Fitch Affirms Fort Bend County, TX's Sr. Lien Toll Road Revs at 'A+'; Outlook Stable
The 'A+' rating reflects continued strong and growing traffic and revenue performance on the authority's two-segment toll road system, while also taking into account the limited catchment area that it serves, exposing it to adverse fluctuations in a narrow segment of the Houston, TX economy. The rating also reflects the authority's prudent financial management, which is similarly expected to help support robust coverage of approximately 3x through the medium term. The system's moderate senior leverage (estimated to peak at around 4x in 2016 in Fitch's rating case) and strong liquidity with over 1,700 days cash on hand (DCOH) provide further rating stability.
KEY RATING DRIVERS
Developing Network, Moderate Volatility [Revenue Risk: Volume - Midrange]: The system's two toll roads opened in 2004 and 2005 and have experienced some traffic volatility as a result of the recession and toll increases. Over the past five years, traffic growth across the system has remained positive, exhibiting a compounded annual growth rate (CAGR) of approximately 10.9% for the period 2010-2015, incorporating changes in toll configuration. The traffic base is nearly 100% passenger vehicle oriented and the facilities are on the western edge of the strong and growing Houston MSA. The Westpark Tollway and Fort Bend Parkway both benefit from direct access to the Sam Houston Tollway loop around Houston; however, there is some competition from alternative routes.
Demonstrated Rate-Making Flexibility [Revenue Risk: Price - Stronger]: Since fiscal 2012, the authority has followed a toll policy providing for automatic annual increases at the greater of 2% or CPI-U. The average toll rate remains on the moderate side at approximately $0.23 per mile and all-electronic tolling makes implementing rate increases easier.
Manageable Near-Term Capital Program [Infrastructure Development/Renewal - Stronger]: The two system roadways comprise only 60 lane miles with minimal maintenance needed given the relatively young age of the assets. Funding for the phase I and II Westpark expansion projects is coming from a variety of sources including the recent series 2016 senior lien issuance, and there should be sufficient flexibility to shift the timing of any future projects to coincide with an adequate cash flow-generation profile. Fitch views there to be minimal completion risk associated with the currently planned expansionary projects given the relatively small and routine nature of the construction and the authority's favorable history of scheduled delivery and budget.
Conservative Debt Structure [Debt Structure - Stronger]: Outstanding senior lien debt is fixed-rate and fully amortizing with a relatively level debt service profile. A cash-funded debt service reserve fund equal to maximum annual debt service (MADS) provides additional credit support.
Solid Financial Metrics and County Support: Due in part to FBCTRA's strong cash position, projected senior leverage is moderate at around 4x on a net debt-to-CFADS basis for fiscal 2016 and should moderate to the 3x range by 2020, both consistent with the 'A+' rating. Total leverage, including subordinate debt backed by Fort Bend County's general obligation pledge (rated 'AA+'), is higher at 10.4x. Fitch's rating case results in senior debt service coverage ratio (DSCR) - calculated on a net basis - remaining at or above 2.7x through the medium term.
Peer Analysis: Fitch-rated peers include the small expressway network of Richmond Metropolitan Authority (RMA; 'A'/Outlook Stable) and the large network of Harris County Toll Road Authority (HCTRA; 'AA'/Outlook Stable). HCTRA also serves the strong Houston MSA, but is a more mature system with a larger footprint and greater franchise strength (revenue risk - volume: stronger assessment) partially accounting for the rating differential. FBCTRA demonstrates greater pricing power and more robust coverage levels than RMA, but weaker volume due to its more limited catchment area.
Negative: Additional leverage used to fund future projects that materially dilutes projected coverage ratios below 2x.
Negative: Higher than anticipated expense profile or delays in implementing adequate toll adjustments that materially affects the financial metrics.
Negative: Material underperformance of new system segments leading to a deterioration of the authority's financial position.
Positive: Given the system's small asset size and limited catchment area, upward migration is unlikely.
