Fitch Affirms Toll Road Investors Partnership II's Revs at 'BB+'; Outlook Stable
KEY RATING DRIVERS
The rating reflects Dulles Greenway's susceptibility to demand volatility due to non-tolled alternate routes within Loudoun County. TRIP II currently benefits from short-term rate-making predictability via scheduled, above-inflationary annual toll increases per the Virginia Highway Corporation Act, subject to annual approval by the Virginia State Corporation Commission (SCC) through 2020. Credit quality could be compromised beyond 2020 as TRIP II's financial profile relies on toll increases, with an estimated revenue growth breakeven of 1.03% through debt maturity in 2056. TRIP II's back-loaded debt structure is mitigated by the partnership's early redemption debt service schedule, cash-trap triggers, and healthy reserve balances. The rating case financial profile reflects narrow 10-year average debt service coverage ratios (DSCRs) of 1.24x and relatively high five-year leverage of 12.67x net debt to cash flow available for debt service.
Revenue Risk - Volume: Midrange
Healthy Service Area with Competition: Dulles Greenway benefits from a primarily commuter base with very minimal exposure to commercial traffic within the economically strong metro DC service area. The road has, however, experienced a sizable amount of traffic volatility, with a peak-to-trough of roughly -24%, as a result of the Great Recession, some elasticity to toll increases, and several non-tolled alternatives existing in the vicinity. The Greenway's toll rates are higher than most peers at $0.37 peak per mile, though comparable to privately-owned peers within similar, healthy service areas.
Revenue Risk - Price: Midrange
Short-Term Rate-Making Predictability: TRIP II's short-term financial position is somewhat stabilized by the current legislation, which provides for annual, above-inflationary toll increases through 2020. TRIP II's history of raising rates above inflation despite political issues is viewed positively. Rate-making ability beyond 2020 could, however, be constrained in the event a similar tolling arrangement is not obtained.
Infrastructure Development & Renewal: Midrange
Manageable Capital Works: Dulles Greenway's six-year, $16.8M cash-funded capital plan is manageable, with roughly 80% of the plan allocated to repaving. TRIP II's ability to recover capital expenses via toll increases is somewhat constrained given the current rate framework, though largely mitigated by the Greenway's status as a young, simple asset with minimal commercial traffic exposure and no near-term capacity constraints, which should provide for marginal capital needs.
Debt Structure: Midrange
Back-loaded Debt, Flexible Amortization Schedule: TRIP II's debt structure features fixed-rate, senior debt with several bullet maturities. The back-loaded debt structure is largely offset by the mandatory early redemption feature, which effectively smooths the partnership's debt service profile to gradually escalate at a 40-year compounded annual growth rate (CAGR) of 0.76% rather than balloon. Missing an early redemption payment is not an event of default, though deferral of planned early redemptions could cause debt obligations to balloon; however, this risk is partially mitigated by the requirement to annually trap excess revenue when the 1.25x DSCR (including early mandatory redemptions) rate covenant is breached.
High Leverage, Narrow Coverage: TRIP II's rating case financial profile is comparatively weaker, characterized by high leverage and narrow DSCRs. Weaker financial metrics coupled with recent and potential near-term rate covenant breaches are inconsistent with investment grade. Unrestricted cash and O&M reserve balances of nearly $8 million or 165 days cash on hand somewhat mitigate TRIP II's weaker debt metrics.
Peer Group: Dulles Greenway's peers include similar commuter-based facilities such as North Carolina Turnpike Authority's Triangle Expressway System (Triangle Expressway, rated
'BBB-'/Outlook Stable) and San Joaquin Hills Transportation Corridor Agency (SJHTCA, 'BBB-'/'BB+'/Outlook Stable). Triangle Expressway and SJHTCA's higher senior ratings reflect higher rating-case average coverage levels of 1.41x (on a minimum loan life coverage ratio, LLCR, basis) and 1.44x, respectively.
Negative: Underperformance of traffic, revenue or maintenance of expenses which decrease DSCRs below 1.2x over a prolonged period could pressure the rating.
Negative: Changes in the pricing regime resulting in reduced overall tolls and/or below inflationary toll increases could pressure the rating.
