Fitch Affirms Texas Turnpike Authority's Revs At 'BBB+'; BANs At 'AA'.

NEW YORK -- Fitch Ratings affirms the underlying 'BBB+' rating on the following outstanding bonds issued by the Texas Turnpike Authority (TTA; Central Texas Turnpike System) with a Stable Rating Outlook:

-- $1,149,993,782 first tier revenue bonds, series 2002-A;

-- $150,000,000 weekly rate demand bonds, series 2002-B;

Fitch also affirms the following issue at 'AA':

-- $900,000,000 second tier bond anticipation notes (BANs), series 2002.

The series 2002-A and -B bonds have a long-term rating of 'AAA' based on a guarantee of scheduled debt service payments under a financial guaranty insurance policy provided by Ambac Assurance Corporation (insurer financial strength rated 'AAA' by Fitch). The series 2002-B bonds have a short-term rating of 'F1+' based on the support of a liquidity facility in the form of a standby bond purchase agreement provided by The Bank of Nova Scotia.

The first tier bonds are secured by a gross lien on revenues of the system. The second tier BANs are secured by a lien on gross revenues that is junior and subordinate to the first tier bonds and from the proceeds of obligations to be issued to refund the BANs. The BANs are scheduled to mature in 2007 and 2008 and are assumed to be taken out with a draw on a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan from the United States Department of Transportation (USDOT). The TIFIA loan is sized adequately to pay principal on the BANs when due, and will be drawn upon pursuant to a loan agreement executed prior to closing on the bonds. The TIFIA loan is secured by a lien on gross revenues junior and subordinate to both the first and second tier obligations. Additional second tier or subordinate lien obligations may be used in lieu of TIFIA loan proceeds if they prove cost-effective. The issuance of second tier bonds to take out the 2002 BANs is not subject to an additional bonds test.

While start-up toll road project risks exist and stress tested debt service coverage is weak for a 'BBB+' rating, Fitch believes these two factors are significantly offset by: the strong commitment and support from the Texas Transportation Commission (the Commission), including the obligation to cover operating, maintenance and rehabilitation expenses if necessary, significant structural enhancements and legal protections that among other things neutralize the risk of TIFIA's springing lien; a financing plan with adequate financial flexibility to mitigate downside modeled forecasting risks; the economic strength of the service area; and, rapidly increasing congestion in the corridors the project is designed to serve.

The Commission, which by statute governs the Texas Department of Transportation, of which the TTA is a division, provides significant credit enhancement to the project. Excluding local government contributions for right-of-way acquisition, the Commission has committed to provide up to $700 million in public equity towards construction costs in order to reduce the debt burden of the project. In addition, given the lack of authority for the State of Texas to file for bankruptcy and the provisions within the trust indenture and the TIFIA loan agreement that limit the ability of the federal government to spring its lien to senior status (to the remote possibility of insolvency of the Commission), the $917 million TIFIA loan enhances the senior lien bonds through its subordinate cash flow position can be viewed as additional quasi-equity. As a result, only about 41% of total project cost is financed through senior debt. The Commission has also taken on the risk of cost overruns for the entire project, significantly mitigating completion risk. The Commission has also resolved to build certain interchanges and essential connectors from other sources of funds and ensure timely opening of those components of the network.

Despite some small design changes, including changes to frontage roads and the addition of tolled and free ramps on the northwestern portion of the project, the project is currently on schedule for opening in December of 2007 and thus far is under budget. While cost overruns or construction delays can not be ruled out, the exposure is considerably lower at this stage. Given the changes in design, a revised traffic and revenue forecast has been completed. The updated forecast incorporates modifications to the project configuration and revised socio-economic assumptions given actual experience. Overall, the revenue forecast is slightly higher than the 2002 forecast used to finance the project. The plan developed by the Commission for project delivery has adequate protections within it to absorb delays, and includes the provision of capitalized interest on the bonds and notes through October of 2008. In addition, the SH 130 component used the design-build process and includes liquidated damages for delayed opening on all four segments.

A key rating consideration is the flexibility available to first tier bondholders within the finance plan. A Fitch stress scenario that assumed reduced auto and truck traffic on the project based on five-year delayed land-use and reductions in the value of time generated adequate debt service coverage to ensure full and timely payment on the First Tier bonds. In addition, the toll regime reflects a low to moderate starting toll rate with infrequent increases every 7-to-10 years. Unlike most start-up project financings, the TTA project includes $150 in variable rate debt. However, the financial flexibility available even in a down-side scenario from cash flow, reserves, toll flexibility and Fitch's expectation that the management team would take pro-active steps to mitigate risk from interest-rate volatility allow this start-up project to support a small percentage of variable-rate debt.

Under the stress scenario described above, there is a high probability that the TIFIA debt may have full and timely payment problems. Mitigating this risk is the tremendous growth potential of the region and the availability of some ratemaking flexibility that provide a high probability of ultimate recovery on the TIFIA loan by final maturity in 2042. Fitch is relying on an opinion of bond counsel as to the constitutional and legal provisions that limit the risk of a springing TIFIA lien to the insolvency of the Commission, and that non-payment of the TIFIA loan on a full and timely basis and violation of covenants under the trust indenture and/or TIFIA loan agreement would not, in and of themselves, result in the TIFIA loan springing to first tier status.

The 'AA' rating on the BANs reflects the long history of the Commission in maintaining its eligibility for federal-aid highway reimbursements and continued confidence that the Commission will maintain that eligibility by meeting all the normal performance criteria for doing business with the USDOT. Given performance to date and that full and timely repayment is essentially dependent on the ability of the Commission to perform, the BANs are consistent with a very high investment grade rating.

The Central Texas Turnpike Project consists of three elements - two in north-Austin (SH45 and Loop 1) referred to as the northwest elements and one that runs approximately 50 miles in a north-south direction (SH130), essentially parallel to Interstate 35 (a key North American Free Trade Route between Mexico, the United States and Canada). Two additional elements are proposed to be built - 183A and SH 45 South. The 183A project will feed traffic to and from the congested northwest Austin suburbs to SH45 and is being funded by the Central Texas Regional Mobility Authority. TxDOT has covenanted to complete the project by 2011, but the CTRMA projects completion by 2007. SH45 South is being delivered through a Comprehensive Development agreement with the Commission, which has covenanted to complete the project by 2010. The project service area has begun to experience job growth following the significant losses in 2001 and 2002. Given the area's diverse economy, desirable location, well educated workforce and the availability of land for development, future prospects for growth remain strong.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.