CHICAGO — Ohio’s plan to float $1.5 billion of bonds backed by a future Ohio Turnpike toll revenue will not hurt existing bondholders and could limit the risk that rising toll rates would hurt the state’s economy, Fitch Ratings said in a report out Friday.
Ohio Gov. John Kasich last month announced a plan to abandon earlier support for a long-term lease of the toll road -- turning down a possible $3 billion payment -- and instead expand the borrowing authority of the Ohio Turnpike Commission by borrowing against future toll revenues.
“Ohio’s decision not to lease its turnpike, as Indiana did in 2006, demonstrates that concern about privatization continues to influence policymakers,” Fitch analyst Mike McDermott wrote in a special report released Friday.
McDermott notes that KPMG LLP, the state’s advisor on the future of the turnpike, said a 50-year lease could generate 3.3 billion to $4 billion for the state, but would also mean toll increases above the rate of inflation throughout the lease.
Kasich’s proposal, which needs legislative approval, calls for the commission to limit toll increases to inflation for the first 10 years and then raise rates by up to 10% every 10 years after that. Fitch called the plan conservative and said it would provide flexibility in the future.
“While Ohio has passed up a potential large upfront payment, it has limited the risk that future toll increases will harm the economy, or divert traffic to free alternatives,” wrote McDermott. “This decision also means that policymakers can benefit from revenue exceeding forecast and that they retain ratemaking flexibility with lower absolute tolls should growth not materialize.”
Under the plan, the state would issue $1.5 billion of bonds against future turnpike toll, including $1 billion in 2013 and $451 million in five years.
The new bonds would be subordinate to the $465 million of existing debt, and may not be as highly rated, McDermott said. Fitch assigns a AA rating to the existing bonds, based in part on strong traffic and revenue growth and debt-service coverage above 2.5 times since 2010.
“[I]t is Fitch’s view that the planned leverage and inflationary toll increases will not likely impair the credit quality of the existing bonds,” McDermott said.
The new bonds would generate $200 million to $250 million annually that the state’s transportation department would be able to tap to finance highway projects across the state, not just within a mile of the turnpike, which is the current limit of toll road-backed bond proceeds.
“Credit quality associated with future bonds will depend in part on the financial covenants that limit leverage in the new indenture since funds will be able to flow out of the turnpike system,” said McDermott.
Fitch estimated that total debt service coverage ratio would fall to 1.33 times after the second proposed bond issue, down from the projected 2012 ratio of 2.87. The ratio would be at 1.45 times after the first bond issue, Fitch said.
The Ohio Turnpike is among the highest rated toll roads in the U.S.
