SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB-' rating on the $20.4 million series 2014 tax-exempt private activity bonds (PABs) issued by the Colorado High Performance Transportation Enterprise, (HPTE) on behalf of Plenary Roads Denver, LLC, (PRD) for the US 36 and I-25 Managed Lanes Project (the project), $60 million Transportation Infrastructure Finance and Innovation Authority (TIFIA) subordinate project loan to PRD for Phase 2 of US 36 (the Phase 2 Loan), and $55.4 million senior TIFIA loan to HPTE, issued for Phase 1 of the US 36 managed lanes (the Phase 1 Loan) and assumed by Plenary Roads upon successful completion of Phase 1 of the project.
The Rating Outlook for the PABs and both TIFIA loans is Stable.
RATING RATIONALE
The 'BBB-' rating reflects the project's location in the affluent Denver metropolitan area along a growing corridor with moderate congestion. The rating is further supported by the new condition of the asset, a pre-funded major maintenance reserve, and a conservative debt structure. These strengths are somewhat offset by revenue and price volatility inherent to managed lanes, dependence on residential and commercial development to support debt service and significant operational and demand risks given that the asset does not yet have a material operating history. High occupancy vehicles (HOV) and Bus Rapid Transit (BRT) use could limit the desirability of the facility.
KEY RATING DRIVERS
Revenue Risk: Volume - Weaker (Corridor Volume: Midrange; Managed Lanes Characteristics: Weaker)
Developing Corridor with Moderate Congestion: The asset serves as an important route connecting the currently tolled and operational I-25 express lanes in downtown Denver to western suburbs and Boulder. As with other managed lane assets, forecast risk does exist, particularly as the tolling policy and pricing structure could change and there is some dependence on suburban development. The project includes development of a single, toll-paying managed lane in each direction on US 36. HOV and BRT use could limit the desirability. Given early stages of operations, there is not enough traffic or revenue data to provide additional analysis.
Revenue Risk: Price - Midrange
Rate-Making Flexibility: The framework in place contains flexibility to allow for toll increases to match inflation and to manage traffic and financial performance. Additionally, the straightforward tolling mechanism that has been used on I-25 for some time and is now applied to the whole project, and users' familiarity with tolling and this mechanism specifically are positives for the project. The project is somewhat constrained by limited pricing power. Maximum toll rates at project opening are somewhat high relative to rates on comparable assets and could limit PRD's ability to impose real toll increases over the life of the concession in periods of economic stress. In addition, the requirement that toll rates during some periods of the day are no less than the Regional Transportation District's (RTD) express bus fare may limit PRD's ability to maximize revenue if toll elasticity is greater than projected.
Infrastructure Renewal and Replacement - Stronger
Infrastructure Risk for this New Asset is Limited: The recently completed asset is in new condition and lifecycle costs will be paid from project cash flows that pre-fund a major maintenance reserve on a five-year rolling basis. PRD has contracted with Broadspectrum (formerly Transfield Services, Limited), for operating and maintenance (O&M) and renewal and replacement (R&R) services. The financings provide a 22-year tail period following the PABs debt maturity, and 15- and 16-year cushions remain following maturity of the Phase 1 and 2 loans, respectively, further mitigating asset reinvestment risk.
Debt Structure - Midrange
Fixed-Rate with Structural Protections: All senior and subordinate project debt is fixed-rate with no refinance risk. The proposed PABs have a fixed payment schedule while the two TIFIA loans are structured to have flexible amortization profiles through mandatory and scheduled payments as well as interest deferrals for the first five years of operations. Equity distribution triggers, additional bonds tests, and other covenants are viewed as adequate for the investment grade rating level. Leverage on the senior and subordinate liens is favorably reduced by the presence of the junior subordinate loan from Northleaf Capital.
Adequate Financial Flexibility: Financial metrics suggest a good overall capacity for the project to withstand sensitivities of both lower than projected traffic growth in the corridor and higher expenses over the life of the concession. Under such a Fitch rating case scenario the average loan life coverage ratio (LLCR) for senior and TIFIA debt service is a solid 1.87x, while the project life coverage ratio (PLCR) is much higher at 7.39x, reflecting the project's long tail. The debt service coverage ratio (DSCR) averages 1.88x with a minimum of 1.3x over the life of the debt, which is consistent with other managed lanes projects in the 'BBB' rating category. Liquidity in the form of a $6 million ramp-up reserve and a separate cash reserve provide additional flexibility, particularly for underperformance in the early years following project completion. Leverage in the rating case is high, as is typical for newly constructed managed lanes projects, but moderates over time.
