NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' long-term rating to Orange County Transportation Authority, California's (OCTA or the authority) proposed $124.6 million toll road revenue bonds (91 Express Lanes), series 2013. The Rating Outlook is Stable. Bond proceeds will be used, together with certain authority funds, to refund all of the outstanding fixed and variable rate series 2003 bonds. The series 2003 bonds are currently rated 'A' with a Stable Outlook.
The new rating reflects modifications to the toll enterprise's bond covenants under a new master indenture of trust, including the flexibility to issue parity senior lien express lanes bonds, which is a likely outcome over a longer timeframe given the extension of the toll road franchise through 2065. This differs from the previous indenture, which fully precluded any issuance of parity obligations. Furthermore, the new indenture eliminates the existing supplemental reserve account requirement sized at maximum annual debt service (MADS). In assigning this rating, Fitch has assumed OCTA will not increase leverage to, or near to, the maximum level allowed in the new indenture.
KEY RATING DRIVERS:
Congested Corridor Traffic: Established traffic demand is evident, particularly for peak-period travel within the SR-91 corridor - one of the most congested traffic arteries in Southern California. Express lane traffic averaged approximately 33,000 per day in fiscal 2013, which represents approximately 12% of overall corridor traffic. Traffic and toll revenue levels have shown sensitivity to corridor improvements, fuel prices and economic activity. Over the past five years, the managed toll lanes have experienced traffic declines in aggregate of nearly 18% as a result of the recent economic downturn in the region and the addition of general purpose lanes to the corridor. Still, long term prospects are favorable for traffic demand given the expected time savings and limitations of alternatives routes.
Revenue Risk - Volume: Midrange
Toll Policy with Demonstrated Track Record: The authority has demonstrated a favorable track record of implementing its current toll policy that permits relatively frequent toll adjustments, both upward and downward, based on specific hourly traffic activity. Still, the peak period toll rates are among the highest in the country and may constrain traffic growth during stressed economic periods.
Revenue Risk - Price: Midrange
Debt Structure With Refinance Exposure: The new bond issue will permit OCTA to operate under an open lien indenture with the series 2013 bonds having a senior lien on net toll revenues. Structural features include a satisfactory toll covenant and multiple reserve accounts. To the extent the refinancing is completed ahead of the Aug. 15, 2013 mandatory tender date for the series 2003B bonds, OCTA will no longer have variable rate exposure which, in the past, has resulted in higher debt interest costs.
Debt Structure: Stronger
Low Leverage and Favorable Financial Cushion: The tollway's current debt burden is low with an expected 2.0x net debt to cash flow available for debt service (CFADS) for fiscal year (FY) 2013. At current traffic levels, MADS coverage is robust at over 2.6x with no additional parity borrowings planned.
Debt Service and Counterparty Risk: Stronger
Well Maintained Corridor Infrastructure: The project has a favorable 17-year operating history with investments made in both the general purpose and express toll lanes over that period. OCTA has a sound approach to assessing corridor needs, as exemplified by its annually published long term implementation plan and 20-year maintenance capital investment forecast. No borrowings are planned, however, some longer term projects for capacity enhancements or connectors to other roadways may necessitate more debt at that time. The 2065 extension to the franchise agreement provides significant flexibility to manage and finance infrastructure needs.
Infrastructure Development and Renewal Risk: Stronger
RATING SENSITIVITIES:
--Any material changes to traffic activity within the express lane corridor caused by the effects of regional economic conditions or improvements in general purpose lanes;
--Additional borrowings to support corridor improvements which lead to a measurable dilution in debt service coverage would likely lower the rating.
SECURITY:
The bonds are solely secured by a pledge of net revenues of the authority's 91 express lanes. The proposed bonds are issued under a new indenture of trust allowing for additional parity toll road revenue bonds, subject to a 1.50x coverage test.
TRANSACTION SUMMARY:
The authority currently has $155 million in total debt, of which $100 million is in a variable interest-rate term mode with a mandatory tender due on Aug. 15, 2013. The proposed series 2013 refunding, to the extent completed under the planned financing schedule, will refund all OCTA obligations and all new debt will be in fixed rate mode and fully amortizing. The final maturity of the new bonds will match those of the outstanding 2003 bonds. To the extent the financing is delayed, the authority is considering alternatives for remarketing. However, the variable rate bonds currently in term mode may still be held by Orange County at an unchanged interest rate. Revised legal provisions include a 1.5x historical and forward-looking additional bonds test of senior bonds and elimination of the supplemental reserve fund. OCTA will continue to have a 1.30x rate covenant as well as separate reserves for debt service, operating expenses and major maintenance.
Annual express lane traffic levels are approximately 12 million and represent approximately 12% of total corridor traffic. While growth rates in usage were robust over the first decade of operation, toll transactions have declined in recent years primarily due to the effects of a softer economy and the completion of new general purpose lanes in late 2010. The weakest performance period was in early 2011 when year-over-year transaction declines were in the 15%-20% range. More recent data indicates that traffic levels have stabilized and overall traffic is expected to increase slightly for the entire fiscal 2013 period. To the extent that regional economic conditions improve, Fitch believes the express lanes are likely to see further positive traffic performance with a likely range of 1%-2% annual growth rates going forward. Over the longer term, an extension of the express lanes in Riverside County and a possible direct connector into SR-241 may provide catalysts for increased demand within OCTA's SR-91 corridor.
The toll revenue framework for the SR-91 express lanes depends heavily on peak period congestion. While the tolled lanes of SR-91 represent an average 11%-13% of aggregate historical corridor volume, peak hour usage spikes to greater than 20% of total volume given the substantial time savings. Peak period toll rates for east-bound evening rush hour traffic have steadily risen over time, but modestly fell to $9.55 in 2013 in line with toll policy. These toll rates make the 91 express lanes among the most expensive toll facilities during peak period use in the country. Over the longer term, capacity improvements may affect toll rates in both peak and shoulder periods and result in reduced toll rates under the current toll policy. Lower rates may create new demand and neutralize some of the effect of the additional general purpose lanes.
Despite the fall in tolled trips and revenues in several of the recent years, coverage of debt service from net revenues remained at or above a healthy 2.0x. Estimated fiscal 2013 financial results indicate a strong debt service coverage ratio of 2.62x as toll revenues improve coupled with reduced interest costs. Prospectively, project reserves will be viewed as a material credit strength as the combined level of reserves for debt service, operations, and major maintenance will equal nearly $24 million. Separately, the project holds approximately $47 million of additional unrestricted reserves, meaning total reserves amount to more than half of total debt outstanding. Following this financing, net debt to CFADS will be favorable at about the 2.0x level, providing a significant amount of financial flexibility to deal with capacity expansion, adverse changes in economic conditions or travel patterns within the region.
Fitch base and rating case forecasts indicate a continuation of strong coverage levels but with the potential for some narrower results reflecting both marginal changes in traffic trends as well as lower toll rates within the toll schedule. The base case is in line with sponsor forecasts resulting in coverage levels well above 2.0x, and net debt to CFADS constantly remains below 2.0x. For the rating case, traffic grows at a slower rate, below 1% CAGR through final maturity, and average annual toll revenues increase by under 2% per annum. Debt service coverage levels average about 2.2x and net debt to CFADS still remains below 2.0x throughout the projection period.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684146
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797143
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