Positive: Continued improvement in traffic growth which increases DSCRs to the 1.4x - 1.5x range on a sustained basis could result in positive rating action.
SUMMARY OF CREDIT
Fiscal 2015 (ended December 31) traffic grew a healthy 5.4%, to 18.7 million transactions, and is currently up an additional 6.0% through August. Positive developments in traffic are driven by improving economic conditions, lower fuel prices and an increase in construction-related traffic along the southern portion of the road, where Phase II of the Silver Line, the new segment of Washington DC's Metrorail, is currently being built. Fitch expects traffic growth on the Greenway to be more modest once the Silver Line is completed by 2020, though the new Metrorail line is not expected to draw a material amount of traffic from the Greenway given comparable expected fares and limited overlap of the Greenway and the Silver Line, making transfer from the Greenway to the Metrorail somewhat inconvenient for drivers considering the likely flow of traffic.
The Greenway has continued to benefit from toll rate increases above inflation, at roughly 2.5% in 2015 and 2.8% in 2016. Revenue grew a robust 8% in 2015 and is currently up approximately 9.3% through August as a result of traffic growth and toll increases. Fitch has assumed an average toll increase of 2.8% alongside a conservative traffic growth assumption of 3% in 2016, translating to an expectation of 6% revenue growth for the year. Operating expenses grew 9.9% in 2015, due to increases in property taxes and increase in electronic toll and credit card processing fees. Operating expenses through August have remained relatively flat, which management attributes to utilizing salt inventory from purchases made in 2015. Fitch expects that operating expenses should grow at a rate slightly above inflation going forward, and has assumed 2.8% expense growth in 2016 for conservatism.
In early September, the Virginia Supreme Court ruled that toll increases will continue to be allowed on the Greenway despite politician's claims that tolls were excessive and contributed to congestion within Loudoun County. The Supreme Court's ruling provides comfort that tolls will continue to increase through 2020 per the current legislature, subject to annual approval by the SCC, though rate increases beyond 2020 remain uncertain.
Fitch's base case assumes gradual erosion of traffic growth from 2016 through debt maturity in 2056, from 1% to 0%, reflecting a maturing system. Average tolls are assumed to increase by 3% through 2020 per the current agreement, with inflationary growth of roughly 2% assumed thereafter. Operating expenses are assumed to grow 2.8% through 2056. Fitch's rating case assumes gradual erosion of traffic growth at half the rate of the base case, average toll increases of 2.5% through 2020 with 1.5% growth thereafter, and operating expense growth 50 bps higher than the base case. Assumptions for both cases are appropriately conservative given historical trends amid potential volatility.
Fitch's base and rating case yield 10-year average indenture DSCRs of 1.31x and 1.24x, minimum LLCRs of 1.51x and 1.24x, and five-year leverage of 11.99x and 12.67x, respectively. In comparison to Fitch's toll road criteria guidance for standalone facilities, TRIP II's projected rating-case coverage is below the minimum threshold of 1.4x and rating-case leverage is above the 10x threshold for the 'BBB' category. TRIP II's relative financial weakness, evidenced by repeated failure to meet the 1.25x DSCR rate covenant, and the absence of a long-term legal contract which allows for periodic toll increases above inflation, remain key credit concerns which constrain the rating below investment grade. Inability of the partnership to obtain a similar tolling agreement once the current arrangement expires in 2020 could pressure the rating, given TRIP II's expected reliance on toll rate increases of at least 1.5% - 2% (assuming modest traffic growth) to maintain its current financial position.
TRIP II is the special purpose company that owns the Dulles Greenway. The Dulles Greenway is a six-lane, 14-mile, limited access toll highway in Loudoun County, Virginia, a suburb of Washington, DC, connecting Dulles International Airport with US-15 in Leesburg. It serves as an extension of the state-owned Dulles Toll Road, which connects Dulles Airport and other high density employment centers in the corridor to the rest of the Washington metropolitan area. The two toll roads connect at a toll plaza, where drivers pay a single toll that is allocated to the two operators.
The senior bondholders have a first priority lien on the security interest within the Trust Estate which includes all of the rights to net revenue, real estate interest, rights under the easements and rights, title and interest in the equipment.