News Column

Fitch Affirms E-470 Public Highway Authority's (CO) Rev Bonds at 'BBB-'; Outlook Revised to Positive

June 13, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB-' rating on the E-470 Public Highway Authority, CO's (E-470) approximately $1.6 billion in outstanding senior lien revenue bonds. The Rating Outlook has been revised to Positive from Stable.

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 Denver International Airport and intersecting with major highways leading into Denver's business center. Despite exhibiting some sensitivity to economic cycles, traffic is now above the previous peak FY 2007 level following 12.1% transaction recovery over 2010-2012 and another 8.2% growth in FY 2013 to 58.4 million. Overall, transactions have grown at a compound annual growth rate (CAGR) of 2.5% since 2004, when the final segment of the project road became operational. Nevertheless, continued and sustained traffic growth will be necessary to meet the authority's escalating debt service profile in the next six to 12 years. (Revenue Risk: Volume- Midrange)

--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 $0.34 per mile and $0.27 per mile respectively, but demand has so far appeared relatively inelastic, and has therefore not constrained the needed revenue growth to date. (Revenue Risk: Price- Midrange)

--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 $113 million and will be largely internally-funded with liquidity from the capital improvement subaccount of its surplus fund. Management has demonstrated a proactive approach to maintenance and budgets around $3.5 million of operating expenses annually for regular renewal and replacement expenses. (Infrastructure Development/Renewal- Stronger)

--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 $127.9 million debt service reserve fund, currently sized above the $118 million requirement, provides some additional cushion. (Debt Structure- Midrange)

--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 $48 million of unrestricted cash and reserves available for O&M equating to 577 days cash on hand (DCOH) for FY 2013, provides some financial flexibility.

RATING SENSITIVITIES:

--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.

SECURITY:

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.

CREDIT UPDATE:

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 $129.2 million from $116.7 million in 2012. With year-to-date (YTD) traffic up coupled with the effect of the implemented annual toll increase, data through April shows net toll revenues 8% over budget and 17% over the same period in 2013.

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 $0.05-$0.10 through 2021, and generally inflationary rates thereafter, should help its financial profile. Although toll increase policy is subject to change, the authority has generally followed its predetermined schedule thus far. Continued cost containment could help mitigate a slowdown in traffic growth should one arise but, ultimately, higher than anticipated toll rate increases may be necessary to maintain healthy coverage levels.

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 $180 million of unrestricted cash and investments as of 2013, although Fitch notes that $90 million of this is earmarked for its capital improvement plan needs and another $60 million is set aside to pay down debt during future bond call opportunities. The remaining funds, when taken together with the operating reserve, provide for 577 days cash on hand. Additionally, the debt service reserve fund is more than fully funded with less than 20% in the form of a surety.

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 $113 million and focused on both renewal and replacement as well as some construction related to projects, such as the Quebec Street interchange, which management projects will have a positive impact on traffic volume. The program is expected to be funded with funds from the capital improvement subaccount ($95 million as of March 2014) of the general surplus account with no additional bonding necessary. There are another $364 million of possible widening and interchange construction projects; however, management indicated that these would be demand-driven and not likely until 2018 at the earliest. Further, the authority has a strong history of coming in on-time and under budget with respect to its capital program.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=834596

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Jeffrey L. Lack

Associate Director

+1-312-368-3171

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

Chad Lewis

Senior Director

+1-212-908-0886

or

Committee Chairperson

Saavan Gatfield

Senior Director

+1-212-908-0542

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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