Fitch Drops Outlook to Negative on Orange County Toll Agency Bonds

SAN FRANCISCO - Falling traffic and revenue prompted Fitch Ratings this week to cut its outlook on Foothill/Eastern Transportation Corridor Agency toll revenue bonds to negative from stable, while affirming the underlying BBB rating for $2.2 billion of debt backed by the 36-mile toll road network in Orange County, Calif.

It's the latest setback for the toll road agency, which was hit in December by a federal decision that threatens to kill its prime objective, a 16-mile extension.

Foothill/Eastern was built in the 1990s, at the same time as a sister highway, the San Joaquin Hills tollway. The two are physically unconnected and legally distinct, but operated by one management team.

Foothill/Eastern has been the stronger performing of the two, able to maintain investment-grade ratings while the San Joaquin Hills Transportation Corridor Agency slipped to speculative grade.

Fitch affirmed its underlying BB rating and stable outlook on the $1.97 billion in toll revenue debt from the San Joaquin Hills agency Monday, at the same time it acted on the Foothill/Eastern agency.

In assigning a negative outlook to Foothill/Eastern, Fitch cited declines in traffic and revenue that reflect the "significant economic weakening" of its service area. The tollway primarily links Orange County employment centers with Riverside County commuters, and Fitch noted that both counties have been hit hard by the economy and housing crisis.

The Foothill/Eastern has reported year-over-year revenue declines every month since September 2007.

Fitch noted that the toll road management team, which also operates the San Joaquin tollway, "has been very proactive" in raising tolls on the San Joaquin tollway to protect the interests of bondholders in the face of lower-than-projected traffic, and noted that Foothill/Eastern debt reserve is fully funded.

Foothill/Eastern's future strategy is up in the air following a December ruling from the U.S. Department of Commerce rejecting the agency's plan to build an extension linking the tollway with Interstate 5 near Orange County's southern border.

That ruling upheld a California Coastal Commission decision to deny certification of the project, which would have used state park property near a well-known surfing beach.

In its Dec. 18 decision, the Commerce Department ruled that it did not have the authority to overturn the state Coastal Commission because reasonable alternatives exist and the project is not necessary for national security.

The alternative cited would claim more than 170 homes in a wealthy residential community.

"As far as the Commerce decision, our board has not made a final decision on whether they will litigate," Jennifer Seaton, spokeswoman for the toll agencies, said yesterday.

She said the board also directed staff to begin reaching out to project supporters and opponents to gather feedback, and review all the other options that have been considered to add traffic capacity in southern Orange County.

Officials and board members of the two agencies have also been working on and off for years on a plan that would create a new agency that would buy out the two existing agencies with newly issued debt. The plan has been touted as a way to facilitate the financing of the Foothill/Eastern extension.

"The market conditions are not conducive to that anyway and with Foothill-South at least several years away from being financed, there's no update on the potential acquisition," Seaton said yesterday.

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