Fitch Rates Bay Area Toll Authority, CA's Sr Toll Revs Series 2018 A & B 'AA'; Outlook Stable.
--$200 million series 2018 A (Term Rate);
--$200 million series 2018 B (Index Rate).
The Rating Outlook is Stable.
The rating reflects BATA's monopolistic bridge network located within the large and affluent San Francisco Bay Area, strong pricing framework with high pricing power and low demonstrated elasticity of demand, as well as the authority's newly renovated infrastructure following near completion of its capital improvement plan (CIP). The rating also reflects overall solid senior lien financial metrics under Fitch's rating case scenario, as exhibited by a high average senior debt service coverage ratio (DSCR) from 2019 - 2049, a period that excludes outliers of 3.5x (3.1x when the BABs subsidy is treated as a revenue and not an offset to debt service), a minimum loan life coverage ratio (LLCR) of 4.1x, and a strong breakeven that indicates the structure does not require any further revenue growth to pay debt service. These strengths, in addition to the system's very strong pricing power, mitigate elevated total year-five leverage of 9.5x (9.7x net of swap termination values) and 10-year total average DSCR of 1.6x (1.5x). Liquidity is robust due to minimum fund balance policies that collectively support an unrestricted cash floor of $1 billion.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
The stronger assessment reflects BATA's monopolistic urban bridge system in the large, diverse, growing, and affluent San Francisco Bay Area. The assessment also reflects the system's affordable toll rates and demonstrated low elasticity of demand, suggesting rates could rise substantially from current levels prior to reaching revenue maximization.
Revenue Risk - Price: Stronger
BATA's strong pricing framework reflects unlimited legal rate-setting authority at the discretion of its board to directly support the bridge system. The board has a positive history of raising rates and of voter approval for toll-raising capital measures, suggesting limited political opposition to further toll increases.
Infrastructure & Renewal Risk: Stronger
BATA's bridge system is in good and seismically-sound condition with its sizeable capital program nearing completion and manageable capital needs over the foreseeable future. There are no debt issuances envisioned until the late 2030's. In June voters approved a broad $4.5 billion capital improvement program under Regional Measure 3 (RM3), which would be funded with up to $3 of toll rate hikes phased in over several years. The measure is being challenged in court, and it remains to be seen whether BATA will ultimately have the ability to levy the toll hikes. Although there are no definitive plans, Fitch would view some degree of leveraging as likely if RM3 is legally upheld.
Debt Structure: Midrange
Mixed Debt Profile: Senior debt benefits from its fully amortizing profile and cash-funded DSRF sized to the lesser of maximum annual debt service or 125% of average annual debt service. These strengths are offset by BATA's moderate unhedged variable rate exposure and multi-layered swap program. Legal covenants are adequate, with an additional bonds test of 1.5x, and a rate covenant of 1.25x.
Financial Metrics: Rating case financial metrics indicate a moderate 10-year total average DSCR at 1.6x (1.5x when the BABs subsidy is treated as a revenue), although DSCR from 2019 - 2049 is substantially higher at 2.1x (2x) and loan life coverage is 2.4x. Year five total leverage, including subordinate obligations, is elevated at 9.5x (9.7x when interest rate swap termination values are added to gross debt), which is mitigated by the system's very strong pricing power as evidenced by low toll rates in comparison to other monopolistic bridge systems and low demonstrated elasticity of demand. Fitch's breakeven analysis demonstrates very strong cash flow resiliency, as toll revenues could fall up to 1.1% annually, or 47% on a one time basis followed by base case growth, and still pay debt service.
BATA's closest peer is the Triborough Bridge & Tunnel Authority (TBTA; rated AA-/A+/Outlook Stable). BATA's higher rating reflects its significantly lower toll rates, newer infrastructure with pay-as-you-go maintenance practises, much higher liquidity, and substantially lower revenue diversion to other governmental entities.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
Degradation of operating performance or additional leverage resulting in total 10-year rating case average DSCR below 1.5x on a sustained basis.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
Given BATA's already strong credit profile and rating level as well as risks inherent to toll roads and bridge systems, upward rating action is unlikely.
