OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-(EXP)' rating to approximately $272 million of senior private activity bonds (PABs) to be issued by the Texas Private Activity Bond Surface Transportation Corporation on behalf of Blueridge Transportation Group, LLC (BTG or the project company), and an approximately $356 million subordinated loan granted under the Transportation Infrastructure Finance and Innovation Act (TIFIA) to the project company. The PABs are expected to be issued at a premium, raising up to $300 million in proceeds. The Rating Outlook for both the PABs and TIFIA loan is Stable.

The 'BBB-(EXP)' rating reflects the project's strategic location within a congested commuting corridor servicing a region that is familiar with tolling and expected to continue to experience healthy, long-term growth despite the recent softening of the regional economy related to the oil industry. It also reflects the project's relatively narrow but adequate debt service coverage ratio (DSCR) profile in Fitch's rating case. The sustained period of tight DSCRs in the early years is mitigated by the project's good liquidity position, notably a $66 million ramp-up reserve account (RURA) that is only partially drawn. The 2.87% real revenue growth rate breakeven from the Fitch rating case first fully ramped-up year revenue provides comfort at this rating level.

KEY RATING DRIVERS

Completion Risk: Midrange
Straightforward Construction, Experienced Contractor: Construction complexity is low-to-moderate, primarily comprising the addition of two managed lanes (MLs) in each direction within the median of the existing corridor, as well as construction of, or improvements to, associated direct connectors (DCs). The design-build (DB) contract is fixed-priced and date-certain, with the DB contractor made up of a joint venture (JV) of experienced construction firms backed by an adequate performance security package.

Revenue Risk - Volume: Midrange (Corridor Volume - Midrange, ML Characteristics - Weaker)
Congested Commuting Corridor: SH 288 connects fast-growing residential areas in Brazoria County and south Harris County with employment centers in Houston, and currently experiences congestion during peaks. The project's two MLs in each direction along a 10.3-mile stretch should provide reasonable time savings based on current corridor peak-period traffic, which is expected to increase considerably as population in the service area grows. Dependence on further population and employment growth to drive ML pricing power leads to the corridor volume assessment of midrange. A familiarity with MLs in the area and tight free access policies are strengths, although the project's current pre-construction status constrains the ML characteristics score at weaker.

Revenue Risk - Price: Midrange
Variable Pricing, Soft Cap: The concession agreement allows for revenue maximization, initially at least to be achieved through a fixed time-of-day toll schedule, up to a soft toll cap of $0.75 per mile (2012$) except on the tolled DCs, although rates may be increased beyond this level to manage ML speeds at or above the slower of 45 miles per hour or 15 miles per hour below posted speed limit, implying a switch toward throughput maximization at these levels. While the soft cap structure limits some of the project company's pricing flexibility, it may also help offset some political risk in a scenario of high congestion.

Infrastructure and Renewal Risk: Stronger
Infrastructure Risk Well Mitigated: Fitch considers the capital maintenance plans it has been presented with to be sufficiently robust and detailed to address ongoing needs of both the MLs and GPLs. The use of a five-year forward-looking major maintenance reserve account (MMRA) significantly mitigates cost risk associated with a lumpy capital expenditure profile, and handback risk is mitigated by the 12-year debt-free tail before concession maturity.

Debt Structure: Senior (PABs) - Midrange, Subordinate (TIFIA) - Midrange
Flexible, Back-Ended Schedule: The capital structure is fixed rate and fully amortizing, and is supported by a standard covenant package. The TIFIA structure, which features a springing lien that would effectively cross-default it with the senior PABs in the case of a bankruptcy-related event (including a payment default), includes flexible debt service terms - considered supportive of the project in early years, but potentially leading to a backloading debt service profile, leading to a midrange assessment. The RURA, funded at substantial completion with $66 million, will provide additional liquidity against revenue shortfalls in the early years.

