Fitch Affirms San Joaquin Hills' (CA) Revenue Bonds; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the ratings on San Joaquin Hills Transportation Corridor Agency's (SJHTCA) $1.694 million senior bonds at 'BBB-' and its $294 million junior bonds at 'BB+'. The Rating Outlook on both ratings is Stable.
The 'BBB-' and 'BB+' ratings reflect state route (SR) 73's role as a congestion-relieving facility, running parallel to the highly congested Interstate highway I-5 and I-405 corridor in Orange County, CA, and its dependence on sustained revenue growth over a prolonged period in order to fully meet the authority's debt service obligations. The affirmations reflect San Joaquin Hills Transportation Corridor Agency's (SJHTCA) solid performance over the last year, with gross toll revenue for the year coming in 7.7% ahead of expectation.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Improving Traffic, Still Below Peak: The 15-mile limited access highway serves as a congestion reliever in Orange and Riverside Counties. Transactions declined from a peak of 31.1 million in fiscal year (FY) 2007 to 25.3 million in FY2010 before remaining essentially flat through FY2013 and increasing in FYs 2014 and 2015. Continuing improvement in Orange County's economy as evidenced by a lower unemployment rate and recovering housing prices should contribute to further traffic stability.
Revenue Risk - Price: Stronger (changed from Weaker)
Well-Tested Ratemaking Flexibility: The authority 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.
Infrastructure & Renewal Risk: Stronger
Limited Capital Plan Going Forward: Caltrans owns and maintains the road, with SJHTCA covering administrative and toll collection related expenses. Capital improvement projects include the development of a Caltrans maintenance station, and phase II of the Glenwood interchange.
Debt Structure: Senior - Midrange / Junior - Midrange
The debt structure includes fixed-rate and amortizing senior and junior debt subject to some interest accretion. Debt service escalates through FY2041, albeit significantly slower than in the previous debt structure.
Metrics Consistent with Criteria: Fitch rating case senior average debt service coverage ratio (DSCR) is 1.44x, 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. Junior lien DSCR metrics are also relatively robust, also excluding the benefit of liquidity support. Leverage is initially high, but falls quickly as cash balances build and debt is repaid. A notable strength of the structure is the lack of dependence on high revenue growth - a compounded annual revenue growth rate of 1.13% will be sufficient to ensure both senior and junior debt is fully serviced.
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. 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.
Positive - Sustained Strong Performance: Consistent traffic and revenue performance in line with or above the Fitch base case would create additional debt service coverage margin and would likely lead to positive rating pressure.
Negative - Material Underperformance: Significant performance below our base case due to traffic or toll rate declines could pressure the rating.
Negative - Unwillingness to Implement Toll Rate Increases: Changes in management's historical stance towards timely toll rate increases.
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.
In November 2014, the authority underwent a major debt restructuring that saw it issue $1.1 million of new senior debt and $294 million on a newly created junior lien in order to refinance a large portion of its then-in-place senior debt, extending the final maturity on senior debt to 2050 and on junior debt to 2049 at the same time.
Traffic and revenue on the road performed strongly in FY2015 (ended June). Gross toll revenue for 2015 was $131.6 million compared to last year's expectation of $122.2 million, reflecting a 7.7% outperformance, and gross toll revenues were not forecast to exceed $131 million until 2017.
SJHTCA continues to face some challenges with respect to all-electronic tolling, and pursuable transactions remain relatively high at 9% of total transactions. However, despite the policy of waiving penalties for first-time violators that settle their toll liability within 30 days, penalty revenues exceeded forecast by $6.5 million.
Current expenses for the year to June were marginally below prior expectations at $11.7 million (excluding tax arbitrage rebate accrual of $1.2 million), as compared to the $12.5 million expected last year. Although total current expenses were slightly lower than previously expected, the variable component of such expenses (credit card fees, postage and other transaction-related costs) related to higher than expected transactions and revenues were higher. The authority is looking to outsource all back-office activities not already outsourced (currently limited to software maintenance), and is moving toward an RFP process.
Average senior and junior DSCR for the year were 2.38x and 1.86x, compared to sponsor case expectations for the year of 2.16x and 1.69x, respectively. The calculation for FY2015 reflects eight months of revenue and six months of debt service and, therefore, is not representative of the rest of the authority's debt service profile. Nevertheless, outperformance during the year puts the authority on a good footing as debt service obligations ramp up over coming years. DSCR is expected to be around 1.40x (senior) and at around 1.20x (junior) for FY2016 in the sponsor case, growing thereafter.
Fitch has not adjusted its base and rating case scenarios for this annual review. The base case remains broadly in line with the sponsor case presented at the time of last year's restructuring, albeit reflecting more conservative assumptions with respect to violation revenue and fee income growth, and limited credit given to interest income. In this scenario, senior DSCR remains in the region of 1.5x over the medium term, while junior DSCR gradually rises from around 1.2x in 2016 to around 1.4x by 2036.
Fitch's rating case adopts more conservative traffic growth assumptions from 2023 onwards, with a larger impact assumed as a result of I-405 widening in that year resulting in a 6% traffic fall followed by two years of no growth, and only a modest return to annual growth rates of 0.3% assumed thereafter. The scenario reflects sponsor case toll rate and expense growth assumptions, and adopts the same assumptions with respect to ancillary income as are reflected in the Fitch base case. The resulting gross toll and CFADS CAGRs are 2.7% and 2.5%, respectively, broadly flat on inflation assumptions. In this scenario DSCR remains more supressed over the medium term, hovering around 1.4x until 2040, while junior DSCR remains closer to 1.30x over the life of the junior debt.
Fitch also looked at a break-even gross toll revenue growth scenario, which also reflected 0% growth in ancillary income line items and 3% expense growth. In order to determine the break-even level, Fitch assumed drawings on the senior and junior debt service reserve fund (DSRF) as well as supplemental reserve fund (SRF) in order to supplement CFADS in meeting debt service obligations, giving no credit to use and occupancy (U&O) fund balances for this purpose. On the basis of higher 2015 net revenue than expected last year, break-even gross toll revenue growth rates using this approach were found to have improved from last year's already robust levels, with senior debt breakeven now at 0.52% (0.78% last year) and the junior debt breakeven now at 1.13% (1.45% last year).
The change in the Revenue Risk - Price key rating factor score from 'weaker' to 'stronger' reflects a change implemented in Fitch's newly released 'Rating Criteria for Toll Roads, Bridges and Tunnels', published Sept. 29, 2015. Under the new criteria, the assessment of Revenue Risk - Price reflects the legal and political framework under which the relevant toll road operator can raise tolls. Economic considerations relating to users' willingness or ability to pay current or proposed toll rates are now taken into account in the assessment of the Revenue Risk - Volume key rating factor.