Fitch Affirms Plenary Road Denver, LLC's PABs Senior Notes and TIFIA loan at 'BBB-'; Outlook Stable
Additionally, Fitch affirms the 'BBB-' rating to the \$60 million Transportation Infrastructure Finance and Innovation Authority (TIFIA) subordinate project loan to Plenary Roads for Phase 2 of the US 36 (the Phase 2 Loan). As part of the Plenary Roads financing plan, the \$55.4 million senior TIFIA loan to HPTE, issued in conjunction with Phase 1 of the US 36 managed lanes (the Phase 1 Loan) and also rated 'BBB-,' will be assumed by Plenary Roads upon successful completion of Phase 1 of the project.
KEY RATING DRIVERS
The rating affirmations reflect that majority of the project construction is progressing to meet the planned scheduled start date and on budget. While there are reported delays in the South Boulder Creek area (western most portion of the project), relief is currently under review and a change order will be provided by the department. Late completion relating to this section is not expected to be a termination event and commencement of tolling and revenue generation is not likely to be affected.
Developing Corridor with Moderate Congestion - Revenue Risk(Volume): Midrange
The asset serves as an important route connecting the currently tolled and operational I25 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. High occupancy vehicles (HOV) and Bus Rapid Transit (BRT) use could limit the desirability.
Toll Rates Provide Limited Pricing Power - Revenue Risk(Price):Weaker
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.
Fixed Rate Debt with Structural Protections - Debt structure: Mid-range
All senior and subordinate project debt will be in fixed-rate mode with no refinance risk. The proposed PABs will 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.
Limited Construction Complexity and Experienced Contractors - Completion Risk: Midrange
Construction elements are relatively straight-forward, consisting of expansion of a facility within an existing right of way, with moderate risks associated with maintenance of operations in the GPLs during construction. The Design Build Joint Venture (DBJV) is comprised of Granite Construction Co. and Ames Construction Co., both experienced contractors currently building Phase 1 of the project. The security package is viewed as adequate with sufficient resources to cover expected debt service payments through the defined Full Service Commencement Long Stop Date in the event of delays. Completion Risk: Midrange
Infrastructure Risk is Well Contained - Infrastructure Renewal and Replacement: Midrange
Upon completion, the project will consist of one express lane and two general purpose lanes in each direction, essentially increasing the one-way road capacity by a third. PRD will be contracting with Transfield Services, Limited, for operating and maintenance (O&M) and renewal and replacement (R&R) services in addition to funding maintenance reserve on a five-year forward looking basis. 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.
Adequate Financial Flexibility:
Cash flow analysis indicates a good 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, debt service coverage ratios (DSCRs) can maintain a minimum of 1.3x on TIFIA mandatory payments and PABs principal and interest. 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.
Riverside County Transportation Commission (RCTC) and 95 Express Lanes LLC (95 Express) serve as suitable peers in terms of managed lanes (ML) facilities in strategic locations with both high peak hour congestion levels and high leverage mitigated by TIFIA flexibility. Despite some differences in tolling mechanisms, policy and lane configuration, Fitch believes all three facilities should, in the medium term, build up high pricing power.
Negative: Inability to complete either phase of the US 36 managed lanes on time and within budget may lead to a downgrade.
Negative: Additional project borrowings resulting in negative pressure on projected debt service coverage ratios could erode credit quality.
Negative: 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 could result in a downgrade.
The PABs and Phase 1 TIFIA Loan are secured by a first priority lien on Plenary Roads net revenues. The Phase 2 TIFIA Loan are secured on a second lien basis with a springing lien to senior upon standard bankruptcy related events as defined in the TIFIA loan agreements. A junior loan obligation from Northleaf Capital will be subordinate to the TIFIA 2 loan.
Much of the project is progressing satisfactorily although there is a construction delay in the western most portion of the facility due to an inadequate floodplain study provided by CDOT. The delay is considered to be a relief event in terms of costs and schedule. The independent engineer has forecast a delay of 207 working days beyond the planned full service date of December 31, 2015 relating to that section of the road. However, the delay is not expected to impact the commencement of toll collection or revenue generation given that it is approximately 1 mile before the first tolling gantry. Construction on other parts of the facility is generally progressing as expected.
The year-end 2014 gross revenues of the I-25 MLs are lower compared to projections along with the associated operating expenses. Gross revenues are down by 26% and while net revenues (net of transaction costs) increased by 5% compared to projections. The traffic advisor has determined the nature of the underperformance to be temporary and caused by the construction on the I-25 north of the U.S. 36 interchange and Phase 1 of the U.S.36 project that has impacted in-bound (AM Peak) traffic. Traffic performance in other time periods is in line with projections. The traffic performance will be closely monitored once construction is completed to assess the actual growth levels. The issuer maintains adequate reserves and contingency funds to alleviate traffic issues on a short-term basis; otherwise any significant deviations will impact cash flow generation of the projects.
A previously filed lawsuit by the Drive SunShine Institute challenging the environmental review process of the project and compliance with Colorado's open access and sunshine laws was dismissed on Feb. 20 2015 by the U.S. District Court (Colorado District).
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.