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Fitch Affirms E-470 Public Highway Authority's (CO) Rev Bonds at 'BBB-'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed the E-470 Public Highway Authority, CO's (the authority) 'BBB-' rating on approximately $1.44 billion in outstanding parity senior lien revenue bonds. The Rating Outlook remains Stable.

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 metropolitan business center. Transactions still remain below the peak FY2007 level of 54.1 million, yet have grown at a 1.5% CAGR since 2004 when the final segment came online. However, traffic has exhibited some sensitivity to economic cycles and a favourable elasticity of demand is needed to meet the authority's escalating debt service profile, particularly over the next nine years.

--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 electronic passenger toll rate is relatively high at $0.33 per mile, but price elasticity of demand does not appear to be limiting needed revenue growth.

--Escalating Debt Service Profile with Limited Refinance Risk: E-470's annual debt service obligation will double by 2026 and remain elevated. Furthermore, approximately 10% of the outstanding debt is subject to mandatory tender within the next two years. And, while a failed tender would not trigger a term-out or a default, interest costs would be higher. Fitch notes, however, that nearly all of the outstanding debt is fixed rate and the authority has plans to further smooth and reduce its future obligations. The $134.8 million debt service reserve fund (currently sized above the $118 million requirement) provides some additional cushion.

--Moderate Leverage and Strong Liquidity: The authority's net debt-to-cash flow available for debt service (CFADS) is reasonable relative to peers at 12.5x. Debt service coverage in FY2011 increased to 1.57x from 1.39x; however, Fitch notes that both transaction and toll rate growth as well as continued proactive financial management will be necessary going forward to ensure the covenant is met given the escalating debt service profile. Providing some financial flexibility is E-470's very healthy balance sheet including over $140 million of unrestricted cash which equates to 2,090 days cash on hand (DCOH).

--Manageable Capital Improvement Plan: E-470 has a history is delivering projects on time and under budget. The 2012-2016 capital plan is modest at $97 million and will be largely funded internally with liquidity from the capital improvement subaccount of its surplus fund. In addition, management is proactive in maintaining the asset in good condition and budgets around $3.5 million of operating expenses annually for regular renewal and replacement expenses.

WHAT COULD TRIGGER A RATING ACTION:

--A material change in near- to medium-term traffic and revenue growth due to higher price elasticity of demand and/or an increase in O&M expenses that produces lower debt service coverage levels and more limited financial flexibility could pressure the rating;

--Near- to medium-term dependence on debt defeasance to avoid a rate covenant violation;

--Loss of the vehicle registration fees that materially impacts financial flexibility.

SECURITY:

The 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 continued its rebound in 2011, growing 1.5% following its 6.9% growth in 2010. While this growth is more modest, it reflects favourable elasticity when viewed in light of a 12.5% or $0.15 toll increase. As a result, net toll revenue for 2011 grew to $107.7 million from $94.3 million or 14.2%. The authority followed its scheduled annual toll increase in 2012, raising tolls $0.10, and data through May shows traffic up 3.5% and revenues up 7.2%, tracking close to budget. E-470's sizeable and continued toll increases have not had a negative impact on traffic growth and demonstrates E-470's moderate rate-making flexibility.

While E-470 has benefited from relatively stable demand and toll increases, traffic and revenue growth has been highly sensitive to economic conditions in Denver, as represented by the 11.7% reduction in traffic from 2007-2009. The authority's track record of proactive financial management has helped it navigate through the economic recession and lower than expected toll revenues. However, Fitch notes that in the event that traffic does not continue to rebound, price elasticity of demand trends higher, or expenses are not prudently managed, financial flexibility will be pressured. Additionally, concerns remain surrounding the near-term escalating debt service profile and refinancing of existing put bonds with the potential for higher interest costs.

Going forward, the authority expects to raise tolls by $0.05-$0.10 annually through 2021, and generally inflationary rates thereafter. Although the toll increases are subject to change, the authority has generally followed its predetermined schedule. Fitch notes that this should limit future political risks and provides greater certainty for future toll rates.

As a result of management's efforts to control costs as well as increased toll revenues, CFADS continued to rise in 2011, increasing 15.2% following growth of 10.2% in 2010. As a result, debt service coverage improved to 1.57x from 1.39x in 2010 and 2009. Leverage was moderate at 12.5x net debt-to-CFADS (including $155.4 million reserves). Continued cost containment will help mitigate the effects of slower traffic level growth, but ultimately, higher than anticipated toll rate increases may be necessary to maintain healthy coverage levels.

Providing additional financial flexibility is the authority's strong internal liquidity, which 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 fully funded debt service reserve fund and other funds and accounts equal approximately $277 million, which exceeds maximum annual debt service and is sufficient to more than cover the next three years of debt service requirements.

The authority's $97 million capital plan is modest and primarily focused on reconstruction of the oldest segment and resurfacing of the two next oldest segments as well as continuous hardware and software upgrades and various other projects. E-470 aims to maintain its facility at least at a 'B' level of service. The authority has a history of delivering projects under budget and the majority of the funds are expected to come from the $91.6 million of the capital improvements fund with no new borrowings anticipated in the near term.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

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

--'Rating Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 5, 2011).

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=646421

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.
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Publication:Business Wire
Geographic Code:1U3IL
Date:Jul 26, 2012
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