Fitch Affirms San Joaquin Hills Transp. Corridor Agency, CA Bonds; Outlook to Positive
The Positive Outlook reflects continued improvement of SJHTCA's financial performance following a restructuring in late 2014. Now entering its second full fiscal year of operations following the restructuring, the agency's 2016 DSCR (unaudited, year ends June 30) was 1.73x on a senior basis and 1.48x on a combined basis. For 2015 (the last audit), DSCR was unusually higher, as it just reflects a partial year of debt service payments following the restructuring. Leverage has improved, from 19.3 in 2012 to 10.2 on a senior basis and 12.0 aggregate in 2016. Under the Fitch rating case, these figures are projected to decline further despite an accreting debt structure, with the senior dipping below 10 in 2021 and the aggregate basis crossing this threshold in 2026. (Leverage figures give credit to supplemental reserve and debt service reserve funds but exclude the Use & Occupancy fund.)
Despite a rising debt service schedule, DSCR under the base and rating cases are projected to average higher than that achieved in 2016: 1.78x and 1.76x over the next five years, and 2.00x and 1.80x over the life of the bonds to 2050. Positive rating migration will be predicated on traffic and revenue data that suggest recent performance is sustainable and not merely the product of a cyclical economic upswing, coupled with evidence of a quicker and sustained deleveraging position.
The 'BBB-' rating reflects the nature of the road as a congestion reliever with two-axle vehicles providing a near-exclusive customer base. As such, it is exposed to moderate volatility as evidenced by its performance over recent economic cycles. Further, the agency operates under a pricing framework that allows for annual toll increases at inflationary levels (or whatever it sees fit) along with a relationship whereby the California Department of Transportation (Caltrans) is responsible for maintenance and upkeep, leaving the agency with limited capital obligations.
The senior structure accretes and is currently outstanding at about $1.86 billion, while the junior debt remains outstanding at approximately $294 million.
KEY RATING DRIVERS
Revenue Risk (Volume): Midrange
Strong recent traffic growth: The 15-mile limited access highway serves as a congestion reliever in Orange and Riverside Counties. Transactions have grown over the past three years between 5.7% and 9.4% on a year-over-year basis, reaching 30.6 million transactions in 2016, which is just below 2007's all-time peak of 31.1 million vehicles. Continuing improvement in Orange County's economy as evidenced by a lower unemployment rate and increasing housing prices should contribute to sustained traffic stability.
Revenue Risk (Price): Stronger
Well Tested Ratemaking Flexibility: The agency has the unlimited legal ability to increase tolls as it sees fit, although its plan is to implement small, regular, inflationary increases going forward. Political freedom to implement toll increases has proven robust. Over the past 10 years, its rate covenant has been well tested, and proven to provide creditors with significant protection. Moreover, following refinancing the agency now has the ability to input inflationary increases (as long as they are projected to meet the rate covenant), rather than an independent traffic and revenue consultant instituting toll increases in order to maximize revenue.
Infrastructure Development & Renewal: Stronger
Limited Capital Plan Going Forward: Caltrans owns and maintains the road, with SJHTCA covering administrative and toll collection related expenses. The agency has no additional debt plans.
Debt Structure: Senior - Midrange / Junior - Midrange
Escalating Debt Service Profile: The debt structure includes fixed rate and amortizing senior and junior debt subject to some interest accretion. Debt service escalates between 2.5% - 2.9% (except for one 6% increase in 2028) through FY2040, then levels off at an aggregate requirement of $186 million. Aggregate leverage was 11.9 in 2016 and under the Fitch base and rating cases declines on a year over year basis despite total debt outstanding accreting over the period.
Low-growth breakeven case: Revenue growth given strong liquidity reserves as required by the bond indenture allows for 0.35% annual change over the debt life on a senior basis and 0.75% on a combined-debt basis.
Metrics Consistent with Criteria: Fitch rating case senior average DSCR is 1.80x, while the combined DSCR is 1.55x, both consistent with 1.40x guidance at the 'BBB'-category level, and this does not reflect the significant benefit provided to creditors by strong liquidity requirements. Fitch base case senior and aggregate averages of debt life (to 2050) are 2.00x and 1.72x, while the rating case is 1.80x and 1.55x.
Peer Group: SJHTCA's closest peers come from Fitch's rated standalone / small network toll roads portfolio with senior debt rated in the 'BBB' category. Its closest peers are its sister agency, Foothill/Eastern Transportation Corridor Agency (F/ETCA), and E-470 Public Highway Authority, both of which face initially high leverage and some dependence on revenue growth. Pertinent recent metrics for F/ETCA include 1.32x DSCR in 2015 on an aggregate basis, with a Fitch base case average of 1.42x over the life of the debt (to 2053) and higher leverage at 15.7x on a senior basis alone. As for E-470, fiscal 2015 DSCR was 1.78x, and over the next 10 years, the Fitch base case projects E-470 DSCR to be no less than 1.5x with an average of 1.78x. Finally, a breakeven revenue growth on the Fitch base case is in positive territory, at 0.8%.
Negative: Significant performance below our base case due to traffic or toll rate declines could pressure the rating.
Negative: Changes in management's historical stance towards timely and meaningful toll rate increases to continue meeting an increasing debt service profile.
Positive: Continued traffic stability and financial operations meeting Fitch's base and rating case assumptions.
SUMMARY OF CREDIT
Historical traffic and revenue continues to perform strongly. On a year over year basis, traffic is up between 5.7% and 9.4% for the past three years to 2016, while revenue has seen double-digit increases during the same period, reflecting continued toll rate increases.
Because Caltrans has title to the road and is responsible for its upkeep, SJHTCA has limited capital needs. In the next five years, SJHTCA plans are $54 million, to be in cash funded with ongoing revenues.
Debt was restructured in 2015, so fiscal 2016 was the first full year of operation post-restructuring. As part of the refinancing, SJHTCA now has the ability to institute rate increases, as opposed to a T&R consultant recommending and the agency virtually being required to adopt. Management is committed to small, inflationary toll increases as a result.
The sponsor case (also adopted as the Fitch base case) assumes traffic growth of 1% annually through 2022, then declining 4% in concert with an assumed I-405 widening that year before returning to positive growth between 0.5% and 1.5% for the remainder of the bonds' life. Toll rate increases are assumed at 2.5% in nearly every year. Under this case, projected 10-year average DSCR is 1.80x senior and 1.55x aggregate, moving to 2x and 1.72x over the entire debt period to 2050.
Fitch's rating case retains the same traffic growth, but drops the toll increases to 2% annually. In this scenario DSCR moves down to 1.75x and 1.51 times for the 10-year projection period, and 1.80x and 1.55x through 2050.
Fitch also looked at a break-even gross toll revenue growth scenario, and concluded that the facility could experience annual growth of 0.75% and still meet its obligations, assuming the use of all available liquidity.
SJHTCA operates a 15-mile, six-lane limited access segment of SR 73 in Orange County, California. At its southern end it connects with Interstate 5, and at its northern end it connects with a previously constructed section of SR 73 near John Wayne Airport that connects with I-405. The SR-73's purpose is to relieve congestion on the parallel I-5, I-405, and the Pacific Coast Highway.
Bonds are secured by net toll revenues and development impact fees, the latter only if certain thresholds are met and in any case have historically not had a significant effect on the agency's ability to service its debt. The junior lien was added in 2014 upon the agency's debt restructuring