SUMMARY OF CREDIT
The Fort Bend Parkway and Westpark Toll Road have demonstrated resilience despite their susceptibility to macroeconomic factors over their somewhat limited operating history. Since 2010, overall system traffic has increased at a five-year CAGR of 10.9%, with growth coming from both toll roads, albeit stronger on the Fort Bend Parkway in fiscal 2015 due to a switch from ramp and mainline gantries to all mainline gantries. More recently, transactions grew by 9.4% in fiscal 2014 and 25.3% in fiscal 2015 to approximately 36.3 million. However, 2015 transactions are not readily comparable to 2014 transactions as a result of the tolling configuration change midyear, which results in more transactions, as noted above. Prior to this change, however, transactions were averaging 8% growth and given the 2015 revenues, it appears that a similar level of growth was maintained throughout the year and surpassed Fitch's base case estimates. Fiscal 2016 performance appears to be in line with historical growth trends.
Over the same five-year period (2010-2015), toll revenues grew at a robust CAGR of 9.3% as a result of transaction growth and the authority's adoption of an automatic annual toll increase, at the greater of 2% or CPI-U, following Harris County's lead. Further, FBCTRA's all-electronic tolling system makes implementing these increases easier. The most recent rate increase was effective April 28, 2015. Fitch views the authority's demonstrated willingness to raise rates favorably and believes that management will take the necessary actions to preserve strong coverage levels with adequate toll rates.
The existing system is relatively new, being built in 2004 and 2005, and remains in excellent condition. FBCTRA does not anticipate any major capital expenditure needs to the existing facility until at least 2020, when actions will be taken to ensure the system's 40-year useful life. Phase I and II of the Westpark Tollway extensions are now under construction and should be completed in approximately two-to-three years. Further expansions to the system are possible; however, FBCTRA appears to have flexibility with regard to the timing of future projects. In terms of non-capital expenditures, FBCTRA will establish a formal budget for special projects in fiscal 2017 and monitor debt service coverage as a gauge for determining the baseline level.
The outstanding series 2012, 2014 and 2016 senior lien bonds are fixed-rate, fully amortizing bonds with a relatively level debt service profile. The senior lien debt service reserve fund is cash funded at MADS. Fitch views this conservative structure as a credit strength. Another credit strength, and adding financial flexibility, is FBCTRA's robust unrestricted cash balance of $51.3 million in fiscal 2015, which equates to over 1,700 DCOH. Fitch also notes that the county's O&M tax pledge, as well as the unlimited GO tax pledge for the outstanding subordinate bonds, provide additional support in a downside scenario.
The Fitch base case builds off of audited fiscal 2015 transactions with slightly more tepid growth assumed than forecast by the authority's T&R consultant. The Westpark Tollway extension is forecast to open in 2018. Expenses are consistent with the sponsor case (2016 budget followed by 3% annual growth) and violation revenues are estimated at 4% of annual toll revenues based on the historical average. The result is robust senior net coverage of no less than 2.89x and a long-term average DSCR of 4.75x. Fitch's rating case, which assumes approximately half of the traffic growth experienced in the base case as well as increased expense growth of 4% per annum, results in a still strong average net senior coverage of 3.56x with a low of 2.75x. Senior lien leverage in Fitch's rating case is projected to peak at a moderate 4.1x on a net debt-to-CFADS basis for fiscal 2016, with total leverage higher at 9.6x, including the subordinate lien bonds.
Providing additional credit strength is FBCTRA's lack of dependence on future revenue growth to meet its obligations. Based upon fiscal 2015 CFADS (which does not include any future revenues for the West Park extension), the authority could cover its MADS (including debt service for the West Park extension) nearly 2x. Fitch also conducted a total DSCR breakeven analysis on its rating case through 2032 that resulted in a strong revenue growth breakeven rate of -0.5%, including the depletion of all available liquidity. Importantly, since this was run on total DSCR, senior DSCR never falls below 1.28x under this revenue reduction analysis. FBCTRA's high liquidity position provides even further downside protection.