SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the 95 Express Lanes LLC's (95 Express) $242 million senior private activity bonds (PABs), issued through the Virginia Small Business Financing Authority. Fitch has also affirmed the 'BBB-' rating on 95 Express' $321 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook has been revised to Positive from Stable.
The senior lien revenue bonds are secured by a first-priority lien on all assets of the project including net revenues and the TIFIA loan is secured by a second-priority lien. The TIFIA loan will spring to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.
RATING RATIONALE
The rating reflects the project's location with a congested, affluent, and highly urbanized commuting corridor in the Northern Virginia and Washington D.C. region with few competing options for motorists. The rating also reflects a high degree of rate-setting flexibility and a new facility with limited capital needs over the foreseeable future. The project's operating performance has been short but very strong, with high toll rates pushing base case minimum and average scheduled debt service coverage (DSC) over the life of the debt to 2.20x and 2.91x, respectively.
The Outlook revision to Positive acknowledges that maintenance of such strong financial metrics would lead to an upgrade. The project's closest peers include other managed lane (MLs) projects along highly congested corridors, including North Tarrant Express Mobility Partners MLs (Segment 1 & 2) in Texas and Riverside County Transportation Commission's (RCTC) SR-91 MLs in Southern California, which both service areas with solid growth characteristics and limited alternative routes.
KEY RATING DRIVERS
Revenue Risk-Volume: Midrange (Corridor- Stronger, ML Characteristics- Weaker)
Solid Service Area with Strong Commuter Base: The project benefits from its location within the highly congested I-95 corridor, serving a wealthy base of commuters who travel between Virginia suburbs and Washington D.C., amongst other locations. Fitch views the region as economically strong and diverse. Competition from alternative routes is limited, and there are structural provisions that mitigate high HOV levels should they surpass certain thresholds. These strengths are somewhat offset by a short history of operations and demand for the managed lanes.
Revenue Risk- Price: Stronger
Unlimited Rate Raising Flexibility: The operator has the legal authority to raise non-exempt vehicle rates to any level at its discretion without interference from any governmental or regulatory body. This strength is slightly offset by its inability to modify the exempt vehicle policy should HOV3+ market share rise materially above projected levels.
Infrastructure & Renewal Risk: Stronger
New Asset, Good Maintenance Funding Mechanism: The lanes are in new condition with low maintenance needs over the intermediate term. Future maintenance funding will be sourced from a capital expenditure facility will that pre-fund a major maintenance reserve with a five year look-forward mechanism. The long, 40-year debt free tail after TIFIA loan maturity further mitigates asset reinvestment risk.
Debt Structure: Midrange
Fixed Debt and Satisfactory Covenants: The debt service profile consists of fixed-rate debt with no refinance risk. All debt is senior or springs to senior and the TIFIA structure benefits from a deferability provision that provides significant payment flexibility. Structural features are adequate overall with moderately sized debt service reserve accounts, and a nine-month TIFIA ramp-up reserve.
Solid Coverage, Breakeven Metrics: Fitch's rating case produces a respectable minimum and average total scheduled DSCR of 1.59x and 2.32x, respectively. The rating case breakeven revenue growth rate of 3.3% from fiscal 2016 reflects a satisfactory degree of cushion against lower than expected revenue generation. As is typical for newly constructed MLs, leverage is initially high but moderates over time.
Peers: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are highly congested, particularly during peak hours such as North Tarrant Express Mobility Partners MLs (Segment 1 & 2) in Texas and Riverside County Transportation Commission's (RCTC) MLs in California which also serve areas with relatively strong demographic characteristics and limited alternative routes. Despite some differences in tolling mechanisms, policy and lane configuration, Fitch believes all three facilities should, in the medium term, build up moderately high pricing power and be in a position to levy high toll rates.
RATING SENSITIVITIES
Negative- An unexpectedly negative shift in operating performance or an aggressively-structured re-leveraging resulting in rating case scheduled total DSCR of less than 1.60x for a sustained period.
Positive- Maintenance of solid financial metrics with scheduled total DSCR of at least 1.80x under Fitch's rating case for a sustained period.
PERFORMANCE UPDATE
The project has performed extremely well since its operational commencement in December 2014. Actual toll revenues of $54.8 million in calendar year 2015 outperformed Fitch's base and rating case expectations by 48% and 60%, respectively, and year-to-date performance in 2016 is outperforming at similar levels. Actual performance is well-exceeding the sponsor's revised revenue expectations from 2014, which were revised downward from prior projections predominantly during the project's ramp-up phase. Project revenues are just moderately exceeding the sponsor's original projections from 2012 by 5%-10%.
The solid revenue out-performance stems from strong toll rates, which have more than offset lower than projected tolled traffic levels of 9.7 million in 2015. These high toll rates reflect the project's affluent catchment area, high congestion levels, and significant time savings that management estimates at about 20-40 minutes. It is possible that a portion of out-performance may additionally be attributable to a quicker-than-projected ramp-up period, which Fitch projected would last through calendar 2017.
Fitch Base Case
Fitch views the sponsor case as reasonable and adopted it as the base case. The sponsor case uses a recently developed three-year revenue projection through fiscal 2019 and thereafter revenues revert to projections developed in 2012 by the original traffic and revenue consultant. In light of operational out-performance to date, the original 2012 revenue projections may be exceeded, especially in the intermediate term.
Under the base case revenues rise by a compounded annual growth rate (CAGR) of 7.5% and 6.6% over the next five- to 10-years and fall thereafter, reflecting a combination of traffic growth and toll rate growth. The average scheduled DSCR over the next five to 10 years equals a robust 3.1x and 2.9x, respectively. Over the life of the debt DSCR averages 2.9x and bottoms out at 2.2x in 2044.
Fitch Rating Case
Fitch's rating case now assumes ramp up ended on June 30, 2016 instead of Dec. 31, 2017 as originally projected, and additionally assumes traffic and toll rate growth of 0.5%-1.5% and 3.5%-4%, respectively. Operations and maintenance costs are assumed to grow 20 basis points higher than in the base case.
The rating case assumptions result in five- and 10-year toll revenue CAGRs of 5.6%. The revenue CAGR over the life of the debt is 4.7%. The average scheduled DSCR over the next five and 10 years equals a solid 2.4x. Over the life of the debt DSCR averages a somewhat lower 2.3x and bottoms out at 1.6x in 2044. Fitch conducted a toll revenue breakeven calculation that suggests revenues must rise by a minimum CAGR of 3.3% to prevent DSCR from falling below 1.0x in any given year. The breakeven revenue growth rate would have been lower still if the calculation had reflected available cash and TIFIA deferability.
The project consists of 28 miles of reversible MLs along a portion of the I-95 corridor in northern Virginia, passing through the highly urbanized counties of Prince William, Fairfax, Alexandria, and Arlington on its way to Washington D.C. The project connects with Capital Beltway, a ring-road that encircles Washington D.C., allowing vehicles making longer trips to circumvent the city.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)
https://www.fitchratings.com/site/re/886038
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013893
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013893
Endorsement Policy
https://www.fitchratings.com/regulatory
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