Fitch Ratings assigns a 'BBB-' rating to the 95 Express Lanes LLC's (95 Express) $300 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan.
In addition, Fitch affirms the 'BBB-' rating on 95 Express' $242 million senior private activity bonds (issued through the Virginia Small Business Financing Authority).
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
Demonstrated Traffic Volumes in Solid Service Area: The existing general purpose lanes have high levels of congestion in the northbound direction (morning) and southbound direction (evening), consisting primarily of commuter traffic. The strategic location of the project in a service area with high wealth levels and limited viable alternatives for commuters is a key strength for this managed lane application.
High Pricing Power with Some Uncertainty: 95 Express will maintain a dynamic pricing policy on the managed lanes to manage traffic throughput and maximize revenues. While managed lanes projects are more sensitive to economic downturns, this risk is partially offset by the strong regional demographics and existing high congestion levels as well as the relative stability of traffic volumes during the recent economic downturn. Given the limited operating history of managed lanes, there is uncertainty associated with the optimal toll rate related to the assumed time savings; however, aforementioned strong demographics should support the assumed moderate-to-high toll rates. These risks are further partially mitigated by the ramp-up reserve and Fitch's conservative approach to traffic and revenue assumptions.
Construction Package with Strong Contractors & Moderate Construction Complexity: In Fitch's view, the project has an above-average construction and contractual support package including a fixed-price turnkey contract with a highly rated contractor (Fluor Corporation, rated 'A-' by Fitch) supporting the design build joint venture. Strong construction risk mitigants are also present, including a 100% parent guarantee and liquidated damages inclusive of principal and interest through the long stop date. Additionally, the project benefits from sizable construction contingency and structured reserves to deal with unforeseen construction issues. The construction contract contains other standard elements including a 40% liability cap.
Fixed-Rate Debt and Solid Covenants: The debt service profile consists of fixed-rate debt with no refinance risk. Senior debt is backloaded with principal amortization scheduled to begin in 2030. The TIFIA structure includes significant flexibility between mandatory and scheduled principal and interest payments in the event that traffic and revenue projections do not materialize and/or future economic conditions impact the assumed managed lanes usage levels. The additional bonds test (1.25x total debt service coverage for construction related activity and 2.0x senior debt service coverage for refinancings that increase the debt quantum) and distribution test (1.30x total debt service coverage) provide solid protection against increased leverage. Senior reserves are adequate at the greater of 12 months senior interest or nine months debt service and also included is a required minimum balance in the ramp-up reserve equal to nine months of TIFIA mandatory debt service. Additionally, a TIFIA debt service reserve equal to 12 months of interest funded after the capitalized interest period is now included.
Financial Flexibility is Low-to-Moderate and Leverage is High: Under Fitch's Base Case (not including the ramp-up reserve), debt service coverage, including senior and TIFIA mandatory minimum debt service, averages 4.85x with a minimum of 1.71x. Fitch's Rating Case yields average debt service coverage, including senior and TIFIA mandatory of 2.06x with a minimum of 1.55x (in 2017). Under Fitch's Base and Rating Case scenarios TIFIA scheduled is also fully amortized, with some very minimal deferral in both cases. Given the TIFIA flexibility, ample financial cushion to deal with weaker conditions exists on both liens of debt. In Fitch's Base Case leverage (cash flow available for debt service [CFADS] to net debt) is initially high at over 23x in the first fully ramped-up year.
Equity and Grantor's Strength is Key:
Fitch does not view the credit quality of the Virginia Dept. of Transportation and the equity partners as a constraint on the project rating.
What Could Trigger a Rating Action
--Unforeseen construction delays and cost overruns, partially mitigated by the aforementioned construction package.
--Traffic and revenue performance at or below the Fitch Rating Case could lead to rating pressure.
--Traffic and revenue performance exceeding the Base Case, coupled with the Concessionaire's ability to manage operations and maintenance (O&M) costs as well as renewal and replacement
expenses could materially improve financial flexibility and higher coverage levels, improving overall credit quality.
SECURITY
The senior lien revenue bonds will be secured by a first-priority lien on project net revenues and the TIFIA loan will be secured by a second-priority lien on project net revenues. The priority shares of the TIFIA loan will spring to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.
TRANSACTION SUMMARY:
Relative to Fitch's expected rating provided on July 12, the final TIFIA loan sets mandatory debt service equal to 10% of scheduled interest from the 5th anniversary of Substantial Completion (SC) through the 6th anniversary of SC, and 17.5% of scheduled interest from the 6th anniversary of SC through the 7th anniversary of SC. Mandatory debt service will equal 25% of scheduled interest from the 7th anniversary of SC until Jan. 1, 2040 and 100% of scheduled interest from Jan. 1, 2040 through the level debt service period.
Scheduled debt service is equal to the amount of interest accrued and/or principal due on the applicable outstanding TIFIA loan balance from and including the first day of such payment period to and including the last day of such payment period minus the aggregate amount of TIFIA mandatory debt service (if any) required to be paid during such period on the TIFIA Loan. Additionally, scheduled TIFIA debt service includes principal payments of $5 million in 2035, $7.5 million in 2036 and 2037, $10 million in 2038, $15 million in 2039, $20 million in 2040 and $30 million in 2041.
In addition to these changes, the TIFIA loan rates are now locked, meaning that average debt service coverage ratios (including senior bonds and TIFIA mandatory) in Fitch's rating cases have improved to 2.06x from 1.84x. Likewise, the minimum coverage ratios have also increased to 1.55x from 1.33x.
For a complete review of Fitch's analysis of the Project please refer to Fitch's Rating Action Commentary 'Fitch Expects to Rate Virginia Small Business Financing Auth's Proposed PABs 'BBB-'' dated July 12, 2012, and Fitch's pre-sale report for 95 Express Lanes LLC issued on July 23, 2012.
