Fitch Affirms Chesapeake Bay Bridge & Tunnel Dist, VA's Sub GRBs at 'A-'; Outlook Stable
Fitch does not rate the district's approximately $35.9 million parity outstanding series 2010A and series 2011A variable-rate refunding GRBs. The GRBs are secured by a subordinate lien on net revenues, subject to a senior lien, on which debt matured in fiscal 2011. CBBT's senior lien remains open with no debt outstanding.
The rating affirmation and Stable Outlook are due to continued solid financial metrics and steadily growing traffic, coupled with a senior lien that remains open. The facility has a mature traffic base with an exposure to cyclical commercial vehicle traffic. Construction of the parallel Thimble Shoal Tunnel will require significant additional debt; as part of the financing it is expected that the existing debt outstanding will be fully cash defeased and, therefore, should not impact the financial profile of the existing bonds.
KEY RATING DRIVERS
Revenue Risk Volume: Midrange
Mature Traffic Base with Commercial Exposure: The District's monopolistic bridge and tunnel facility is the only link between the metropolitan Hampton Roads region and Virginia's eastern shore. Volume has been relatively stable over recent years, with a 0.76% compound annual growth rate (CAGR) over the last decade and a more recent five-year 1.9% CAGR. However, the facility is exposed to cyclically volatile seasonal leisure traffic and is moderately dependent on heavy truck volume, which over the past five audited years generated 22% of toll revenues.
Revenue Risk Price: Stronger
Moderate Price Flexibility: Historically, toll rates increased about every 10 years by roughly 20%. However, the District last increased the rate by 10% on average in 2014 and plans to continue incorporating this increase every five years going forward. The increases have not materially impacted the traffic profile. While the round trip toll rate is high, a lack of convenient competitive alternatives coupled with above-average regional demographics provide the District with moderate rate-making flexibility. The framework allows the District to set tolls at levels necessary to maintain capital assets, and the district's proposal to increase tolls 10% every five years seems reasonable.
Infrastructure Renewal/Obsolescence: Midrange
Substantial Future Debt Plans: The District has accepted a contractor bid for the Thimble Shoal Tunnel and plans to begin construction in fall 2017, with an estimated project cost of $750million (total associated costs of $1.1 billion, to be funded via a combination of debt, cash and ongoing revenues).
Debt Structure: Midrange
Open Senior Lien: A subordinate lien of toll revenues secures the rated debt, but the senior lien remains open, albeit with no outstanding debt, which constrains the score to 'midrange.'
Strong Financial Metrics: Leverage in fiscal 2015 (ends June 30, last audited year) was among the lowest in Fitch's portfolio at 0.2x on a net debt/cash flow available for debt service (CFADS) basis, excluding reserves in the general fund. The debt service coverage ratio (DSCR) has remained above 3.0x since senior lien debt matured in fiscal 2011, and has remained above 1.5x on a combined basis since 2000. The District's cash balances are healthy at over 1,400 days cash on hand. For fiscal year (FY) 2016 (on an unaudited basis), leverage was in negative territory at -2.36x due to the District's continual build-up of cash in anticipation of the Thimble Shoals Tunnel project award, 4.05x DSCR, and over 4,000 days' cash.
Peers: CBBT's peers include Florida Department of Transportation's Alligator Alley (Alligator Alley, rated 'A+'; Outlook Stable) and Mid-Bay Bridge Authority (Mid-Bay, rated 'BBB+/BBB'; Outlook Stable). Alligator Alley's toll rates are among the lowest in the nation with a similar financial profile as CBBT (high DSCR and liquidity and low leverage) while Mid-Bay is rated lower partly due to its higher than average leverage (near 14x) and dependence on future revenue growth.
Negative: A financing structure that leaves general resolution bondholders with minimum financial cushion just above the 1.2x rate covenant could result in rating pressure.
Positive: If a financing occurs as scheduled later in 2016, the existing bonds will be defeased; rating upgrade is unlikely.
SUMMARY OF CREDIT
Fiscal 2015 traffic and revenue increased by 3.2% (to 3.66 million) and 9.5% (to $53.2 million), respectively relative to fiscal 2014. A 10% toll increase occurred in January 2014, so fiscal 2015 was the first full year of the new rates. Approximately 9% of total traffic is commercial accounting for 22% of toll revenues, demonstrating a moderate dependence on relatively volatile commercial throughput to generate revenue.
On an unaudited basis, fiscal 2016 traffic and revenue was up 6.6% and 5.2%, respectively. The toll rate for passenger vehicles is currently $13 (reflecting a $1 increase above the previous level) while heavy trucks were increased $4 to $39 for a one way trip. The next rate increase is expected in January 2019.
Operating expenses for fiscal 2015 declined 7.7% to $14.1 million, following a 2.6% increase in fiscal 2014 - excluding preservation expenses that are determined annually in advance to be the investment needed to maintain infrastructure in a good condition as determined in an independent annual inspection of the facility. The facility is more than 50 years old with two lanes in each direction except within the two tunnels where only one lane in each direction is provided, and there are no alternative routes in the event of accidents. The Thimble Shoal will add a parallel tunnel, thus creating a two-lane roadway in each direction at one of the tunnels.
DSCR has remained above 3.0x since fiscal 2012 and reached a healthy 3.93x in fiscal 2015. The debt service profile is broadly stable through maturity in 2026, ranging from $7 million to $16 million. Existing leverage is very low at 0.2x on a net debt to CFADS basis (even when excluding the general fund).
On an unaudited fiscal 2016 basis, operating expenses increased only 0.4%, DSCR was 4.05x and leverage entered negative territory at -2.36x due to the district accumulating significant cash reserves in advance of the new tunnel construction. Further, net revenues of $46.1 million could sustain annual 10% declines until debt maturity while still meeting all obligations on a 1.0x basis, reflecting the resilience of the current debt structure.