Fitch Affirms CA's Foothill/Eastern Transportation Corridor Senior Revs 'BBB-'; Outlook Stable
RATING RATIONALE
The 'BBB-' senior lien and 'BB+' subordinate lien ratings reflect the strength of the road's service area, its role as a congestion reliever, F/ETCA's demonstrated willingness to raise rates to meet bondholder covenants and a solid liquidity position, combined with a moderate debt service profile that leaves F/ETCA dependent on modest revenue growth over the long term to service its obligations. The facility is vulnerable to prolonged adverse developments and/or capacity enhancements on nearby competing facilities such as I-5 as well as higher than average senior leverage of 15.67x. The differential between the senior and junior lien ratings reflects the subordinated position and the relative thinness of junior lien debt, which is only around 8% of aggregate debt.
KEY RATING DRIVERS
Revenue Risk: Volume - Midrange
Limited Traffic Profile: Traffic increases over the last decade have been constrained somewhat by nine mostly above-inflationary-toll increases since fiscal 2000, including the most recent in fiscal 2016 (effective July 1, 2015). F/ETCA has limited economic ratemaking flexibility as current toll rates are viewed as close to the revenue maximization point. Future traffic growth potential, reliant on residential development activity, is limited in part by the narrow corridor in which development can take place. The average toll rate is higher than peers at more than 30 cents per mile.
Revenue Risk: Price - Stronger
Robust Ratemaking Framework: A history of proactive decisions by management to raise rates is a credit strength. Furthermore, F/ETCA has full flexibility to increase toll rates (with board approval) without any additional legal or regulatory approvals.
Infrastructure Development and Renewal - Stronger
Relatively New Asset: While F/ETCA is less than 15 years old and does not currently have any material state of good repair needs, some uncertainty exists with regard to implementation of future expansion projects with costs, timing and funding undefined. The state of California's Department of Transportation (Caltrans) has an obligation to maintain the physical assets and a covenant to budget for capital expenditures annually which provides some renewal protection and is a credit strength. Importantly, as part of the agreement with Caltrans, the agency is not authorized to collected toll revenue on any segment of the corridor south of the existing terminus (Oso Parkway) beyond Jan. 1, 2040.
Debt Structure - Midrange (senior lien) / Midrange (junior lien)
Back-Loaded; Long-Dated Debt: All debt amortizes at a fixed rate but is significantly back-ended. The 2013 restructuring extended debt maturity by 13 years, potentially stabilizing the financial profile. Taking into account the series 2015 refunding, the debt service payment profile grows at a lower 3.6% compound annual growth rate (CAGR) from FY2017 to maximum annual debt service (MADS) of \\$226.7 million in fiscal 2039 (down from a 3.9% CAGR at \\$297.9 million). The agency has fully funded debt service reserves and an additional reserve mechanism that provides some mitigation against the escalating debt service profile. There are no cross default or acceleration provisions between the senior and junior liens, which protects the senior debt.
Fiscal 2015 Financial Metrics:
F/ETCA is dependent on continued toll rate increases and traffic and revenue growth throughout the life of the debt to maintain coverage levels at or above 1.30x. Fitch-calculated FY2015 debt service coverage ratio (DSCR), reflecting the 2015 restructuring, was 1.32x for all obligations. The Fitch base case minimum combined DSCR is 1.24x for fiscal 2016, averaging 1.42x through 2053, in line with Fitch's stand-alone toll road criteria. High debt levels and low liquidity keep senior leverage high at 15.67x.
Peer Group:
F/ETCA's closest peers in the standalone / small network toll roads portfolio with senior debt rated in the low 'BBB-' category include San Joaquin Transportation Corridor Agency (SJHTCA) and E-470 Public Highway Authority, both of which face initially high leverage and some dependence on revenue growth to ensure debt is fully serviced.
RATING SENSITIVITIES
Negative: Weaker traffic growth than projected in the Fitch rating case over a sustained period;
Negative: Toll rate increases that are materially below inflation for a sustained period;
Negative: A decision to increase leverage or reduce liquidity to support any extension projects without commensurate financial mitigants;
Positive/Negative: Developments on the Authority's continued expansion projects could result in a rating action.
Positive: Future positive rating actions are considered unlikely in the near term.
SUMMARY OF CREDIT
Traffic on F/ETCA has fluctuated with the economy and has reacted to a series of toll rate increases, but F/ETCA's traffic and revenue consultant, Stantec Inc. (Stantec), has not revised its T&R forecast since 2013 given that actual performance has since then consistently exceeded that date's forecast. FYE2015 traffic of 58.4 million transactions is 13.6% below the peak reached FYE2007 of 67.6 million, but the authority has increased toll rates almost annually since fiscal 2007 including the most recent increase in FY2016 (July 2015). In addition the authority converted to all-electronic tolling in May 2014, which has increased toll revenues, as 84% of total transactions paid tolls using an electronic transponder. Revenue has grown at a 4% CAGR since opening to a new peak of \\$126.5 million FY2015, and toll revenues are over 18.89% higher than the peak reached in FY2007. To date, FY2016 traffic is up 9.6% to 31.3 million and revenue is up 12.8% to \\$69.7 million through December 2015, as expected from the July 2015 toll increase.
Fitch applied conservative assumptions to Stantec's T&R forecast in the Fitch base case with a traffic CAGR of 0.8% and a net toll revenue CAGR of 3.35%, resulting in an average DSCR through 2053 of 1.53x, with a minimum of 1.39x for senior debt, and an average of 1.42x with a minimum of 1.24x all-in. In the Fitch rating case, more conservative T&R projections were adopted with a traffic CAGR of 0.5% and a net toll revenue CAGR of 2.96%. In this scenario, senior DSCR averages 1.41x with a minimum of 1.25x, while all-in DSCR averages 1.31x with a minimum of 1.12x.
Fitch also undertook breakeven analysis, assessing the level of sustained revenue growth from fiscal 2015 revenue that would allow for all debt service obligations to be met using all available liquidity (the authority's unrestricted cash, senior and junior debt service coverage ratio (DSRFs), and the DSRF fill-to-MADS mechanism beginning in FY2019). The breakeven growth rate in transactional toll revenues for senior debt is 1.63% and 1.64% for junior debt, which is below most long-terms assumptions for inflation of 2.0-2.5%, and further supports the ratings. In our view this illustrates that F/ETCA will have relatively limited dependence on toll revenue growth primarily as a result of the strong cash reserve structure available. F/ETCA is a joint power authority with its sister agency, SJHTCA, which was formed by the California legislature in 1986 to plan, finance, construct and operate Orange County's public toll road system.
F/ETCA fully opened in 1999, is 36-miles long, and comprises State Routes (SR) 241, 261, and 133. F/ETC's staff also manages SJHTCA (a 15-mile SR 73 toll road) but projects are governed by separate boards, are financed independently, and funds cannot be commingled. SJHTCA is a separate and distinct legal entity. F/ETCA has a cooperative agreement with Caltrans extending through 2053.
SECURITY
The senior and junior lien bonds are secured by a pledge of net revenues and certain other pledged revenues such as development impact fees (DIF). F/ETCA has the right to withdraw DIF amounts in excess of \\$5 million annually to be used for any lawful purpose, including debt service.
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