Fitch Rates Harris County, TX's Sr. Toll Revenue Refunding Bonds Ser 2016A 'AA'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned a 'AA' rating to Harris County, Texas' (the county) $495 million senior lien revenue refunding bonds series 2016A. Fitch has additionally affirmed $1.8 billion of outstanding senior toll revenue bonds on parity with the refunding debt. The Rating Outlook is Stable. The bonds are issued by the county on behalf of the Harris County Toll Road Authority (HCTRA, or the authority). Bond proceeds will refund a portion of the authority's outstanding senior revenue bonds for net present value savings. The bonds are expected to sell via negotiated sale on or about the week of June 6.

RATING RATIONALE

The 'AA' rating and Stable Rating Outlook reflects the authority's essential road network in a large and economically solid region with limited viable alternatives. It also makes for a strong volume profile, while years of consistent toll rate increases demonstrate a willingness and ability to raise tolls to maintain a healthy financial profile. The rating also reflects the authority's strong financial metrics in Fitch's rating case, with a very high average 10-year senior debt service coverage ratio (DSCR) of 6.56x, and low senior leverage (net debt to cash flow) of 0.70x in five years. These metrics compare quite favorably to the indicative 'AA' rating category in Fitch's criteria. These strengths are modestly offset by a large capital plan that is expected to require additional debt issuances.

KEY RATING DRIVERS

Revenue - Volume: Stronger

Resilient Traffic Demand: HCTRA's toll road facilities provide vital transportation links with a strong monopolistic position in the Houston metropolitan area and an established and stable traffic demand profile. System traffic has increased almost every year since fiscal year (FY) 1998, supported by its continuing expansion in a large and rapidly growing metropolitan region. Toll rates are moderate at an average $1.28 per transaction and historical elasticity of demand has been low.

Revenue - Price: Stronger

Demonstrated Ratemaking Flexibility: The authority's toll rate policy allows for annual increases at the greater of 2% or inflation, which has provided sufficient flexibility to maintain a strong financial profile. Policymakers have shown a willingness to implement consistent annual toll rate hikes nearly every year since the toll rate policy was implemented in 2008.

Infrastructure & Renewal: Stronger (changed from Midrange)

Manageable CIP, Prudent Planning Policies: The authority adheres to strong capital planning policies that do not allow deferred maintenance, limits leverage to four to five times toll revenues, and makes use of significant pay-as-you-go funding resources. These strengths are modestly offset by large annual subordinate transfers to the county, sized to about $120 million in recent years. The stronger assessment assumes that the size of the transfer, set on a discretionary basis, is not increased substantially from current levels.

Debt Structure: Stronger

Senior Lien, Fully Amortizing Debt: Debt service declines in most years and principal amortizes moderately with 43% of debt retired over the next 10 years. The authority has a limited degree of variable interest rate exposure of around 18% of outstanding debt that is fully hedged to term and, although swap counterparties are rated lower than the outstanding debt, HCTRA's negative mark-to-market on the swaps is significantly collateralized.

Financial Metrics

Strong Financial Profile: The authority benefits from a strong balance sheet and high coverage ratios highlighted by unaudited fiscal 2016 unrestricted reserves of $921 million and DSCR of 5.44x. Leverage is also low with 1.87x net debt (inclusive of subordinate debt) to cash flow. Although future debt issuances will weaken financial metrics to some extent, Fitch expects metrics to remain at levels consistent with the 'AA' rating category.

Peers: HCTRA's closest large expressway network peer is the Illinois State Toll Highway Authority (ISTHA; rated 'AA-'/ Stable Outlook). ISTHA's lower rating reflects lower debt service coverage and higher leverage compared to HCTRA.

RATING SENSITIVITIES

Negative- A substantial and unexpected deterioration of the authority's financial or operating profile could result in negative rating action. Although not anticipated, such deterioration could be caused by severe traffic reductions or much higher than projected expenditure growth.

Negative- Excessive leveraging beyond the authority's historical targeted maximums of 5.0x senior gross debt to cash flow available for debt service (CFADS).

Negative- A material reduction in the authority's debt service coverage profile that leaves rating case DSCR projections significantly below 2.50x for a prolonged period.

Positive- The authority's rating is constrained by its sizeable subordinate transfer to the county, and a large and growing capital improvement plan (CIP).

SUMMARY OF CREDIT

The authority manages a large and growing toll road system with a long operating history, 15 assets, and 127 miles of roadway that serve the Houston metropolitan region in Texas. The authority operates as a department of the county and coordinates with outside agencies including the Texas Department of Transportation (TxDOT).

CREDIT UPDATE:

HCTRA's operational and financial performance in fiscal 2016 was quite positive with traffic and toll revenues rising 7.9% and 7.5%, respectively. The performance was boosted by ongoing economic expansion and population growth within the Harris County (unlimited tax general obligation bonds rated 'AAA'/ Stable Outlook) region in spite of its concentration in the energy sector, which has experienced acute weakness over the past year. Traffic and revenue growth were also supported by the opening of the Tomboll Tollway and the delayed handover of the Katy Managed Lanes to the Texas Department of Transportation (TxDOT). Fitch expects continued economic expansion and system-wide expansion to support growth into the foreseeable future and does not view eventual handover of the Katy Managed Lanes as a credit negative given its small size relative to the overall system and financial concessions offered by TxDOT in exchange for the handover.

A very small toll rate hike anticipated for fiscal 2016 was delayed by decision of the commissioner's court in May because the size of the toll rate hike (which is in part linked to inflation, which has been low) was small in comparison to the costs of implementation. Policymakers may choose to implement the hike on a delayed basis at a future session, as policymakers have consistently done in the past subsequent to delays. Because the hike was estimated to have raised only $225,000 annually (0.03% of fiscal 2016 toll revenues), Fitch views the delay as immaterial.

Financial performance is extremely strong in Fitch's base and rating cases. Fitch's base case assumes a compound annual growth rate (CAGR) of 2.5% for pledged revenues and 3.5% for expenditures. Under these assumptions DSCR averages 6.97x over the next 10 years, and total leverage falls to 0.65x in five years. Fitch's rating case assumes recessionary conditions lead to a moderate traffic decline of 5% in fiscal 2017, followed by a two-year recovery and a prolonged period of very low growth. The case also assumes constant 2% toll rate increases. Under this scenario, DSCR averages a still impressive 6.56x over the first 10 years and leverage falls to a very low 0.70x in five years.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 29 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870170

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings
650 California Street
San Francisco, CA 94122
or
Secondary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings
650 California Street
San Francisco, CA 94122
or
Secondary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com