Adequate Coverage, Reasonable Breakeven: Although the average scheduled DSCR of 1.37x (through Dec. 2052) is slightly below indicative criteria guidance at the 'BBB'-category rating level, it is mitigated by the $66 million RURA which provides structural support to the project in Fitch's rating case through 2027. The extended reliance on cash balance drawings to support debt service in this scenario is considered a weakness, although the remaining ramp-up reserve balance at the end of this period provides comfort as to additional buffer and, further is available to support the project post-ramp-up to weather any continued underperformance. The breakeven real revenue growth rate of 2.87% from the rating case first fully ramped-up year provides additional comfort, particularly in light of expectations of further population and employment growth in the service area.

Peer Group: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are congested during peak hours such as 95 Express Lanes LLC (95 Express) and Riverside County Transportation Commission's (RCTC) MLs. Both serve areas with relatively strong demographic characteristics and limited alternative routes, similar to the SH 288 corridor, but have somewhat different congestion levels and varied exposure to toll free vehicles. Despite some differences in tolling mechanisms, policy and lane configuration, Fitch believes all three facilities should, in the medium term, build up moderate-high pricing power and be in a position to levy relatively high toll rates of over $0.50 per mile (real$) in peak periods.

RATING SENSITIVITIES

Negative - Construction Problems: Unforeseen construction delays and cost overruns.

Negative - Traffic/Revenue Underperformance: Longer ramp-up than expected, or post-ramp-up traffic and revenue performance at or below the Fitch rating case on a sustained basis.

Negative - Operating Costs Above Projections: Operating costs consistently higher than expectation, or the incurrence of material additional capital investment charges to those currently anticipated.

Positive - Traffic/Revenue Above Expectations: Stabilized traffic and revenue performance above Fitch's base case that improve financial metrics.

TRANSACTION SUMMARY

The State Highway 288 (SH 288) Toll Lanes in Harris County Project (Project) is a public-private-partnership (P3) granted by the Texas Department of Transportation (TxDOT) to the project company under a long-term Comprehensive Development Agreement (CDA) with a 52-year term inclusive of a 3.3-year construction period. Its scope includes design and construction of four toll lanes within the median of SH 288 from US 59 to the Harris County line at Clear Creek, construction of eight DCs to Beltway 8, and maintenance and operation of the MLs and adjoining general purpose lanes (GPLs) along the project road. At a future date, the developer will be responsible for the addition of one GPL in each direction from IH 610 to BW 8, subject to certain traffic thresholds and compensation from TxDOT set out in the CDA.

The project will be constructed by Almeda-Genoa Contractors, a JV between Dragados USA, Pulice Construction, and Shikun & Binui America with joint and several parent company guarantees from Dragados, S.A. and Shikun and Binui Ltd. Additional security package features including payment and performance bonds, a 6% letter of credit, a liability cap of 40% and a delay liquidated damages cap of 12% are considered supportive of the expected rating. A five-year forward-looking MMRA, 5% contingency, and 12-year debt-free tail further mitigate renewal and handback risk through the project life.

The MLs will help alleviate growing traffic constraints in the Houston metropolitan area and allow for better access to jobs and community services for the neighborhoods in the project area as well as improve access to the Texas Medical Center. New residential subdivisions in the area are projected to increase population substantially in the medium term.

There will be 14 tolling points along the corridor, including six on the MLs, four on the IH 610 DCs, and four on the BW 8 DCs. Rates will be set according to a fixed time-of-day schedule (schedule can be changed once per week during the initial three months after opening and once per month thereafter), subject to a soft toll cap of $0.75 per mile and floor of the greater of $0.06 per mile or $0.35 (all 2012$) for non-direct connector toll segments, in order to manage demand to a capacity threshold of approximately 1,600 vehicles per lane per hour and ML speed of at least 45 mph. BW 8 DC toll rates are fixed throughout the day, and may only be changed once a year. The lack of free- or discounted-access, except for exempt vehicles (e.g. emergency vehicles), is considered by Fitch to be a project strength.

