Fitch Ratings has assigned the following ratings to the Foothill/Eastern Transportation Corridor Agency (F/ETCA or the agency), CA.
--Second senior lien toll road refunding revenue bonds, series 2013 'BBB-';
--Junior lien toll road refunding revenue bonds, series 2013B 'BB'.
The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS
--Limited Traffic Profile: The Foothill/Eastern Transportation Corridor (F/ETC or the facility) serves as a highway connection for commuters in Orange and Riverside Counties. Traffic has grown only marginally over the last decade due to seven, mostly above inflationary toll increases since fiscal 2000. Future growth potential is limited in part by the narrow corridor in which development can take place. Revenue Risk Volume: Midrange.
--Price Sensitive Commuter Traffic: The F/ETCA has limited economic rate-making flexibility as current toll rates are close to the revenue maximization point. The average toll rate is higher than peers at more than 30 cents per mile. It is Fitch's view that inflationary increases are achievable over time. A history of pro-active decisions by management to raise rates is a credit strength. Revenue Risk Price: Weaker.
--Back Loaded and Long Dated Debt: The revised debt service schedule which extends debt by 13 years is better tailored to the risks of the project and provides growing financial flexibility. The debt service profile increases steadily to maximum annual debt service of $193 million (down from $297 million) in fiscal 2042. The agency's various reserves for debt service are projected to remain healthy at $217 million in fiscal 2013. There are no cross default or acceleration provisions which protect the senior debt. Debt Structure Risk: Midrange (senior lien) / Weaker (junior lien).
--Growing Financial Flexibility: The F/ETCA is dependent on continued toll rate increases and traffic and revenue growth throughout the life of the debt to maintain coverage levels at or above 1.30x. In fiscal 2012, the debt service coverage ratio (DSCR) was 1.42x utilizing $16.4 million of the escrow defeasance fund (EDF) and 1.17x without the assistance. The Fitch base case combined senior/junior lien DSCRs indicate a minimum of 1.19x in fiscal 2014 and an average of 1.52x through 2053 without use of the EDF. The agency's various reserves, totaling $604 million in fiscal 2013, serve as a key mitigant to weak short-term financial performance. Total leverage is high at 23x. Debt Service Risk: Midrange (senior lien) / Weaker (junior lien).
--Manageable Approved Capital Program: The F/ETC corridor is less than 15 years old and does not currently have any material state of good repair needs. The agency's fiscal 2013-2014 capital improvement program (CIP) is small at $47 million. A large portion of the CIP has not received the necessary environmental permits or record of decisions to proceed. The State of California's obligation to maintain the physical assets and a covenant to budget for capital expenditures annually provides some protection. Infrastructure Development/Renewal Risk: Stronger.
--Weaker traffic growth than projected by the traffic and revenue consultant over a sustained period.
--Toll rate increases that are materially below inflation for a sustained period.
--A decision to increase leverage to support the Foothill South project without commensurate financial mitigants.
--Dependence on the EDF for a prolonged period of time to meet the 1.30x/1.15x rate covenants.
The ratings are subject to execution of the Caltrans Cooperative Agreement in substantially its current form. Should the proposed transaction close, Fitch will withdraw the existing ratings on the outstanding series 1995 and 1999 bonds, excluding the 2035 maturity of the 1995 bonds that is not planned to be refunded. The current rating on these bonds is 'BBB-' with a Negative Outlook.
The bonds are secured by a pledge of net revenues and certain other pledged revenues such as development impact fees (DIF). F/ETCA has the right to withdraw up to $5 million DIFs to be used for any lawful purpose.
The agency is restructuring its debt to create more credit stability and capacity for future investment in expansion projects. The proposal includes second senior series 2013A, C, and D bonds and junior lien series 2013B bonds with a 1.3x and 1.15x rate covenant, respectively. These bonds will refinance the $2.2 billion in outstanding series 1999 bonds. Importantly, a default on the junior lien bonds shall not cause an event of default on the senior lien bonds. In addition, one maturity on the senior series 1995 bonds will remain as this will not be refunded.
The F/ETCA is a joint power authority with its sister agency, the San Joaquin Hills Transportation Corridor Agency (SJTCA) that was formed by the California legislature in 1986 to plan, finance, construct and operate Orange County's public toll road system. The Foothill/Eastern corridor, fully open in 1999, is 36-miles long comprising of State Routes (SR) 241, 261, and 133 while the SJTCA is a separate and distinct legal entity that manages the 15-mile SR 73 toll road (Newport Beach to southwest Orange County). A common staff manages both agencies but the projects are governed by separate boards, are financed independently, and funds cannot be commingled. The agencies appointed both a new CEO and CFO in the last seven months.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 2, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels
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