The Positive Outlook reflects E-470's strengthened financial and operational profile since the 2008-2009 recession. Traffic continues to outperform Fitch's base case assumptions (up a combined 20.3% since 2009), and management has taken strides to reduce its original sharply escalating debt service profile and to manage expenses. As a result, coverage rebounded to pre-recession levels (1.48x in fiscal year (FY) 2013) and management currently anticipates the debt service coverage ratio (DSCR) to remain over 1.50x in the near-to-medium term.
Fitch's base case reflects slightly lower traffic growth rates, resulting in a sustained period of DSCR remaining around 1.30x-1.40x in the medium term. Fitch's rating case assumes limited traffic growth and higher expense growth resulting in a minimum DSCR level close to 1.20x in the medium term before gradually rising through maturity, in line with the peer projects with debt rated 'BBB'. Importantly, the authority does not anticipate any near-term debt issuances to fund capital needs, and its strong liquidity position provides significant cushion against unforeseen events. Successful implementation of the authority's debt management plan along with sustained traffic growth and expense management would likely lead to upward rating migration.
KEY RATING DRIVERS:
--Established Traffic Base With Some Volatility: Traffic on the road is primarily commuter based, providing access to
--Moderate Rate-Making Flexibility: Management has demonstrated a willingness and ability to raise rates. Annual increases have been established through 2021 to meet rising debt service obligations and inflationary increases are planned thereafter. The current passenger toll rates for license plate and electronic tolling customers are relatively high at
--Manageable Capital Improvement Plan: E-470 has a history of delivering projects on time and under budget. The 2014-2018 capital plan is modest at
--Escalating Debt Service Profile With Limited Refinancing Risk: E-470's annual debt service obligations will increase by more than 60% by 2026 and remain elevated thereafter. Furthermore, nearly 10% of the outstanding debt remains subject to mandatory tender. While a failed tender would not trigger a term-out or a default, interest costs would be higher as a result. However, nearly all of the outstanding debt is fixed rate, and the authority has plans to further smooth and reduce its future obligations. The
--High Leverage but Strong Liquidity: The authority's net debt-to-cash flow available for debt service (CFADS) is high but not unreasonable relative to peers at 11.5x and its DSCR in FY 2013 increased marginally to 1.48x from 1.46x. Still, both transaction and toll rate growth, as well as continued proactive financial management, will be necessary going forward to ensure the 1.30x rate covenant is met in the face of the escalating debt service profile. E-470's healthy liquidity, including over
--A material change in near- to medium-term traffic and revenue growth due to heightened sensitivity of demand to further toll increases could impact the rating;
--O&M expense growth in excess of forecasts that results in lower debt service coverage levels and more limited financial flexibility could pressure the rating;
--Successful implementation of the authority's debt management plan in conjunction with continued revenue growth and expense management that lead to a DSCR profile with an average not significantly below 1.50x in Fitch's rating case projection could lead to upward rating migration.
Senior bonds are secured by a pledge of toll revenues, excess vehicle registration fees (after vehicle registration fee bond debt service), highway expansion fees, and interest earnings after the payment of operating expenses.
Traffic on E-470 grew for a fourth straight year in 2013, rising above its pre-recession level to a new peak of approximately 58.4 million transactions. Further, year-to-date transactions are up nearly 13% through four months. This growth has been despite annual and substantial toll increases, reflecting relatively inelastic demand. As a result, net toll revenue for 2013 grew 10.7% to
The fact that E-470's sizeable and continued toll increases have not had a negative impact on traffic growth demonstrates E-470's rate-making flexibility. However, in the event that traffic does not continue to grow, price elasticity of demand trends higher, or expenses are not prudently managed, financial flexibility will be pressured. The authority does have a history of proactive financial management that helped it navigate the 2008-2009 economic recession, yet concerns remain surrounding the near-term escalation of the debt service profile and refinancing risk associated with existing put bonds, with the potential for higher interest costs if a refinancing is not successful.
Going forward, the authority's expected annual toll increases of
As a result of management's efforts to control costs along with increased toll revenues, CFADS continued to rise in 2013, increasing 11% following growth of 6.3% in 2012 and 15.1% in 2011. Fitch notes, however, that E-470's escalating debt service profile necessitates growth of this magnitude. With the increased cash flow, DSCR increased marginally to 1.48x from 1.46x in 2012 and is budgeted to remain flat in 2014. Leverage, while high at 11.5x net debt-to-CFADS, is not out of line with some similarly rated peers and is expected to migrate down to approximately 7.7x by 2018 as the authority pays down principal.
Providing additional financial flexibility is the authority's strong internal liquidity position. This is an important credit strength and helps to mitigate escalating debt service requirements, basis risk and, in the unlikely event of a swap termination, termination payment and unhedged variable-rate risk. The authority had approximately
E-470 is a relatively new facility with phase 1 opening in 1991 and the final phase opening in 2003. As a result, the facility is in good condition with minimal annual capital expenditure needs. The authority's current five-year capital improvement program is modest at
Additional information is available at 'www.fitchratings.com'.
--'Rating Criteria for Infrastructure and Project Finance' (
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges and Tunnels
Source: Fitch Ratings
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