Fitch Ratings has downgraded the $40.1 million outstanding Lake of the Ozarks Community Bridge Corporation Bridge System refunding revenue bonds, series 1998 to 'BB+' from 'BBB-'. The Rating Outlook is revised to Negative from Stable. The bonds mature in December 2026 and are secured by the net revenues of a toll bridge over the Lake of the Ozarks in central Missouri. Fitch had placed the bonds on Rating Watch Negative in August 2008.
The downgrade reflects management's historical reticence to raise tolls even as pledged revenues were insufficient to pay scheduled principal and interest. The bridge company has entered a cash burn that will likely persist until management takes action. Moderate to high economic ratemaking flexibility exists due to the absence of comparable alternative routes. Additionally, the bridge company holds cash on hand sufficient to meet debt service requirements for five years or more depending on the severity of the current economic downturn.
The Negative Outlook reflects uncertainty related to future management decisions and the broader economic environment. Traffic on the bridge is 98% cars and is highly seasonal. Camden County, Missouri, which contains a large part of the bridge service area, contains over 70,000 vacation homes. The preponderance of second homes and partial-year residents in the area may cause traffic declines on the bridge to be more severe and persistent than traffic declines on toll facilities elsewhere. Trailing 12-months traffic is down 13% compared with the preceding 12-month period. Traffic in November, December and January declined 19%, 12% and 17% compared with the same months a year earlier.
Management has historically been unwilling to raise toll rates to a level consistent with bond covenants and investment grade comparables. Instead management has used a defeasance program to apply balance sheet cash in order to artificially meet the covenant. For example, the company defeased $1.2 million of principal in 2008, reducing the scheduled debt service payment for 2009 and allowing the corporation to artificially meet its 1.2 times (x) coverage requirement for the fiscal year ending in April. The company's general fund balance is currently about $5 million and total current assets are approximately $11 million, meaning that management could most likely continue its strategy for at least five years even in a scenario where the current year's traffic declines are repeated in fiscal 2010. Nonetheless Fitch does not consider the use of liquidity to prop up legal coverage for such an extended period to be consistent with an investment grade rating.
The bridge opened in 1998 with traffic levels 30% below initial forecasts. Car tolls in each direction were set at $2.50 in the summer and $1.50 in the off-season. In fiscal year 2005 the bridge company extended the summer toll period to the seven months from April through October, but the revenue increase was insufficient to achieve 1.2x coverage. Continuous strong traffic growth, however, eased credit concerns. From 2001-2007 traffic growth averaged 7% per year, leading management to adopt its current debt defeasance strategy in anticipation of revenue eventually increasing to its forecast level.
Lake of the Ozarks, a man-made lake created by the damming of the Osage River, is a popular recreational destination for residents of the St. Louis and Kansas City metropolitan areas. The half-mile bridge provides a critical transportation link by reducing driving time around the lake by up to one hour. The Lake of the Ozarks Community Bridge Corporation is a not-for-profit corporation governed by a seven-member board of directors. The corporation oversaw construction and financing of the bridge and manages its ongoing operations. It was the first of its type to be created under the Missouri Transportation Corporation Act of 1990, which allowed private non-profit corporations to develop projects as an alternative to normal bridge and highway funding methods. The bridge, located in Lake Ozark, MO, is currently the corporation's only facility.
