NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed LBJ Infrastructure Group, LLC's (LBJ) approximately $615 million senior lien revenue bonds series 2010 issued by the Texas Private Activity Bond (PAB) Surface Transportation Corporation and $850 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan at 'BBB-', with a Stable Outlook.
The affirmations reflect the newly opened managed lanes (ML) project that is supported by its strategic location in a highly congested area north of Dallas and near the Dallas-Fort Worth Airport, which along with the solid economics of the service area, has benefited from considerable population and employment growth over the last decade. Regional macroeconomic demographics and development in the area are broadly in line with Fitch's expectations at closing and, despite somewhat slower than originally expected revenues reported in the first nine months of 2016, performance continues to support Fitch's rating case assumptions. Revenue risk is partially offset in the medium term by the flexibility afforded by the TIFIA loan structure and the project's strong liquidity position, currently over $90 million; however, an escalating debt structure that relies on revenue growth to meet debt service obligations has a constraining effect on the project's credit quality.
The ratings also reflect the lack of demand history and uncertainty associated with price sensitivity to increasing toll rates, as well as the inherent volatility and long-term forecast risk associated with ML projects.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange (Corridor Volume - Stronger, ML Characteristics - Weaker)
Congested Commuting Corridor: The facility is strategically located in a highly congested area north of Dallas and near Dallas-Fort Worth Airport. Continued population, and therefore traffic, growth in the area is widely expected over forthcoming years on top of the considerable population and employment growth experienced over the last decade. The corridor traffic has returned post construction, reportedly exceeding pre-construction demand levels. Demonstrated traffic congestion in both directions during weekday am and pm peak periods, weekday inter-peak, and weekend daytime supports the expectation of strong ratemaking ability. The price sensitivity to toll rates is uncertain given the highly demand-driven nature of toll rates. A tight free access policy is a project strength, although current ramp-up status constrains the ML characteristics assessment at "weaker."
Revenue Risk - Price: Midrange
Dynamic Pricing, Soft Cap: The project utilizes a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. The comprehensive developer agreement allows for revenue maximization up to a soft cap on toll rates of $0.75 per mile (2009 dollars) and rates may only be increased beyond this level if the concessionaire is unable to manage ML speeds at or above 50 miles per hour, or if traffic volumes exceed pre-determined thresholds, implying a switch to throughput maximization at these levels. While the soft cap structure limits some of the concessionaire's pricing flexibility, it may also help offset some political risk regarding rate increases in a scenario of high congestion.
Infrastructure Renewal and Replacement: Stronger
Infrastructure Risk Well Mitigated: The project contains adequate mechanisms to assess and address infrastructure requirements on an ongoing basis through the life of the debt. The project company is required to fund capex needs from cash flow on a rolling five-year look forward basis. The 12-year tail after TIFIA debt maturity in 2050 provides additional financial flexibility to meet handback requirements and partially mitigates asset reinvestment needs.
Debt Structure: Midrange
Fixed Senior Debt with Flexible TIFIA Loan: Debt is all fixed rate with a back-loaded aggregate debt service schedule. The covenant package is adequate with a senior debt service reserve fund (DSRF) equal to 10% of par and an equity lockup trigger of 1.20x. The TIFIA structure includes considerable flexibility between scheduled and mandatory principal and interest payments. Still, the project is reliant on future revenue growth to support its escalating debt structure, which may be exacerbated by any necessary TIFIA scheduled debt service deferrals. In addition to the $61.5 million DSRF, a major maintenance reserve account (MMRA) of $20 million provides additional liquidity against revenue shortfalls in the early years of operation.
Moderate Financial Flexibility: Fitch's analysis at financial close indicated a loan life coverage ratio of 1.6x in 2015 and a minimum project life coverage ratio of 2.2x, with both growing over time - levels consistent with low investment-grade ML projects.
The closest peers from Fitch's rated portfolio include other ML facilities that are highly congested, particularly during peak hours such as the neighboring North Tarrant Express Segments 1&2 (NTE) and 95 Express Lanes LLC (95 Express), both of which are in the operations phase, and also serve areas with relatively strong demographic characteristics and limited alternative routes. Although still shy of stabilized traffic ML performance on both peers appears is encouraging. All three facilities are charging relatively high toll rates of over $0.50 per mile (real) in peak periods, with NTE and 95 Express charging well above that.
Negative: Longer than expected ramp-up that stretches liquidity support, or post-ramp up traffic and revenue performance at or below Fitch's rating case on a sustained basis.
Positive: Sustained traffic and revenue performance materially above Fitch's base case that improves financial metrics.
Approximately one year of traffic and revenue data is available, approximately halfway through the originally envisioned ramp-up period, but the length and extent of the ramp-up is still unknown. The data from the first year of operations is slightly better in revenue and expense terms than the sponsor's budget from April of 2016, though toll revenues have underperformed the Fitch's rating case. Macroeconomic regional development in the Dallas-Fort Worth metropolitan area is broadly in line with Fitch's expectation at closing, and prospects for the requisite level of corridor congestion to yield the required project revenues once the road has ramped up remain unchanged.
Fitch's original rating case from the new issue rating assumed a one year delay and full year revenues in 2017 of $86.9 million. Given the facility opened well in advance of Fitch's one year delay scenario, Fitch has analysed actual 2016 results to analyse future performance. Actual 2016 revenues as of the end of Q3 2016 were $54.4 million ($18.1 million/quarter) according to unaudited Quarterly Operations and Maintenance Reports from LBJ. Fitch expects full year 2016 revenues to be in excess of $70 million. While it is too early to fully estimate ramp-up through 2017, given Fitch's observations on other managed lanes projects, growth is expected to continue. To reach Fitch's rating case of $86.9 million in 2017, revenues have to increase between 20% and 25% 19.8%, which given the ramp up phase, would not be unreasonable. Operating expenses in the first three quarters of 2016 were $12.8 million, 26% lower than the Fitch Rating case of $17 million.
The sponsor provided data from the week of September 19, 2016, which represented an average weekday, unaffected by abnormal weather, traffic flow or holidays. In addition LBJ provided Quarterly Operations and Maintenance Reports through Q3 2016. Performance analysis is based on this data set. The capture rate and number of transactions in the first full year of operations have underperformed expectations. However, average toll rates have been higher than anticipated, significantly outperforming the sponsor's forecasts at financial close.
The project was fully completed (all three segments) in September 2015 and the receipt of the Texas Department of Transportation (TX DOT) Substantial Completion Letter on September 10. This was approximately three months ahead of schedule on budget. The recently completed project includes the reconstruction of IH-635, including an eight lane general purpose freeway, a four-to-six-lane ML facility and a continuous two to three-lane frontage road system with access ramps, as well as construction of two, two-lane elevated direct connector MLs along IH-35E that will interface with the IH-635/IH-35E interchange direct connectors
Fitch Base and Rating Cases
Given the limited traffic and revenue data since opening and continued ramp-up expected over the next two to three years Fitch has not re-evaluated its medium and longer-term expectations to traffic, revenue and operations and resulting debt service coverage ratios and loan life coverage ratios. As Fitch continues to monitor traffic ramp-up and operations over the upcoming year Fitch will evaluate base and rating case traffic and revenue and provide more detailed analyses.
The bonds are secured by net toll revenues generated from the LBJ / I635 managed lanes project. The lien securing the TIFIA obligation is subordinated to the lien securing the PABs, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with the senior PABs.
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)
Dodd-Frank Rating Information Disclosure Form
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