BATA is issuing $400 million of senior lien toll bridge revenue bonds series 2018 A & B bonds to refund all outstanding 2014 Series C bonds and to pay the costs of issuance. The bonds are expected to sell via negotiated sale on or about the week of Dec. 3, 2018.
Fiscal year (FY) 2018 traffic and revenues grew moderately at 1.1% and 0.9%, respectively, due to strong regional economic performance, thus continuing a trend of annual traffic growth since 2011. Toll-paying traffic and revenues totalled 138 million and $727 million, respectively. All seven BATA bridges are expected to experience positive growth moving forward, reflecting expectations of continued growth across the San Francisco Bay Area.
Traffic and revenue growth supported strong financial metrics in fiscal 2018, with total and senior DSCR of 1.6x and 2.9x, respectively. Fiscal year end unrestricted cash remained quite healthy, exceeding $1 billion on top of DSRF balances cumulatively exceeding $500 million. The authority has a policy of maintaining a minimum $1 billion unrestricted cash balance, thus supporting sustained robust liquidity.
Regional Measure 3 (RM3) was approved by voters in the June 2018 election. Subsequent to its passage, a taxpayer group sued to invalidate the measure. Although the authority plans to implement a $1 toll hike in January 2019 under RM3, related revenues will be held in an escrow account until the lawsuit is settled.
If BATA prevails and RM3 is upheld then tolls will rise as much as $3 from current rates, phased in over time, and are projected to provide up to $4.5 billion in funding resources for a long list of new capital projects across the Bay Area with the aim of relieving congestion. Because funded improvements would not apply directly to the bridge system, the toll hikes required voter approval. Projects include improvements to rail, ferry, highway, bike, and pedestrian modes of transportation. RM3 would also provide up to $60 million of ongoing operational support to certain transit systems. The RM3 tolls could be increased with inflation, which Fitch views positively. Although any related toll revenues would be additive to cash flow available for debt service, a significant degree of leveraging would likely occur.
Fitch's base case assumes 2% annual inflationary toll rate hikes plus a one-time $1 toll rate hike in 2027 (in order to fund a major bridge replacement/rehabilitation), 2% inflationary O&M cost escalation, and flat interest and violations revenues. It also assumes all toll bridge traffic increases annually at 0.5%, except the Bay Bridge which is assumed to reach its capacity in fiscal 2021.
Base case financial metrics are strong overall, with 10-year senior DSCR of 2.8x (2.4x when BABs subsidies are treated as revenues)), 2019-2049 average DSCR of 3.7x (3.2x), minimum senior LLCR of 4.3x, and year five senior leverage of 4.9x (5.2x when swap termination values are rolled into debt outstanding).
Fitch's rating case uses the base case assumptions with the following modifications. The rating case conservatively assumes a recession leads to 2.5% annual traffic losses in fiscal years 2019 and 2020, followed by 1% growth in fiscal 2021 and 2022, and 0.5% growth thereafter until 2028 when the Bay Bridge is assumed to stop growing due to having reached maximum capacity.
Rating case senior lien financial metrics are solid overall, with 10-year DSCR of 2.7x (2.3x when BABs subsidies are treated as revenues), 2019-2049 average senior DSCR of 3.5x (3.1x), minimum senior LLCR of 4.1x, and year five senior leverage of 5.2x (5.4x when swap termination values are rolled into debt outstanding).
Fitch analysed two breakeven scenarios and considers them very strong due to the project's sizeable liquidity and solid DSCR levels. When run on the Fitch base case, the project would require negative -1.1% average annual revenue growth from fiscal 2018 to fully pay off all debt service obligations. Fitch performed a second breakeven analysis that showed revenues could be cut 47% and then grown annually at the base case revenue growth rate and still pay off all debt service obligations.
BATA manages seven of the eight major bridge crossings in the Bay Area, with the single exception being the Golden Gate Bridge. The bridges benefit from their monopoly over vital vehicular travel links throughout the region. The authority operates the FasTrak electronic tolling system and other administrative functions, while Caltrans performs bridge maintenance and is reimbursed by BATA. The board consists of 18 voting members from various local governments. The authority shares the same voting members as the Metropolitan Transportation Commission, which is a regional transportation planning governmental entity.