Average annual daily traffic (AADT) growth in the SH 288 corridor has varied from 3%-4% in the south to around 1% in the north over the past two decades. Current volume-to-capacity (VC) ratios at the northern points along the corridor during and between peak periods would support a stronger corridor volume score but a majority of the project will service the expanding southern portion towards Brazoria County, which is dependent on traffic growth to support increased ML pricing power. Median travel speeds indicate a mostly singular directional peak (northbound in the AM, southbound in the PM). During peak periods, actual travel speeds reduce further at various bottlenecks or pinch points where multiple lanes are merging at on-ramps or short segments where the facility temporarily reduces a lane before opening back up - in Fitch's view, these pinchpoints will largely drive pricing power in the project's early years.

Sponsor case assumptions include a $13.56 per hour median and $19.55 per hour mean value of time (VOT, both 2012$) for passenger vehicles, with trucks assumed to have a VOT 2.5x greater; real VOT growth of 1.17% per annum; value of reliability (VOR) adjustment for the 20% worst delay journeys, for which VOR is assumed to be 90% of VOT; employment growth across the service area of 1.43% from 2015-2025, 1.18% from 2025-2035, and population growth in the same area of 1.68% from 2015-2025 and 1.37% from 2025-2035.

Fitch views the resulting AADT corridor growth of 2.75% from 2015-2020, 1.65% from 2021-2030, and 1.60% from 2031-2040 as somewhat optimistic, particularly in the early years. Similarly, the mean VOT of $19.55 is at the higher end of the range seen by Fitch across its portfolio, although not unreasonable and, while it understands the rationale behind the VOR assumption made, it considers the 90% adjustment factor to be high.

The Fitch rating case is derived by applying various assumption adjustments to the sponsor's traffic and revenue forecast by Steer Davies Gleave to achieve the revenue in the first fully ramped-up year. Adjusted assumptions included population growth rates of 1.5% through 2025, 1.2% 2025-2035 and 1% thereafter; employment growth of 1.25% through 2025, 1.15% 2025-2035 and 1% thereafter; no induced demand on the project road as a result of its increased capacity, with the exception of demand influenced by the addition of DCs at IH 610; a 10% reduction to VOT; a reduction to the VOR factor from 90% to 25% through 2025 and 50% thereafter. Once the Fitch rating case first fully ramped-up year's revenue line was determined, a 5% average annual real growth was applied to it through 2033 and 4.5% thereafter, reflecting Fitch's long-term positive view on the regional economy and population and employment in the corridor despite recent economic slowdowns impacting the area.

In forming the Fitch base case scenario, Fitch formed the revenue line by increasing the Fitch rating case first fully ramped-up year revenue by 25% and growing it at 5% annually thereafter. Simplified assumptions were used in order to reflect a less conservative revenue profile, regardless of the combination of underlying ML traffic and toll rate assumptions that would come together to achieve such revenue.

The Fitch base case resulted in an average scheduled DSCR of 1.92x through the first 33.5 years after opening with scheduled DSCR at or around 1.0x over the first 8 years, reflecting a deferral of TIFIA payments. Mandatory DSCR is 1.0x for the first four years during which RURA drawings support debt service payments. The minimum loan life coverage ratio (LLCR) is solid at 1.96x.

The rating case reported an average scheduled DSCR of 1.37x through the first 33.5 years after opening. Scheduled DSCR remains at or around 1.0x until 2038, in which period some deferral of TIFIA payments is made. Over this period, and after dependence on the RURA is alleviated (from December 2027 through December 2038), mandatory DSCR averages 1.53x. However, reliance on the RURA is more prolonged in this scenario, with drawings supporting debt service until 2027, but an excess balance of approximately $19 million at the end of this period provides comfort as to the project's ability to withstand further revenue shortfalls. The minimum LLCR in this scenario is 1.44x. The breakeven revenue growth rate from the first fully ramped-up year of 2.87% (real$) and the breakeven downward adjustment to the rating case revenue curve from first fully ramped-up year of 19% both provide an indication as to the project's ability to withstand further stress beyond the rating case.

SECURITY

The PABs will be secured by a first priority interest in the project company's right, title, and interest in the project. The lien securing the TIFIA obligation is subordinated to the lien securing the bonds, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with senior PABs.