LOS ANGELES — The Orange County, Calif., toll roads that introduced the concept of paying for roads through a fee-based system, rather than taxes, have soared over hurdles that caused their ratings to tank during the Great Recession.
Orange County decided to pay for the roads using tolls during a funding crunch in the 1980s. The California Department of Transportation is in charge of maintenance.
The dual joint power transportation agencies -- The San Joaquin Hills Transportation Corridor Agency and The Foothill/Eastern Transportation Corridor Agency -- both under the auspices of Orange County's The Toll Roads, are managed separately. Ratings on the agencies were cut as low as BB following the recession, because revenues forecast for the toll road during planning for the roads didn't meet expectations.
Over the past two months, both agencies received boosts from rating agencies, which cited above-forecast revenue growth.
"The upgrade reflects growth in transactions and revenues above forecast resulting in debt service coverage higher than the previous forecast," wrote S&P Global Ratings credit analyst Todd Spence.
The increased revenues and higher debt service coverage will help the agency meet its ascending debt service requirements, he said.
The 791-square-mile coastal Southern California county has the largest network of toll roads in the state. The Toll Roads, comprised of State Routes 73, 133, 241, and 261, make up more than 21% of the county's limited-access highway system.
Studies indicated new roads were needed in the 1970s and the routes were roughly sketched out by 1981 in the county's road plans. They were originally planned as freeways, but due to a lack of state funding they had to be built as toll roads, said Lisa Telles, a tollways spokeswoman.
The toll roads were the first public highways to be constructed in Orange County since 1987. Though TCA built the toll roads and operates the toll collection system, Caltrans owns the roads and maintains them as part of the state highway system.
"Our system is a really important part of the entire network system," Telles said. "We are working together with the Orange County Transportation Authority and Caltrans to make sure all of these systems work together and they are coordinated and it becomes an efficient and functioning system."
The Toll Roads will not benefit directly from the $54 billion in funding coming from Senate Bill 1 passed by the California Assembly during the budget process, but it will indirectly in that the legislation covers Caltrans' ability to maintain the roads.
The Orange County, Calif. Tollways Agency has received two ratings boosts from separate agencies in recent months. First, in May, S&P Global boosted its ratings on the agency's senior lien debt from BBB-minus to BBB with a stable outlook. On Wednesday, Moody's Investors Service upgraded the San Joaquin Hills Transportation Corridor Agency's senior lien toll road revenues bonds to Baa3 from Ba2 Wednesday, also with a stable outlook.
Fitch Ratings has rated both the San Joaquin Hills and Foothill/Eastern bonds BBB-minus.
Moody’s also upgraded the Foothill/Eastern debt late Wednesday from Ba1 to Baa3. With Moody’s upgrade, all the agencies’ senior lien debt is now investment grade.
The rating agencies attributed the ratings upgrades to strong revenues. The Toll Roads also benefited from a legal settlement in late 2016 with environmental groups on a planned extension on the road network run by the Foothill-Eastern agency.
The agreement between the Orange County toll road agency, former state Attorney General Kamala Harris and national local environmental groups will protect San Onofre State Beach, the Richard and Donna O'Neill Conservancy and San Mateo Creek watershed while allowing exploration of other transportation solutions for south Orange County.
The 15-year battle was over the proposed Foothill-South Toll Road in southern Orange County and northern San Diego County.
This agreement resolves all outstanding litigation arising out of the TCA's Foothill-South and Tesoro Extension plans to extend the 241 toll road in southern Orange County.
Those plans were opposed by the Save San Onofre Coalition, the attorney general and various state agencies because they would have significantly damaged environmental and cultural resources in San Onofre State Beach, the Richard and Donna O'Neill Conservancy, and other open space lands, according to a statement released by Tollways when the agreement was reached in November.
"We basically settled the lawsuit and set aside areas that we would not cross in any type of alignment through," Telles said.
The settlement presents an opportunity for TCA to consider a number of transportation project ideas including State Route 241/Interstate 5 connection options while protecting sensitive lands and cultural resources within the San Mateo Creek watershed, including San Onofre State Beach and the Richard and Donna O'Neill Conservancy, according to the release.