Peer Analysis: The closest peers from Fitch's rated portfolio include other ML facilities rated in the 'BBB-' category such as I-77 Mobility Partners' (NC) (I; 'BBB-'/Outlook Stable) and Riverside County Transportation Commission's (RCTC; 'BBB-'/Outlook Stable) SR-91 MLs. Both PRD and I-77 have had some historical corridor volatility and moderate dependence on suburban development, partially mitigated by the respective areas' diverse employment bases and strong wealth levels. ML revenue generation on both facilities is expected from narrow peak windows of meaningful congestion on part of the project's facilities. Unlike RCTC SR-91, PRD has almost achieved full completion and has commenced operations. However, pricing power may take longer to build than on RCTC SR-91 given the lack of familiarity with tolling in the service area, and this is reflected in the Fitch base and rating case scenarios.
RATING SENSITIVITIES
Negative:
-- Additional project borrowings resulting in negative pressure on projected debt service coverage ratios could erode credit quality.
-- Materially slower ramp-up, inadequate level of managed lane transactions due to lower overall corridor demand, toll sensitivities, changes in economic conditions, or other operational constraints that result in compounded adverse financial impacts below Fitch's rating case projections with resulting coverage DSCR (mandatory TIFIA loans and PABs) below 1.3x on a sustained basis could result in a downgrade.
Positive:
-- Sustained traffic and revenue performance resulting in rating case DSCR materially in excess of 1.80x would result in positive rating action.
CREDIT UPDATE
Plenary Roads Denver, LLC was selected by Colorado High Performance Transportation Enterprise to finance, design, and construct the U.S. 36 Phase 2 Corridor (88th Street to Table Mesa Drive) and provide the systems, operations, and services related to the managed lanes on the Phase 2 Corridor, the Phase 1 Corridor (U.S. 36 Pecos Boulevard to 88th Street), and the I-25 managed lanes under a 50-year agreement.
The construction is substantially complete and toll collection has commenced on all segments of the road. The expected 2016 gross revenues for the project are slightly above original forecast, and O&M expenses are in line. The project maintains a ramp-up reserve fund to alleviate short-term traffic issues, if such arise. It is too early in the ramp-up stage to draw any conclusions about traffic and revenue trends, as it will be important to monitor the transition to HOV3+ standard for the MLs in January 2017, and to evaluate how the transition impacts the project.
PERFORMANCE UPDATE
Both Phase 1 and 2 of the project are complete and operational, and revenues are slightly above expectations. Phase 1 became operational in July 2015, and Phase 2 opened to the public in January 2016 and the toll collection commenced in late March 2016. The design build joint venture (DBJV), made up of Granite Construction Co. and Ames Construction Co., both experienced contractors that also built Phase 1 of the project, is continuing to correct final punch-list activities, and full completion is expected by Dec. 31, 2016.
The dispute regarding delays around the South Boulder Creek area (due to the floodplain study provided by CDOT) has been reviewed and ruled on by the Dispute Review Board (DRB). PRD agreed with the DRB recommendations, while HPTE did not. The DRB process is a non-binding and required part of the dispute resolution process outlined in the Concession Agreement. While the dispute resolution process continues, HPTE and PRD also are continuing settlement discussions to seek a negotiated resolution of the dispute. PRD and HPTE are concurrently negotiating a change order that would revise the planned work completion date and planned full services commencement date.
FITCH CASES
Fitch's base case forecast suggests that the project's DSCR for senior and TIFIA loans will average 3.22x and stay above 1.89x over the life of the debt assuming utilization of reserve funds, and will average 3.08x and reach a minimum of 1.21x without such utilization. The base case assumes first year ramp-up revenue growth of 54.6%, second year ramp-up growth of 35.7% and normalized 5.95% growth thereafter. The average LLCR for total debt service is a solid 3.44x, while the project life coverage ratio (PLCR) is much higher at 13.44x, reflecting the project's long tail.
Fitch's rating case forecast suggests that the project's total DSCR will average 1.88x and stay above 1.3x over the life of the debt assuming utilization of reserve funds and will average 1.74x and reach a minimum of 1.07x without such utilization. The rating case assumes similar ramp-up revenue growth as the base case and normalized 4% growth thereafter. Under the rating case scenario, the average LLCR for senior and TIFIA debt service is a solid 1.87x, while the PLCR is much higher at 7.39x, reflecting the project's long tail. The DSCR averages 1.88x with a minimum of 1.3x over the life of the debt, which is consistent with other managed lanes projects in the 'BBB' rating category.
Fitch breakeven analysis indicates that under the base case project revenues would need to grow 4% on an annual basis post 2019 to maintain minimum DSCR of 1x.
Liquidity in the form of a $6 million ramp-up reserve and a separate cash reserve provide additional flexibility, particularly for underperformance in the early years following project completion. Leverage in both the base and rating case is high, as is typical for newly constructed managed lanes projects, but moderates over time.
For more information, please reference "Fitch Affirms Plenary Road Denver, LLC's PABs Senior Notes and TIFIA loan at 'BBB-'; Outlook Stable" dated Feb. 24, 2015.
Additional information is available at '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
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