Fitch Rates Illinois Tollway's Toll Highway Revs 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the Illinois State Toll Highway Authority's (ISTHA, or the authority) $400 million series 2015B toll highway senior revenue bonds. The Rating Outlook is Stable.
The rating reflects the essentiality of the tollway system, evidenced by its growing traffic base since 1974 and demonstrated moderate price elasticity. It also reflects prudent debt management, as illustrated by its strong historical and projected debt service coverage ratios (DSCR). Total leverage should remain moderate and relatively stable as the authority presses ahead on its MOVE Illinois capital program, which is expected to require around $5 billion in total debt financing. Fitch notes that this is largely mitigated by a history of delivering capital programs on time and under budget, a very robust balance sheet position, and an approved 60% commercial toll increase being phased in 2015 - 2017, which complements the 88% passenger vehicle increase in 2012.
KEY RATING DRIVERS
ESSENTIAL ROAD NETWORK WITH STABLE DEMAND: Revenue Risk: Volume - Stronger
The tollway system provides critical transportation links that serve the Chicago and northern Illinois metropolitan area and provide key connections to interstate highways. As a result, toll transactions have grown in nearly every year since 1974; the five-year compound annual growth rate (CAGR) of 1.6% reflects recessionary effects, the operational interruptions of the Congestion Relief Program (CRP), and some elasticity to the recent passenger toll increase. The network benefits from a passenger vehicle base, comprised mostly of commuters, that accounts for 88% of total transactions.
MODERATE RATE-MAKING FLEXIBILITY: Revenue Risk: Price - Stronger
While ISTHA has full legal authority to adjust toll rates and has demonstrated in the recent past a willingness to implement significant increases when necessary, future toll increases beyond those currently approved are uncertain. However, ISTHA's passenger car rates are very competitive, providing significant economic ratemaking ability as evidenced by the lower-than-expected 4.2% drop in traffic following the 88% passenger toll rate increase in 2012. Approved commercial toll increases aggregating 60% over prior levels are being phased in over 2015 - 2017, with CPI-based increases thereafter.
LARGE CAPITAL PLAN PARTIALLY DEBT FUNDED: Infrastructure Development/Renewal - Midrange
ISTHA is in year four of its 15-year, $12.1 billion MOVE Illinois capital program. Funding is expected to come from $5 billion of new money debt issuances ($2.2 billion of which has already been issued including the current series 2015B bonds) with the remainder from cash flow, supported by recent and future toll increases. Fitch notes that the authority has nearly completed its existing $5.7 billion CRP on time and under budget and MOVE Illinois is similarly proceeding according to plan.
REDUCED VARIABLE-RATE EXPOSURE: Debt Structure - Midrange
ISTHA has taken strides to reduce its variable rate exposure, which should drop to approximately 22% after the series 2015B fixed-rate issuance. The authority's variable rate debt exposure is, in any case, 100% hedged with multiple counterparties, all rated at least 'A' category. Following issuance, maximum annual debt service (MADS) is $449 million in 2032, but is estimated by the authority to increase to approximately $615 million after all Move Illinois borrowing is taken into account.
MODERATE LEVERAGE AND HEALTHY DSCR: The current tollway system's $5.8 billion debt burden is expected to increase measurably to $7.4 billion in conjunction with the capital program. However, the authority's net debt-to-cash flow available for debt service (CFADS) is moderate at 5.2x for 2014 and is not expected to increase much higher than 6x as a result of the MOVE Illinois program. DSCR has historically been 1.8x or higher and Fitch's rating case projections indicate DSCR should remain at or above 1.9x through the medium term. Strong liquidity of over 1,100 days cash on hand as of fiscal 2014 provides the authority with additional financial flexibility, although this will contract to partly fund the MOVE Illinois program.
PEERS: The closest Fitch-rated large expressway network peers include Harris County Toll Road Authority (HCTRA: 'AA'/Stable Outlook by Fitch) and Central Florida Expressway Authority (CFEA, 'A'/Stable Outlook), despite a significantly larger annual volume and toll revenue base for ISTHA. The authority has higher coverage and lower leverage than CFEA, but lower coverage and higher leverage and capital needs when compared to HCTRA, largely explaining its rating relative to these peers.
Negative- HIGHER CAPITAL SPENDING: Increased project costs or additional capital projects that materially increase leverage.
Negative- LACK OF TIMELY TOLL ADJUSTMENTS: Failure to adjust tolls in the face of traffic and revenue underperformance or increases in operating expenses that result in a weaker DSCR profile than currently expected.
Negative- DEBT STRUCTURE RISKS: A rising interest rate environment could result in lower financial flexibility as the authority issues the remaining $2.5 billion of debt relating to its capital plan over the next seven years.
Positive- Given the authority's sizeable, multi-year capital program, upward migration is not likely at this time.
The authority is issuing its fifth series of new money bonds in the amount of $400 million for the $12.1 billion MOVE Illinois, 15-year capital program. These bonds are fixed-rate with a final maturity of Jan. 1, 2040 and are expected to price the week of Nov. 16, 2015. Proceeds will go towards project costs and to cash-fund the debt service reserve. The debt service profile is being structured to wrap around existing debt service, with an estimated $46 million being amortized through 2034 and $354 million amortized 2035 - 2039. Fitch expected this issuance, and it has already been factored into prior analysis.