NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB' to a $285 million subordinated loan granted under the Transportation Infrastructure Finance and Innovation Act (TIFIA), entered into by the Texas Transportation Commission, the governing body of the Texas Department of Transportation (TxDOT). The Rating Outlook is Stable.
The rating reflects low construction risk with the most complex activities completed and liquidity support from TxDOT to mitigate potential cost overruns. The managed lanes (MLs) project benefits from its strategic location in a congested commuting corridor serving the Dallas-Fort Worth Metropolitan area. The rating also reflects risks associated with free capacity expansion, the lack of demand history, untested price sensitivity to tolls, as well as the inherent volatility and long-term forecast risk associated with ML projects. Revenue risk is partially offset by the TIFIA loan structural features such as a flexible debt service schedule and available liquidity. Under Fitch's rating case, which incorporates additional downside assumptions from the sponsor's relatively conservative forecast, TIFIA total coverage averages 1.90x overall, which is consistent with the 'BBB' rating level for MLs.
KEY RATING DRIVERS
Advanced Stage of Construction (Completion Risk - Stronger): Completion risk is largely mitigated by the project being approximately 75% complete, along with a fixed-price, date-certain contract with a joint venture (JV) comprised of experienced builders. The project is generally on budget and on time to meet its scheduled substantial completion date in May 2017. The five-year capitalized interest period following substantial completion provides a buffer against delay risk. Performance and payment bonds, retainage bond, parent guarantees and liquidated damage payments for delays and lane closures further mitigate completion risk, along with the strong support of TxDOT.
Congested Corridor, Fast-Growing Region (Revenue Risk: Volume - Midrange; Corridor Volume - Midrange, ML Characteristics - Weaker): The project's two reversible MLs along a 28-mile stretch should provide reasonable time savings based on current corridor peak-period traffic. Demand uncertainty remains due to the lack of operating history and exposure to competing alternatives, including the addition of general purpose lanes (GPLs). However, while the region is expected to experience continued robust economic and population growth over the medium term, the project is only modestly dependent on population growth. A familiarity with MLs in the area and tight free access policies are strengths, although the project's current pre-construction status and the addition of GPL capacity keeps the ML characteristics score weaker.
Dynamic Pricing, Soft Cap (Revenue: Price Risk - Midrange): The project uses a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. North Central Texas Council of Governments (NCTCG) MLs policy allows for revenue maximization up to a soft cap on toll rates of $0.75 per mile (2012 dollars) and rates may only be increased beyond this level if TxDOT is unable to manage ML speeds at or above 50 miles per hour. While the soft cap structure limits some of TxDOT's pricing flexibility, it may also help offset some political risk regarding rate increases in a scenario of high congestion.
New Asset, Sound Maintenance Plan (Infrastructure Renewal and Replacement - Stronger): Once completed, the managed lanes will be in new condition with minimal capital needs for some time. Renewal and replacement (R&R) expenditures will be paid from cash flows on a rolling five-year look-forward basis, partially mitigating asset reinvestment risk.
Flexible, Back-Ended Schedule (Debt Structure - Midrange): All debt is fixed rate and amortizing. The TIFIA structure includes flexible debt service terms between mandatory and scheduled payments, which is considered supportive of the project in early years, but could potentially lead to a backloaded debt service profile. Liquidity is adequate with the debt service reserve account sized to maximum annual mandatory debt service. The potential to raise additional senior- or parity-ranking debt results in TIFIA-loan structural subordination and constrains the assessment to Midrange.
Adequate Financial Flexibility: Considered on a net pledge basis, debt service coverage ratios (DSCRs) are maintained at healthy levels in most scenarios, supported by debt service flexibility and liquidity. The Fitch rating case shows average TIFIA total DSCR of 1.90x, which is consistent with the 'BBB' ML rating. TxDOT's base case forecast includes relatively conservative assumptions and Fitch's rating case assumes a one-standard-deviation downward adjustment to the main forecast drivers, resulting in an added level of conservatism considering the volatility of this asset class. Overall, the project's cash flow is relatively resilient to stresses. A low revenue growth breakeven CAGR of 2.17% post ramp-up under Fitch's rating case demonstrates cash flow resiliency and low dependence on growth.
Peer Analysis: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are congested during peak hours such as 95 Express Lanes LLC (rated 'BBB-'/Positive Outlook) and Riverside County Transportation Commission's (rated 'BBB-'/Stable Outlook) MLs. Both serve areas with relatively strong demographic characteristics and limited alternative routes, but have somewhat different congestion levels and varied exposure to toll-free vehicles. IH 35E's one-notch rating differential is supported by its robust DSCRs and limited need for growth to support debt service.
Negative: Financial performance that is materially and persistently below Fitch's rating case of approximately 1.8x, which could be caused by lower than expected traffic volumes or pricing power, or additional debt absent commensurate revenue growth, could lead to negative rating action.
Positive: While positive rating action is not anticipated in the near term, given continued construction and needed ramp-up, traffic performance persistently above the sponsor case resulting in strong sustained financial performance could lead to positive rating action.
The TIFIA loan agreement was executed and the project reached financial close on Nov. 3.
Final pricing provided an all-in interest rate of 2.58%, which was below original expectations. The overall impact of the lower borrowing costs resulted in slightly higher debt service coverage in Fitch's base and rating case scenarios.
The Fitch base case resulted in an average scheduled DSCR of 2.53x from 2022 when mandatory interest payment commences through TIFIA maturity in 2052.
The Fitch rating case reported an average scheduled DSCR of 1.90x from 2022 through TIFIA maturity. The breakeven revenue growth rate from the first fully ramped-up year of 2.17% and the breakeven downward adjustment to the rating case revenue curve from first fully ramped-up year of 31.6% both provide an indication as to the project's ability to withstand further stress beyond the rating case.
The Interstate Highway 35E Managed Lanes Project is being undertaken by TxDOT along a 28-mile section of the highway starting at the IH 35 split in Denton, TX and stretching south to IH 635, the northern part of the Dallas beltway. IH 35E connects fast-growing residential areas in Dallas County and Denton County with employment centers throughout the region and downtown Dallas. The project is wholly owned and operated by TxDOT. The financing of this project is ring-fenced from TxDOT's other activities. A failure by TxDOT to pay its debts as they come due would, however, trigger a bankruptcy-related event, causing the TIFIA loan to spring to senior.
For a complete review of Fitch's analysis of the IH 35E project please refer to "Fitch Expects to Rate Texas Department of Transportation's (TX) TIFIA Loan 'BBB'; Outlook Stable" dated Aug. 31, 2016.
The TIFIA loan is secured by project gross revenues and restricted accounts. Should any additional senior debt be raised, the TIFIA loan will be subordinated to the lien securing the bonds, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with any senior debt.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
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