DALLAS — Fitch Ratings and Moody’s Investors Service expect to assign their lowest investment-grade rating to $404 million of tax-exempt private-activity bonds for a commuter rail line connecting downtown Denver to Denver International Airport.
The ratings are the first for a project that combines private equity, municipal bond debt, and federal grants.
The bonds, scheduled for pricing next week, will come from the Denver area’s Regional Transportation District.
It is overseeing a massive, $6.9 billion project known as FasTracks, which includes the airport commuter line.
The airport line, known as the Eagle P3, is one of the nation’s largest public-private partnerships. The project will be built by a consortium called Denver Transit Partners.
Financing of the Eagle P3 coincides with redevelopment of downtown Denver’s Union Station, which will serve as a hub for the airport and light rail lines, as well as bus connections from RTD.
In advance of its rating on Eagle P3, Fitch last week said the BBB-minus was contingent on receiving further documents and legal opinions for the commuter rail line.
Lead analyst Vanessa Roy noted that “primary concerns include high leverage with a debt-to-equity ratio of 88%-12%.”
Other factors include “relatively narrow debt-service coverage of total obligations if performance and availability deductions are not passed” to the operating and maintenance operator; a low debt-service reserve account, equal to six months principal and interest, given the level of completion risk; and a long construction period requiring interaction with two Class 1 railroads, integration with the RTD’s existing system, and ongoing work at Union Station.
Moody’s assigned a provisional rating of Baa3 to the bonds, citing similar concerns.
“The rating is constrained by construction risk,” wrote analyst Chee Mee Hu. “While the project is not overly complex and Moody’s views the probability of default during construction to be relatively limited for the rating category, loss given default could be high because of the project’s heavy reliance on grant funding arranged by the RTD.”
Standard & Poor’s in April revised its outlook to negative from stable on the A-plus rating for RTD’s certificates of participation, citing pressure from the Eagle P3 project.
A joint venture of Fluor Enterprises Inc. and Balfour Beatty Rail Inc. will design and build the commuter rail line.
“Moody’s views the operations of the project to be somewhat more complex than for the typical P3 project [because] the concessionaire is not just responsible for maintaining physical infrastructure but for maintaining a significant amount of mechanical and electrical equipment,” the analysts wrote.
They noted that Denver Transit Partners also is responsible for the actual operations of the rolling stock and other related systems.
At financial close, DTP is expected to be 45% owned by Uberior Infrastructure Investments (No. 4) Ltd., an affiliate of Lloyds Banking Group, and 45% by an affiliate of John Laing Investments Ltd. Fluor will have a 10% stake.
Another P3 partnership known as Denver Union Station Project Authority last week closed on a $146 million loan from the federal government that was structured like a long-term bond deal under the U.S. Department of Transportation’s Transportation and Infrastructure Finance and Innovation Act.
The partnership includes the RTD, the Denver Regional Council of Governments, and the DOT.
Additional funding for the $483 million redevelopment of Union Station will come from a $155 million federal loan under the Railroad Rehabilitation and Improvement Financing Act, $103 million in state and federal grants, and another $79 million in cash.