The agency is currently evaluating options for relieving traffic in the area of south Orange County that has only one route to San Diego on the I-5.
"There is a real bottleneck in south Orange County," Telles said.
The Tollways is taking the approach of speaking with the community first, rather than drawing up rough plans to present to residents, said Amy Potter, the agency's chief financial officer.
"The other thing we are working on is a direct connection between the 241 toll road to the 91 Express Lanes," Potter said.
The boost to BBB from BBB-minus with a stable outlook came on its San Joaquin Hills agency senior-lien toll road refunding revenues bonds. It also received a boost to BBB-minus from BB-plus on the SJHTCA's junior lien toll road refunding revenue bonds.
Moody's upgraded the San Joaquin Hills agency senior bonds to Baa3 "acknowledging several years of stronger than actual forecasted traffic and revenue growth amid a slower pace of annual debt service growth due to the debt restructuring in 2014."
The rating considers the high leverage and an escalating debt service profile through 2040, which constrains the toll road's financial flexibility in the event of economic downturns limiting its time frame for recovery and resiliency, Moody's wrote.
The Tollways refinanced its debt for both agencies in 2013 and 2014 to take advantage of historically low interest rates and establish debt structure that align with the Toll Roads' historical revenue growth, including the dip in traffic that took place during the recent recession, according to tollways officials.
The 2014 debt restructuring of $2.4 billion in debt eliminated the mitigation payment and loan agreement from Foothill/Eastern and San Juan Hills agencies, and included the expectation that $120 million in mitigation payments will be reimbursed to Foothill/Eastern in annual installments from 50% of the agency's excess cash flow at the bottom of the flow of funds starting in January 2025.
Transactions and revenues were up for the third consecutive year in 2016, according to an investor document filed on EMMA last year.
The rating agency also ticked off a list of factors that kept the JTPA at a low investment grade rating, but added the caveat that they "believe the service area's high wealth levels, high traffic on toll free highways, and a population that relies on the highway network partially mitigate these risks."
Those risks included high debt levels and a debt service schedule that increases to $186 million from roughly $107 million in 2016; and uncertainty regarding the elasticity of tolls and management's financial forecast plans for annual toll increases
Traffic resulted in negative operational performance with traffic flat or decreasing from 2008-12;, according to S&P, however, transactions increased from 2014-16 ranging from 5.9% to 11.1%.
"The stable outlook reflects our view of good demand, with strong transaction growth, an dour assumption that the agency will be able to adjust rates as needed to maintain adequate debt service coverage," We could raise the rating during the two-year outlook period if the SJHTCA continues to outperform its revised forecast."
The San Joaquin Hills agency restructured $2.1 billion in debt in April 2011 gaining approval from bondholders to lower the debt-service coverage requirement to 1.0 times from 1.3 times and extending maturities to 2042. The bonds were originally slated to be repaid in 2033.
Analysts told The Bond Buyer at the time that the restructuring offered relief in the early years, but weakened the credit.
The restructuring was expected to save the toll road agency $550 million in debt service costs from fiscal 2012 through fiscal 2024, but debt service in each fiscal year from 2025 through 2036 would rise by $43 million, according to disclosure filed with the Municipal Securities Rulemaking Board.
Following the restructuring announcement, Standard & Poor’s put San Joaquin Hills BB-minus rating on negative credit watch. Moody’s had an underlying rating of Ba2 on San Joaquin Hills bonds with a negative outlook, while Fitch Ratings rated them BB with a negative outlook.
The Foothill/Eastern agency JPA members include the County of Orange and the cities of Anaheim, Dana Point, Irvine, Lake Forest, Mission Viejo Orange, Rancho Santan Margarita, San Clemente, San Juan Capistrano, Satna Ana, Tustin and Yorba Linda.
The San Joaquin Hills agency JPA members include the County of Orange and the cities of Aliso Viejo, Newport Beach, San Clemente, San Juan Capistrano and Santa Ana.