NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating for the City of McAllen, Texas' approximately $31.2 million international toll bridge system revenue bonds series 2007A and 2007B. The Rating Outlook remains Stable.
The 'A' rating reflects the bridge system's moderate leverage of 2.3x net debt/cash flow available for debt service (CFADS) and strong debt service coverage ratios (DSCR) despite a history of volatile traffic performance. The rating further reflects the singular nature and limited catchment area of the bridge system as well as nearby competition along the Mexican border.
KEY RATING DRIVERS
Revenue Risk: Volume-Midrange
Volatile Traffic Base with Competitive Pressure: The toll bridge system is a mature facility with revenue generating capabilities limited by border crossing regulations, local violence, and competition from the neighbouring Pharr-Reynosa Bridge which could potentially limit economic rate-making flexibility. Bridge traffic increased 1.0% in fiscal year 2015 (FY15) to 5.4 million while having decreased at a five-year compound annual growth rate (CAGR) of -2.4%. Higher value commercial traffic on the system's Anzalduas Bridge is anticipated to commence around FY18; this transition should add some stability to the traffic base thereafter.
Revenue Risk: Price-Stronger
Demonstrated History of Toll Increases: Toll rates charged are consistent with nearby bridge crossings. Management has full legal flexibility to implement toll increases and has historically demonstrated proactive positions toward raising tolls during periods of continued traffic declines to stabilize revenues, with no material political pushback. Toll revenues grew 9.1% in FY'15 largely as a result of a non-commercial vehicular traffic toll increase.
Manageable Capital Expenditure Needs: The Anzalduas Bridge is newly completed, and the McAllen-Hidalgo Bridge is generally in good condition. Funding is covered with bridge system reserves funded with set-aside revenues from traffic tolls.
Conservative Capital Structure: The debt is 100% fixed-rate with a flat amortization profile through final maturity (2032) and is further supported by an adequate level of reserves.
Low Leverage and Healthy Coverage: Robust DSCR of 4.4x for FY'15 helps to mitigate the volume risk for the bridge system. In addition, adequate cash reserves and moderate leverage equate to a relatively low net debt-to-CFADS of 2.3x, with no additional borrowing anticipated. DSCR has not fallen below 3.5x historically and is projected to remain above this level in Fitch's rating case.
Peer Group: Closest Fitch-rated peers include Cameron County and Laredo, TX toll bridge systems, rated 'A'/Stable Outlook and 'A+'/Stable Outlook, respectively. All three systems maintain minimal net leverage and robust coverage levels, often exceeding 4x. Higher coverage helps to weather fluctuations in traffic levels that result from safety concerns related to border violence and economic cyclicality. Laredo's higher rating reflects its location along I-35, a vital international trade link, and its resilient traffic and revenue performance during the last recession.
Negative: Significant traffic/toll revenue decline, potentially driven by drug violence, economic slow-down, and/or border trade conflict, leading to a material change in financial metrics.
Negative: Reluctance by management to raise tolls as planned/needed or its inability to control O&M expenses which materially changes coverage and liquidity.
Negative: Meaningful additional leverage.
Positive: Positive rating action is unlikely in the near term given the bridge system's history of volatile traffic levels.
SUMMARY OF CREDIT
Total crossing realized a modest increase in traffic of 1.0% at 5.4 million in FY15. Passenger vehicle and pedestrian traffic grew at 0.4% and 4.1% respectively while truck volume was down 4.7% and bus crossings realized a decline of 2.7%. Overall traffic is down 27% since 2001, largely due to a decline in passenger vehicles which is down 37% over this period. The traffic decline is due in large part to safety concerns following terrorist attacks and border violence, the weakened economy, and, to a lesser extent, several toll increases.
Passenger vehicles represent the vast majority of transactions and revenues (70% and 87% respectively) with pedestrians accounting for virtually all of the remainder (29% and 11% respectively) and minimal commercial traffic. Although Fitch expects a moderate shift in this profile once commercial traffic commences on the Anzalduas Bridge; the impact on traffic and revenue remains uncertain.
Toll revenues increased 3.8% in FY15, continuing a consistent trend of growth; revenues have grown at a five-year CAGR of 5.1%. Management continues to raise tolls, having implemented a $0.25 increase to the passenger vehicle toll to $3.25 on March 1, 2014, while further raising rates to $3.50 in December 2015. These fare increases are being used to partially fund major capital improvements such as repairs at the McAllen-Hidalgo Bridge, and commercial truck infrastructure at the Anzalduas Bridge.
Expenses increased moderately, up 2.4% during FY15. Most of the system's expenses are now fixed and there should be less variance going forward, even when commercial traffic is permitted across the Anzalduas Bridge. Furthermore, Fitch recognizes historical elevated expense growth and has modelled 4%-5% annual growth in operating costs in its rating case.
The increase in expenses in FY15 was more than offset by a 3.8% rise in toll revenue resulting in an improved debt service coverage from 4.2x in FY14 to 4.4x in FY15. Going forward, Fitch expects management to maintain high coverage levels, especially when commercial traffic adds to the toll revenue base beginning in 2018. Fitch views this level of cushion as necessary given the volatility in the traffic base that is tied to the performance of the maquiladora industry in Mexico, as well as border security threats.
Capital expenditure needs are modest given the recent completion of the Anzalduas Bridge and the good condition of the Hidalgo Bridge. Several projects to improve efficiency are in the pipeline which already have funding while recent toll increases have established a $0.50 per vehicle set-aside that should enhance the system's ability to undertake additional projects in the future.
The Fitch base case grows overall system traffic at a CAGR of 0.5% through FY25 while costs rise at slightly above inflationary levels throughout the projected period. This scenario results in an average and minimum DSCR of 4.6x and 4.5x respectively. The Fitch rating case decreases traffic at a CAGR of 1.1% through FY25 and grows expenses at 5.0% per annum. This scenario results in an average and minimum DSCR of 3.8x and 3.5x respectively.
Additional information is available at 'www.fitchratings.com'.
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)
Dodd-Frank Rating Information Disclosure Form