DALLAS – Traffic and revenue on the LBJ Texpress managed lanes in Dallas fell below expectations in the first year, but the public-private project still merits investment-grade ratings and a stable outlook, according to Moody’s Investors Service.
The LBJ Infrastructure Group, a consortium of investors and engineering firms that built and financed the $2.6 billion project, drew Moody’s lowest investment grade rating of Baa3.
“The investment grade rating reflects our expectation that while traffic and revenue have fallen short of original projections and traffic will likely continue to do so, there is sufficient cushion to meet both operating expenses and debt service requirements at least until 2021,” said Moody’s lead analyst Earl Heffintrayer, whose June 6 report was co-authored by analysts Maria Matesanz and A.J. Sabatelle.
The Spanish toll-road developer Cintra is the managing partner in the project, whose investors include the financially troubled Dallas Police and Fire Pension System.
Financing came through four main sources, including an $850 million loan from the U.S. Department of Transportation’s Transportation Infrastructure Finance and Innovation Act, $490 million from the Texas Department of Transportation, $664 million from investors and $615 million from private activity bonds.
With more than $110 million in outstanding debt per mile, the overall leverage profile for the 13.2-mile project is higher than for other comparable projects that Moody’s rates, according to Heffintrayer.
Although the first-year revenue through December was below expectations, it ran above the budgeted amount, according to Moody’s. Actual revenue of $75.5 million was 4.2% greater than the 2016 budget of $72.5 million, the report said. Operating expense was $16.7 million, which was 11.1% below budget, while the debt-service coverage ratio was 1.34x.
The project has a fully funded debt service reserve of $61.5 million, and major maintenance reserve that is cash funded at $20 million, Moody’s said.
“Future debt service coverage ratios benefit from the support of the subordinated and back-ended TIFIA loan repayment terms after senior bonds amortize,” Heffintrayer wrote. “However, back-ended debt poses longer term risks if traffic and revenue continue to significantly underperform the forecast.”
The federal TIFIA loan amortizes only after senior bonds are repaid, providing protection for bond investors, the report said. TIFIA's flexible repayment terms include no mandatory payments due until 2020 when a small amount of annual mandatory TIFIA interest is payable.
However, mandatory payments grow to $13.1 million by 2023, followed by a doubling of senior lien debt service to $96.7 million in 2031, Heffintrayer said.
“The TIFIA scheduled interest payments also begin in 2020, but these scheduled payments can be missed, capitalized, and paid in the last ten years of the TIFIA loan life, after the senior lien bonds fully amortize,” he said. “We also believe that the expected loss on the TIFIA loan is higher than the senior bonds, given that the senior bonds are fully repaid before significant principal amortization of the TIFIA loan.”
LBJ Infrastructure Group was awarded a 52-year concession by Texas Department of Transportation for the project, which features managed lanes designed to speed paying traffic faster than adjacent free lanes.
Cintra is a 51% partner with 42.4% indirectly owned by Meridiam Infrastructure Finance, The Dallas Police and Fire Pension System owns 6.6% of the project.
Bonds were issued through a conduit called the Texas Private Activity Bond Surface Transportation Corp.
LBJ Infrastructure Group has budgeted revenue of $99.7 million for 2017, a 32.1% increase over 2016, and operating expense of $22.9 million, a 36.9% increase of 2017, Moody’s said.
“Operating expense increases are driven by the increased toll processing fees owed to the North Texas Tollway Authority (NTTA, A1 stable) caused by increased transactions and a five-month period when both the original manufacturer and the company are both providing maintenance of the tolling equipment,” Heffintrayer said.
The original traffic and revenue forecasts assumed that traffic along the project corridor and the primary parallel routes would grow by a combined 16.5% from 2007 levels by the beginning of service in 2015, or nearly 2% annually. Traffic on the project corridor itself, including both the managed lanes and the general purpose lanes, was forecast to increase by 23% with the managed lanes expected to capture just over 21.3% of the traffic on the project corridor as a whole once ramp-up was complete. Ramp up was assumed at 71% in the first year of operation, 95% in the second year and 100% in year three.
“The high assumed capture rate of 21.3% of corridor traffic post ramp-up may be aggressive given the lack of historical experience for comparable managed lane projects in the US,” Heffintrayer said. “Managed lane projects have a limited history in the U.S. and the demand for them is highly discretionary, despite the significant portion of existing traffic represented by commuters and other business travelers.”