build costs (4% of the design-build contract). The reduction in ROW contingency funds was used to offset the net increase in ROW costs. To the extent needed, additional funding is expected to come from available contingency funds, commission's sources, including equity contributions and Measure A sales tax revenues and cost savings. Measure A sales tax revenues thus far have performed strongly above baseline expectations, as reflected in Fitch's revised Outlook on the sales tax revenue bonds ('AA'/Outlook Positive), with capacity to issue additional sales-tax debt at approximately $70 million over the approximately $100 million currently proposed 2017 issuance.

The proceeds of the senior lien revenue bonds and the TIFIA loan, along with $462 million in sales tax bonds and about $211 million in RCTC and state funds are being used to fund the project. The project consists of the development, design, finance, construction, maintenance and operation of SR-91 express lanes in Riverside County. Expansion of the corridor includes extension of the two existing SR-91 express lanes from the Orange/Riverside County line approximately eight miles to the Interstate 15/SR-91 interchange in Riverside County. The project also involves the construction of one new general purpose lane in each direction from SR-71 to I-15, ultimately providing two tolled express lanes, five general purpose lanes and an auxiliary lane in each direction. There will only be three points of ingress/egress: at the Riverside County/Orange County line; west of I-15; and, I-15, south of the SR 91. The project also includes future improvements (2035) including an additional general purpose lane and improvements to the SR91/SR71 interchange.

SECURITY

The senior lien revenue bonds and subordinated TIFIA loan are secured by a pledge of project net toll revenues derived from the operation of the project and the related senior and TIFIA debt service reserve funds. The priority of the TIFIA Loan springs to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

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

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986577

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986577

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Tertiary Analyst
Matthew Chou
Analyst
+1-415-732-7576
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1-212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis
Senior Director
+1-212-908-0886
or
Tertiary Analyst
Matthew Chou
Analyst
+1-415-732-7576
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com