NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on Harris County, Texas' approximately $1.9 billion outstanding senior lien toll road revenue bonds issued on behalf of the Harris County Toll Road Authority (HCTRA or the authority) at 'AA'. The Rating Outlook is Stable.
The affirmation and Stable Outlook reflects continued solid operational and financial performance of HCTRA. Its essential road network with limited viable alternatives makes for a strong volume profile, while recent toll increases demonstrate a willingness and ability to raise tolls if and when necessary. Nevertheless, toll rates remain comparably low. The authority's extensive capital plans should require moderate additional debt in the medium term.
KEY RATING DRIVERS:
RESILIENT TRAFFIC DEMAND: HCTRA's toll road facilities provide vital transportation links, and hold a strong monopolistic position in the Houston metropolitan area, and have an established and stable traffic demand profile reflecting the limited viable alternatives available. System traffic has increased almost every year since fiscal year (FY) 1998, also supported by its continuing expansion. Revenue - Volume: Stronger.
DEMONSTRATED RATEMAKING FLEXIBILITY: Toll rates remain on moderate at between $1.45 and $1.75 per segment (excluding the Katy managed lanes and ship channel bridge) depending on payment method. The authority's toll policy allows for annual increases at the greater of 2% or inflation, and it has shown willingness to implement these increases, doing so in three of the last four years. Revenue - Price: Stronger.
CAPITAL WORKS FUNDING POTENTIALLY LIMITED BY TRANSFER POLICY: The commissioners court annually budgets a subordinate county transfer of approximately $120 million and, although coverage of senior bond debt service is currently sufficiently high to fund these annual transfers, the transfer amount can be changed at any time and increases could leave the authority with no choice but to fund future projects with additional debt. Infrastructure & Renewal: Midrange.
VARIABLE RATE AND REFINANCING RISK WELL MITIGATED: Combined maximum annual debt service occurs in 2015 and around 40% of debt currently outstanding amortizes in the next 10 years. The authority's residual variable interest rate exposure of around 13% of outstanding debt is fully hedged to term and, although counterparties are rated lower than the outstanding debt, HCTRA's negative mark-to-market on the swaps is fully collateralized. Debt Structure: Stronger.
STRONG FINANCIAL PROFILE: HCTRA's financial performance has been robust, with net senior debt service coverage ratios (DSCR) in excess of 2.0x since fiscal 1996. Fitch projects net senior and total DSCR in its base case of at least 3.2x and 2.0x over the next 10 years. Fitch estimates current gross senior and total leverage (excluding benefit of cash holdings) as at end of FY 2014 to be approximately 5.0x and 6.0x respectively. Significant financial flexibility is afforded by the authority's strong cash and reserve balances, resulting in net working capital in excess of $1 billion in FY 2013 (figure currently unavailable for FY 2014).
RATING SENSITIVITIES:
-- Material increases in debt to fund the authority's capital projects resulting in combined net DSCRs below 1.8x for a sustained period or higher than average leverage.
-- Significant erosion of financial metrics due to sustained underperformance in terms of revenue yields from toll increases or higher than expected expense growth.
SECURITY:
The senior lien bonds are secured by a first lien on the revenues derived from the toll road system. Tax support of the county is pledged for operating expenses, which are subordinate to senior lien debt service. Outstanding toll road unlimited tax bonds are secured by a pledge of property taxes, although no pledged tax support has ever been needed.
CREDIT UPDATE:
The system experienced year-on-year traffic and revenue growth in FY 2014 (ended Feb. 28) of 3.5% and 7.9% respectively based on preliminary unaudited numbers. The authority continues to benefit from a resilient, wealthy catchment area in terms of the Houston MSA, and its road network continues to face little or no meaningful direct competition. Average toll rates remain low despite efforts in recent years to push through increases, implying significant economic ratemaking flexibility to go hand in hand with the authority's legal ratemaking ability. System-wide revenue and growth is also supported by the ongoing launch of new expansionary road segments.
HCTRA adopted a policy of indexed toll increases in 2007, with raises having occurred in 2007, 2009, 2011, 2012 and 2013, although the 2011 increase was actually deferred to 2012, when a 12.3% increase was implemented. Current rates are $1.75 cash or $1.45 EZ Tag except for the Katy managed lanes, placing HCTRA's assets as among the lowest tolled within Fitch's rated portfolio, and implying that the authority has significant economic flexibility to raise tolls further if necessary.
Operating and maintenance costs remain well managed, and HCTRA has continued to operate at or above an operating margin of 75%. Unaudited FY 2014 operating costs are approximately 22.5% of operating revenues.
The authority issued refunding bonds series 2012 A & B in July 2012 and series 2012 C & D in September 2012 and has not issued anything else since. Fitch understands that it expects to come back to market for more debt to fund construction in the near-to-medium term. Fitch estimates that any such additional debt should be affordable at the current rating level; however, the agency has not been provided with any specific details relating to the quantum of additional debt expected to be raised nor terms of such debt and, as such, will assess such debt when more information is provided.
Fitch's base case reflects steady 2% tariff increases, combined with moderate but slowing traffic growth, falling from 2% starting in 2015/2016 to 1% from 2021 onwards, giving limited credit to additional capacity coming online over coming years. Opex growth is assumed to remain at around 5% per annum. Fitch's rating case assumes a contraction of traffic in 2016 and 2017, reflecting increasing demand elasticity to continuing average toll increases, followed by stabilization thereafter. Opex growth is assumed at 7% until 2020. Metrics in both scenarios demonstrate the resilience of the HCTRA credit, with senior net DSCR averaging 3.80x in the base case and 3.00x in the rating case, and total net DSCR averaging 2.9x in the base and 2.3x in the rating case.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Oct. 16, 2013).
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=720736
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826266
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