NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the City of Laredo, Texas' approximately $55 million international toll bridge system (the system) revenue bonds. The Rating Outlook remains Stable.
KEY RATING DRIVERS:
STRATEGIC LOCATION: The bridge system serves as a major North American Free Trade Agreement (NAFTA) gateway, providing 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. Traffic and revenues are inherently susceptible to economic cycles on both sides of the border and the exposure of cross-border shopping trips to the Mexican economic and political conditions. While overall crossings have been affected by heightened border violence and economic downturn, with continued declines in fiscal year 2011 (fiscal year ends Sept. 30) down 7% to 9.3 million total crossings, commercial traffic (at about 58% of toll revenues) has remained resilient and the maquiladora industry has stabilized.
STRONG ECONOMIC RATE-MAKING FLEXIBILITY: The system's economic and political rate-making flexibility is demonstrated by its historical track record of raising toll rates, its relatively competitive tolls and a moderate degree of demand inelasticity.
CONSERVATIVE DEBT STRUCTURE: All outstanding debt is in a fixed rate mode with a 16-year maturity profile and a declining debt service schedule.
LOW LEVERAGE AND ROBUST COVERAGE LEVELS: The system's low leverage (at 1.21 times (x) net debt/cash flow available for debt service) and healthy debt service coverage ratio (with 3.98x coverage on all debt in fiscal 2011) provide significant cushion against volatility in traffic. While the system makes deeply subordinated toll revenue transfers to the city's general fund (equivalent to about 50% of toll revenues) ensuring high coverage of senior debt, it also results in low levels of liquidity being maintained (at about 261 days cash on hand) within the system.
MODERATE CAPITAL PROGRAM: The bridges are mostly in good condition and funding of any future enhancements are expected to be predominantly grant based. No new borrowing is anticipated to fund the system's four-year $58 million capital plan.
WHAT COULD TRIGGER A RATING ACTION:
--Negative rating action would be triggered by significant declines in crossings and revenue levels driven by considerable declines in manufacturing industry and cross-border trade activity and/or security concerns which could further restrict/slow border crossings;
--Changes in key financial metrics such as coverage and liquidity. Management's reluctance to raise tolls if necessary and inability to control operating and maintenance expenses;
--Meaningful 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 UPDATE:
Overall traffic levels declined at a compound annual growth rate (CAGR) of 4.8% between fiscal 2006 and 2011 as a result of the global economic downturn combined with border security concerns. Although total traffic was down 7% in fiscal 2011 to 9.3 million, commercial traffic was up 9.5% to 1.7 million trucks. 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. The first three months of fiscal 2012 (through December) indicate further traffic declines of 5.6%; however, commercial traffic remained resilient and increased 2% over the same time period in fiscal 2011. 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 2.2% from fiscal 2006 to 2011 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 12.9% 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% and continued growth in truck traffic in fiscal 2011 resulted in another increase of 1.9% to $43.6 million. During the first three months of fiscal 2012 total revenues were essentially unchanged (up 0.1%).
To compensate for the traffic losses, the city historically contained the system's operating expenditures, which grew at 1.3% CAGR between fiscal 2006 and 2011. Fiscal 2011 net revenues available for debt service of $34.9 million generated a senior DSCR of 4.93x 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 $19.6 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 flat growth in fiscal 2011 with net revenues expected to provide senior and total DSCRs of 4.8x and 3.9x, respectively. In Fitch's view this level of cushion in coverage levels is necessary given the volatility in the traffic base associated with shopping trips and the maquiladora industry in Mexico.
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 $21.8 million to the city's general fund in fiscal 2011, or approximately 50% of fiscal 2011 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.
The system owns the portion of the bridges (50%) on the U.S. side of the border. 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).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421
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