Fitch Rates Harris County, TX's Senior Toll Revenue Rfdg Bonds 2015B 'AA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to Harris County, Texas' (the county) $136 million senior lien revenue refunding bonds series 2015B. The bonds are issued by the county on behalf of the Harris County Toll Road Authority (HCTRA, or the authority). Bond proceeds will refund a portion of the authority's outstanding senior revenue bonds for net present value savings and the bonds are expected to sell via negotiated sale on or about October 29.
The Rating Outlook is Stable.
The 'AA' rating and Stable Rating Outlook reflects the authority's continued strong operational and financial performance, with very high debt service coverage ratios (DSCRs), robust liquidity, and low leverage. The authority's essential road network in a large and economically solid region with limited viable alternatives makes for a strong volume profile, while years of consistent toll rate increases demonstrate a willingness and ability to raise tolls to maintain a healthy financial profile. These strengths are modestly offset by a large capital plan that may require the authority to raise additional debt.
KEY RATING DRIVERS:
Revenue - Volume: Stronger
RESILIENT TRAFFIC DEMAND: HCTRA's toll road facilities provide vital transportation links with a strong monopolistic position in the Houston metropolitan area and an established and stable traffic demand profile. System traffic has increased almost every year since fiscal year (FY) 1998, supported by its continuing expansion in a large and rapidly growing metropolitan region.
Revenue - Price: Stronger
DEMONSTRATED RATEMAKING FLEXIBILITY: Toll rates remain moderate at between $1.50 and $1.75 per segment (excluding the ship channel bridge) depending on payment method. The authority's toll policy allows for annual increases at the greater of 2% or inflation, and it has shown willingness to implement these increases, doing so in four of the last five years.
Infrastructure & Renewal: Midrange
CAPITAL WORKS FUNDING POTENTIALLY LIMITED BY TRANSFER POLICY: The commissioners court annually budgets a subordinate county transfer of approximately $120 million. Although coverage of senior bond debt service is currently sufficiently high to fund these annual transfers whilst continuing to largely cash-fund capital expenditures, the transfer amount could be changed at any time and increases could leave the authority more dependent on additional debt for future projects.
Debt Structure: Stronger
VARIABLE RATE AND REFINANCING RISK WELL MITIGATED: Debt service declines in most years and principal amortizes moderately with 42% of debt retired over the next 10 years. The authority's residual variable interest rate exposure of around 15% of outstanding debt is fully hedged to term and, although counterparties are rated lower than the outstanding debt, HCTRA's negative mark-to-market on the swaps is partially collateralized.
STRONG FINANCIAL PROFILE: HCTRA's financial performance is very strong, with a Fitch-calculated fiscal 2015 net senior debt service coverage ratio (DSCR) of 3.8x. Fitch projects net senior and total DSCR in its base case of at least 3.8x and 2.8x over the next 10 years. Fitch estimates current net senior and total leverage at fiscal year-end (FYE) 2015 to be 1.6x and 2.3x respectively. Significant financial flexibility is afforded by the authority's strong cash and reserve balances, resulting in net working capital of $569 million at FYE 2015.
--A substantial and unexpected deterioration of the authority's financial or operating profile could result in negative rating action. Although not anticipated, such deterioration could be caused by severe traffic reductions or much higher than projected expenditure growth.
--Excessive leveraging beyond the authority's historical targeted maximums of 5.0x senior gross debt to cash flow available for debt service (CFADS).
--A material reduction in the authority's debt service coverage profile that leaves rating case DSCR projections significantly below 2.50x for a prolonged period.
--The authority's rating is constrained by its sizeable subordinate transfer to the county, and a large and growing capital improvement plan (CIP).
SUMMARY OF CREDIT
The authority manages a large and growing toll road system with a long operating history, 15 assets, and 127 miles of roadway that serve the Houston metropolitan region in Texas. The authority operates as a department of the county and coordinates with outside agencies including the Texas Department of Transportation (TxDOT).
The authority's fiscal 2015 audit, released subsequent to Fitch's July review of the authority, points to slightly better fiscal 2015 financial performance than projected. Beneficial variations in interest income and expenditures resulted in senior and total DSCRs of 3.84x and 2.42x compared to Fitch's original estimates of 3.64x and 2.29x, respectively. Despite this positive, Fitch believes these variations are immaterial to the current rating and continues to view upside rating movement as restricted by sizeable subordinate transfers to the county and HCTRA's sizeable CIP. As expected, the authority implemented a modest toll rate hike in September.