SAN FRANCISCO - The Foothill/Eastern Transportation Corridor Agency in Orange County, Calif., is starting to experience year-over-year declines in traffic and revenue numbers.
Foothill/Eastern was constructed in the early 1990s simultaneously with the San Joaquin Hills toll highway in the same county and until now has been the stronger performing of the two roads, which are legally distinct entities but operated by one management team.
Foothill/Eastern has been able to maintain investment-grade triple-B level ratings for its revenue bonds while the San Joaquin Hills Transportation Corridor Agency has slipped to double-B levels.
But the 36-mile Foothill/Eastern system, which provides a short cut for Riverside County commuters heading for Orange County job centers, appears to be experiencing the fallout from the faltering Southern California real estate market.
Since September, year-over-year revenue figures for Foothill/Eastern have been down every month by as much as 5.9%
"It's part of the general economic trend were seeing as part of gas prices and the economy here," said Jennifer Seaton, spokeswoman for the two toll road systems.
In the first quarter of 2008, the Riverside-San Bernardino metropolitan area had the nation's second highest foreclosure rate, according to data published by RealtyTrac, an online marketplace for foreclosed properties. Orange County held the 19th rank.
In fiscal 2007, Foothill/Eastern reported $106.4 million in toll revenue. It budgeted $111.3 million in toll revenue for fiscal 2008, but if the trends of the first nine months hold it will record less than $103 million, resulting in a year-over-year decline and missing its budget by almost 8%.
It would also mean that, for the first time in 10 years, Foothill/Eastern revenues would fall below projections in the traffic and toll-revenue study used to structure the initial financing.
That traffic study projected about $100.5 million in toll revenue in fiscal 2007, and $109.3 million in fiscal 2008.
Foothill/Eastern's ability to meet its annual revenue projections have distinguished it from its sister tollway. Revenues for the 15-mile San Joaquin Hills tollway have struggled to meet 80% of projections from that initial revenue study.
Standard & Poor's affirmed its BBB-minus underlying rating for Foothill/Eastern bonds in March. At the same time, it affirmed the BB-minus rating and stable outlook for San Joaquin Hills bonds.
Fitch Ratings assigns its BBB rating to Foothill/Eastern and BB rating to San Joaquin Hills, both with stable outlooks.
"It's not surprising given the economic difficulties the area is facing," Fitch analyst Mike McDermottsaid of the Foothill/Eastern traffic slippage. "At moment, both of them have a fair amount of saved up reserves and surplus cash."
Debt service coverage for both toll roads remains well above 1.0 times, McDermott said.
"It would take some significant deterioration in annual revenues before they would need to even get to that point," he said. "The ratings both of them have do incorporate that there can be short-term bumps at some time in their lives. They do have sufficient liquidity to deal with that."
Moody's Investors Service rates Foothill/Eastern and San Joaquin Hills Baa3 with stable outlook and Ba2 with negative outlook, respectively.
Foothill/Eastern has about $2.2 billion in outstanding revenue bonds and San Joaquin Hills about $2 billion, according to Standard & Poor's. There is a mix of unenhanced bonds and those wrapped by MBIA InsuranceCorp.
The eventual fate of the toll road system will depend on the outcome of two long-running and independent, but intertwined, proposals.
One is a 16-mile-long southward extension of the Foothill/Eastern system to an interchange with Interstate 5 near the San Diego County line.
The other is a proposal to refinance all the existing debt of the two agencies under the auspices of a new joint-powers authority, the Transportation Corridor System, which would acquire the assets of both roads through a new bond issue that,presumably would carry an underlying investment-grade rating.
The bond refinancing proposal has been on and off for more than half a decade. The original proposal was shelved in 2004 after drawing opposition from some Orange County politicians who expressed discomfort with returning to the bond market for another huge financing within five years of the first refunding of the toll roads' debt.
As an alternative, they came up with a plan for the Foothill/Eastern to make "mitigation payments" to the San Joaquin Hills road as compensation for the possible loss of traffic from the planned Foothill/Eastern extension.
So far, $60 million of the $120 million in mitigation payments have been made, with the balance coming this June 30 and June 30, 2009. In following years, the plan calls for Foothill/Eastern to make loans to San Joaquin Hills from surplus revenues, to be repaid in the years after the construction bonds are retired.
"While the mitigation payments are assured, the loan payments in fiscal 2011 through fiscal 2034 are virtually at the bottom of the F/ETCA waterfall and not assured," according to the Standard & Poor's rating report released in March.
The bond-financed merger acquisition plan returned to the table in 2007, spurred by stronger-than-expected performance by the San Joaquin tollway that improved the financial metrics of the proposal, according to backers.
That acquisition plan remains on the drawing board, but is unlikely to come to fruition in the near future because of the recent bond market turmoil, according to one of its architects, Bill Campbell, an Orange County supervisor who is a member of both toll road agency boards.
"Obviously, as you understand, the bond markets and credit markets are not at a time where it would be wise to do such a thing," he said this week.
To bolster the merger plan, the toll road agencies this year applied to the U.S. Department of Transportation for a $1.1 billion TIFIA loan, said Seaton, the toll road spokeswoman. The Transportation Infrastructure Finance and Innovation Act authorized the loan program for "projects of national or regional significance" that demonstrate that they can use the TIFIA program to leverage other investment.
"A TIFIA loan would strengthen the offering," Campbell said.
Plans to extend the Foothill/Eastern have run into controversy over the proposed right of way, which would run through part of a state park, the San Onofre State Beach.
Those plans generated environmental opposition, culminating in February when the state Coastal Commission, which regulates coastal development, voted 8 to 2 to reject the toll road project, saying it doesn't meet the standards of the California Coastal Act that covers coastal development.
The debate drew even more attention when Gov. Arnold Schwarzenegger, who supports the toll road, chose not to reappoint his brother-in-law, Bobby Shriver, and Hollywood pal Clint Eastwood to the state's parks commission after both men opposed the toll road.
The Foothill/Eastern agency appealed the Coastal Commission's decision to the U.S. Department of Commerce, which has jurisdiction through the federal Coastal Zone Management Act. A decision is expected late this year.
The proposed Transportation Corridor System refinancing can take place no matter the fate or the status of the planned extension, according to both Campbell and Seaton, though it would be designed to incorporate the revenue bond financing of that extension.
"It could provide additional funding capacity for Foothill-South," Seaton said.
Officials also say the extension could be financed without the agency merger and refinancing.
"As slow as both of them are going they may meet up back again," Campbell said.