Fitch Ratings has assigned 'A-' and 'BBB' final ratings with a Stable Rating Outlook to Texas Transportation Commission (TTC), Central Texas Turnpike System's (CTTS) $451 million first tier series 2015A&B and $1.157 billion second tier series 2015C debt, respectively. The debt is being issued to refinance $666 million of the commission's existing $1.675 billion first tier debt and fully refund its $1.107 billion TIFIA loan.
The 'BBB+' rating of the commission's existing first tier debt remains on Rating Watch Positive, to be resolved once financial close on the new transaction has occurred. $1.009 billion of existing debt will be maintained within the new debt structure.
KEY RATING DRIVERS
The rating reflects TTC's commitment to support operating, maintenance and capital costs; a moderate reliance on revenue growth to break even; and a system supported by a strong and expanding service area. An escalating debt structure and periods of low debt service coverage ratios (DSCRs) have a constraining effect on the system's overall credit quality; however, flexibility to raise toll rates provides considerable protection from downside risk.
The Rating Watch Positive placed on the existing first tier debt reflects the expectation that the rating assigned to this debt will be upgraded to 'A-', to match the series 2015 first tier debt, once financial close has been reached.
Revenue Risk - Volume: Stronger
Multiple Segments, Strong Area: The Central Texas Turnpike System (CTTS) captures a mix of both commuter and long-distance traffic, with limited direct competition in the strong, growing, Austin, TX, service area.
Revenue Risk - Price: Midrange
Considerable Rate-Making Flexibility: Toll rates appear moderate in comparison with peers, and Fitch expects inflationary annual toll increases to have a limited impact on traffic. CTTS has demonstrated its willingness to raise tolls if necessary.
Infrastructure Development & Renewal: Stronger
Gross Pledge Supports Credit: TTC's pledge to support operating, maintenance and rehabilitation expenses, if necessary, provides certainty that necessary works will be undertaken regardless of CTTS' own performance.
Debt Structure: Midrange (First Tier); Midrange (Second Tier)
Back-Loaded Structure: CTTS' total debt service through 2038 escalates 5.6% annually, remaining moderately dependent on toll revenue growth.
Financial Metrics
Ample Coverage and Liquidity: Average first tier and total DSCRs in Fitch's base case are projected to be 3.1x and 1.6x, respectively. Strong liquidity support provides further protection to weather periodic stresses to the system.
Peers: CTTS' closest peers include expressway networks such as Central Florida Expressway Authority (CFEA; 'A'/Outlook Stable) and Colorado's E-470 Public Highway Authority (E-470; 'BBB-'/Outlook Positive).
RATING SENSITIVITIES
Negative:
Pricing Flexibility: Inability to raise toll rates as forecast may pressure the rating should traffic not materialize.
Traffic and Revenue Performance: Volatile traffic and/or revenue performance over a sustained period, beyond Fitch's expectations, may pressure the rating.
Positive: Future positive rating actions are considered unlikely in the near term (other than resolution of the Rating Watch Positive).
TRANSACTION SUMMARY
TTC is issuing its series 2015 refunding bonds in order to refinance the majority of its debt issued on behalf of CTTS for economic savings of approximately 22%. The refinancing will also smooth the aggregate debt service profile and reduce maximum annual debt service (MADS) by approximately $154 million, or 36%. The first and second tier bonds will refund all callable series 2002-A capital appreciation bonds (CABs); portions of the non-callable series 2002-A CABs; the series 2012-B put bonds; and the fully subordinated 2002 Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) bond issued under the TIFIA loan agreement. Additional proceeds will fund a six-month debt service reserve to support the second tier bonds, while the first tier reserve will remain fully cash-funded. The transaction priced Jan. 21, 2015 and is expected to close Feb. 4, 2015.
Post-refunding, CTTS will have $2.618 billion of outstanding debt, $1.461 billion on the first tier and $1.157 billion on the second tier, and no TIFIA loan. The debt is predominately back-loaded with a total aggregate annual debt service growth rate of 5.6% from 2015 through MADS, in fiscal 2038. This is tapered moderately from the pre-refunding growth rate of 6.2% on the prior structure because MADS in that structure occurred in 2042, four years later. First tier leverage (incorporating current accreted value of CABs) will decrease from 13.1x to 8.4x while total system leverage will be 15.8x. The back-loaded debt structure is illustrated by total MADS coverage of 0.6x, which, while low, is mitigated by the extended length of time to MADS.
The Fitch base case reflects a traffic growth scenario of 2.5% from 2015 to 2042 that, coupled with moderated toll increases, results in a total revenue growth rate of 4.4%. Projected average and minimum DSCRs over the life of the debt are 3.1x and 2.1x, respectively, for the first tier and 1.6x and 1.4x, respectively, at the aggregate level. Important to note, however, is the amortization structure wherein the second tier amortizes the bulk of its principal from 2031 to 2034, resulting in very high first tier DSCRs that skew average coverage metrics - removing these years from the calculation, average first tier DSCR is closer to 2.6x.
The Fitch rating case reflects a more moderate traffic growth rate of 1.8%, incorporating a traffic stress and recovery scenario beginning in year 10 reflecting capacity expansion on competing roads, and results in a total revenue growth rate of 3.6%. Projected average and minimum DSCRs over the life of the debt are 2.8x and 1.9x, respectively, for the first tier, and 1.4x and 1.3x, respectively, at the aggregate level. Stripping out periods of higher second tier amortization, the average first tier DSCR would be closer to 2.3x. Although the aggregate ratios are on the low end of criteria guidance for the 'BBB' category, Fitch notes the rating case scenario developed reflects a very conservative operating environment.
In addition to the Fitch base and rating cases, Fitch also undertook a revenue growth break-even analysis, assessing the rate at which total revenue could grow from its current level and still service annual debt obligations, taking into account dedicated liquidity support. In order for the first tier to maintain at least 1.0x coverage after depleting all available reserves, CTTS would only require a 0.4% total revenue growth rate. At the time of Fitch's presale report, the first tier total revenue growth rate was calculated to be 1.7%. This new rate reflects favorable pricing levels that allowed CTTS to considerably lower first-tier MADS from $288 million in the proposed refunding structure to $194 million in the final structure while further reducing the aggregate amortization profile. The first tier assumption, however, assumes a second tier default.
In order for both tiers to avoid default while depleting reserves, a 2.2% total revenue growth rate would be required. This compares to a 2.7% calculation in Fitch's presale report and to total revenue growth rates of 5.5%, 4.4% and 3.6% in the Stantec Inc. projections, Fitch base case and Fitch rating case, respectively. Significantly, this 2.2% rate is approximately in line with Fitch's individual base case growth assumptions for traffic and inflation, implying that, even in a scenario of no future traffic growth, only small real toll increases would be required to fully service first and second tier debt.
In Fitch's view, this break-even analysis demonstrates the resilience of the system and its financing structure, despite its back-loaded profile. Furthermore, these break-even figures illustrate the value that the liquidity provisions included in the proposed structure provide in mitigating the escalating nature of the debt profile as well as tight coverage levels in the rating case.
SECURITY
The first tier bonds are secured by a gross lien on revenues of the system. The covenant by TTC, which governs the Texas Department of Transportation (TxDOT), to budget for operational costs that cannot be supported by toll revenues, and to pay for ordinary and capital maintenance on the project, provides significant support to both the bonds and the overall system.
For further information please refer to Fitch's forthcoming New Issue Report to be published early February 2015.
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', (Aug. 20, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978774
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