NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the City of Laredo, Texas' approximately $59 million international toll bridge system (the system) revenue bonds.
RATING RATIONALE:
The 'A+' rating reflects the following credit strengths:
--The system's role as a major North American Free Trade Agreement (NAFTA) gateway, which provides a direct land route from Monterrey and Mexico City to major cities in Texas and along Interstate 35, the NAFTA route that traverses the U.S. north to Minnesota and the Canadian border;
--The system's low leverage of 1.7 times (x) debt/net revenue and robust debt service coverage ratios (DSCRs), despite six consecutive years of traffic declines;
--The system's demonstrated economic and political rate-making flexibility.
The 'A+' rating reflects the following credit concerns:
--Reliance on more volatile cross-border shopping trips which are influenced by Mexican economic and political conditions;
--Commercial traffic exposed to the health of the maquiladora industry in Nuevo Laredo and Mexico as a whole;
--Potential for increased border security may make crossings less attractive;
--Low liquidity given the system's sizable annual transfers to the city's general fund.
KEY RATING DRIVERS:
--Continuation of large traffic declines triggered by violence related to drug cartels;
--Considerable declines in manufacturing and cross-border trade activity;
--Management reluctance to raise tolls to maintain historic levels of financial flexibility;
--Additional leverage.
SECURITY:
The outstanding revenue bonds are secured by a senior lien on and pledge of net revenues of the toll bridge system.
CREDIT SUMMARY:
Reflecting the cyclical nature of cross-border trade and consumption, overall traffic levels declined at a compound annual growth rate (CAGR) of 4.6% between fiscal 2005 and 2010, with the most significant year-over-year decline of 8.2% in fiscal 2009. As a result of the global economic downturn combined with stabilization of maquiladoras in Nuevo Laredo in fiscal 2010, non-commercial and pedestrian transactions declined 7.5% and 9.2%, respectively, while commercial traffic rebounded with a 12.5% increase. Total traffic volumes dropped 5.5%. In fiscal 2010, non-commercial vehicles and pedestrians represented approximately 47% and 37% of total traffic, respectively, while commercial vehicles comprised the remainder. The first three months of fiscal 2011 (through December) indicate further traffic declines, at an accelerated rate of 11.5%. Management has indicated that the bridges and surrounding areas have not experienced any direct cross-border violence, which has been restricted to Mexico. Nevertheless, Fitch notes that violence on the Mexican side has affected traffic results. Commercial traffic remains resilient, increasing 11% over the same time period.
Mexico has issued national warnings regarding violence near the border. In order to meet demand for crossing the border, alternative modes of transportation (i.e., buses and airplanes) have been used. Fitch is unable to determine the proportion of traffic that may rebound as a result of improved economic conditions and/or security, but it will continue to monitor traffic performance and its impact on the system's financial results and economic ratemaking ability.
Despite traffic declines during the last five years, toll revenue has continued to grow at a CAGR of 5.3% from fiscal 2005 to 2010 due to toll rate increases. The toll increase implemented in October 2007 (fiscal 2008) increased toll revenues by 19.8% to $45.6 million, strengthening the system's financial profile. However, toll revenue in fiscal 2009 dropped by 10.4% to $40.8 million due in large part to a 15.1% reduction in commercial traffic. The system's financial profile improved in fiscal 2010 as the increase in commercial volumes drove toll revenues up 4.9% to $43.5 million. During the first three months of fiscal 2011 total revenues were essentially unchanged (up 0.4%).
To compensate for the traffic losses, the city reduced the system's operating expenditures by 4.2% and 1.1% in fiscal 2009 and 2010, respectively (to $11.3 million in fiscal 2010). This resulted in net revenues available for debt service of $34.7 million and generated a senior DSCR of 4.9x and a total DSCR of nearly 4.0x. Included in the total debt service coverage calculation are annual debt service payments associated with the system's outstanding $20.5 million SIB loans. The repayment of SIB loans is subordinate to the system's revenue bonds and the loans are not rated by Fitch. Management projects toll revenues will increase 1.6% in fiscal 2011 with net revenues expected to provide senior and total DSCRs of 4.8x and 3.8x, respectively.
Under a Fitch scenario that incorporates further traffic losses and no further toll increases, senior and total DSCR are at least 2.5x and 2.1x, respectively, over the next 10 years, after which annual debt service obligations drop dramatically. In Fitch's view this level of cushion under such a stress scenario is necessary given the volatility in the traffic base associated with shopping trips and the maquiladora industry in Mexico. An application to build another crossing was recently withdrawn.
The bridge system supports deeply subordinated transfers to the City of Laredo's general fund. While the city's dependence on these transfers serves to ensure high coverage of senior debt, it also results in minimal levels of liquidity being maintained within the system and higher levels of usage of the system's strong economic ratemaking flexibility. Partially mitigating these risks is the fact that transfers are made after debt service, and city council caps the general fund transfers to 50% of toll receipts and requires the maintenance of a 15% operating reserve. Bridge management transferred $21.4 million to the city's general fund in fiscal 2010, or approximately 50% of fiscal 2010 toll revenues. Should the system's surplus revenues become insufficient to accommodate such transfers, management indicated it would reduce operating and maintenance expenses before they would consider a toll increase. However, any deferral of the system's essential maintenance expenses would be viewed as a concern by Fitch.
Laredo is the largest inland port in the U.S., and during the past decade the population of the city was one of the fastest growing in the nation, recording a nearly 30% population growth from 2000-2010. In anticipation of increased traffic and resulting congestion, the city submitted a presidential permit application to the State Department to build a fifth bridge. Concurrent with the city's own application, Webb County has applied for and received permission from the Texas Department of Transportation to construct a similarly situated bridge pending federal approval. These federal applications have been withdrawn by both the city and the county, and system management has indicated that the construction of the fifth system bridge is not anticipated in the near to medium term. To support potentially increasing future traffic and reduce waiting times, the system is currently expanding the world trade bridge inspection station.
The system owns the portion of the bridges (50%) on the U.S. side of the border as well as the U.S. immigration, customs, security, and retail facilities. The international toll bridge system is comprised of four bridges, two of which primarily handle pedestrian and passenger traffic (Gateway to the Americas bridge and Juarez-Lincoln International bridge) and two that handle a mix of passenger and commercial traffic (Colombia Solidarity bridge and World Trade bridge). The system is run by the bridge manager, who is responsible for operations and maintenance and reports directly to the city manager. The city has full authority to charge and collect bridge tolls on southbound traffic and pedestrians using the bridge system. The toll collection process includes state of the art technology to allow for weigh-in-motion processing of overweight vehicles.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010;
--'Rating Criteria for Toll Roads, Bridges, and Tunnels', dated Aug. 10, 2010.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265
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