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Fitch Upgrades Orange County Transportation Authority, CA's 91 Express Lanes to 'A+'; Outlook Stable.

New York: Fitch Ratings has upgraded the long-term rating on Orange County Transportation Authority, California's (OCTA) $97.795 million of senior lien toll revenue bonds for the 91 Express Lanes program to 'A+' from 'A'. The Rating Outlook has been revised to Stable from Positive.

The upgrade reflects the continuation of strong traffic and revenue growth following the opening of connecting managed lanes operated by Riverside County Transportation Commission (RCTC) in March 2017. The connecting managed lanes systems are complementary and have bolstered already strong financial metrics at OCTA that Fitch views as sustainable.

KEY RATING DRIVERS

The 'A+' rating is supported by OCTA's long history of strong operating performance, demonstrated consistent revenue generating capability, and solid long-term prospects for continued traffic growth. These strengths are somewhat offset by heightened revenue and price volatility inherent to managed lanes, and the potential impact on liquidity and leverage from utilization of excess toll revenues to finance the development of other SR-91 corridor projects. Financial metrics are strong, with a high debt service coverage ratio (DSCR) of 3.8x, unrestricted cash balances that fully offset the current balance of outstanding debt, and manageable capital plans with no need for additional leverage.

Congestion Supports Increasing Volume - Revenue Risk (Volume): Midrange (Corridor Volume: Stronger; Managed Lanes Characteristics: Midrange)

Established traffic demand is evident, supported by commuters who traverse the corridor from their homes in Riverside County to the large and diverse employment market in Orange County. SR-91 is one of the most congested arteries in CA and is likely to become even more so given long-term expectations of continued population and economic growth, particularly in Riverside County. Fitch views these strengths as somewhat offset by a history of significant demand volatility. Favorably, the opening of RCTC's connecting managed lanes in March 2017 indicates that the systems are complementary, with over half of OCTA express lane customers connecting into the RCTC express lanes.

Solid Rate-Setting History - Revenue Risk (Price): Stronger

The authority has a long and consistent record of implementing toll rate adjustments, up and down, based on formulas that consider inflation and traffic volume. The toll policy allows for frequent adjustments and the formulaic nature of the process somewhat insulates rates from political considerations.

Affordable Capital Plan - Infrastructure Renewal and Replacement: Stronger

The Express Lanes have been regularly maintained in good condition, and the authority annually updates its 10-year capital improvement plan (CIP), which is manageably sized at $66 million and will be funded on a pay-as-you-go basis. The authority, partnered with the Transportation Corridor Agencies (TCAs), is considering an express lane connector to SR-241, with an estimated cost of $180 million that is expected to be fully covered by the TCAs with no obligation for OCTA.

Fixed-Rate and Rapid Amortization - Debt Structure: Stronger

The Express Lanes debt is fully fixed-rate with level debt service and a final maturity in 2030. Structural features are sound, with a cash-funded debt service reserve fund, various other operating and maintenance reserves, and a satisfactory additional bonds test and rate covenant. There are no additional borrowing plans at this time.

Financial Profile

Strong trends in traffic and modest toll rate hikes have improved already solid key financial metrics, with DSCR for fiscal 2018 estimated at a robust 3.8x. The express lanes' unrestricted cash position of over $117 million at fiscal year-end (FYE) 2018 remains strong, and sufficient to cover the remaining balance of outstanding debt, resulting in negative leverage (net debt-to-cash flow available for debt service) of -0.8x. Liquidity is unlikely to experience further build-up due to OCTA board policy that dedicates future-year excess tolling revenues to capital reserves for SR-91 corridor projects. Financial metrics remain robust under Fitch's rating case projections, not falling below 3.0x DSCR.

PEER GROUP

A direct comparison with other Fitch-rated managed lanes is difficult because no other managed lanes have a similarly long operational track record. RCTC (SR-91 express lanes senior lien and TIFIA bonds BBB-/Stable) shares a service area with OCTA as it connects to the eastern terminus of OCTA's Express Lanes. RCTC has similar tolling mechanics, HOV policy and lane configuration, and also uses the same operator to monitor traffic/toll collections. The rating differential reflects RCTC's high leverage and limited operational and traffic history. Similarly rated facilities include Fort Bend County Toll Road Authority (A+/Stable), which boasts similarly strong DSCR metrics of over 3x, but features a different operating profile with a relatively limited catchment area in the western Houston suburbs. By contrast, OCTA provides an important connection between Orange and Riverside counties, though its catchment area strength is somewhat offset by the inherent volatility of managed lane facilities.

RATING SENSITIVITIES

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:

--Further positive trends resulting from the RCTC integration;

--Continued performance in line with or in excess of base case expectations.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:

--Unexpected and material deterioration of the system's operating or financial performance leading to DSCR below 2.0x on a sustained basis.

CREDIT UPDATE

OCTA's SR-91 express lanes continue to benefit from the opening of connecting express lanes operated by RCTC along SR-91 in March 2017. Initial data based on the first three months of opening from April-June 2017 showed strong double digit traffic and revenue growth, and estimated results for fiscal year 2018 (ending June 30) reflect a continuation of robust annual growth in traffic of 16% over FY2017. Monthly westbound traffic in FY2018 increased 22% over FY2017, while eastbound traffic grew by 12%.

Financial metrics are extremely robust, given the strong profitability of the system paired with relatively low and predictable operating expenses and manageable capex requirements. Estimated toll revenues in FY2018 of $45.2 million are up 9% compared with FY17 levels of $41.4 million. Other revenues, primarily toll violation and processing fees and interest income, provided $10 million in FY2018, down 38% from the high point of $16 million in FY2017. Operating expenses normalized in FY2018, following a one-time spike in FY2017 as OCTA was engaged in a repaving project for approximately $13.7 million of one-time costs that were treated as operating expenses, which led to a significant 70% increase to approx. $32 million in FY2017. FY2018 expenses of $14.8 million represent a 19% decrease from FY2017 recurring spending (net of one time capital costs). Net pledged revenues of $40.6 million in FY2018 are estimated to provide 3.8x coverage of annual debt service.

The project has a very strong cash position with $117.6 million of unrestricted cash as of June 30, 2018 compared with total debt outstanding of $97.8 million as of Sept. 1, 2018, resulting in negative leverage. The express lanes also hold an additional $24 million of restricted cash in the DSRF and for maintenance costs. In 2017, the OCTA Board of Directors approved a proposal to dedicate future year excess toll revenues from the express lanes to fund capital projects within the SR 91 corridor, including the Placentia Metrolink rail station and highway improvements that were slated for funding from OCTA's Measure M2 capital plan. OCTA filled these reserves with excess toll revenues (after payment of opex, debt service, and required SR91 reserve deposits) leading to fund balance levels at FYE 2018 of $18.7 million in the capital reserve and $20 million in the Measure M2 capital reserve. In Fitch's view the capital reserves will likely prevent further buildup of unrestricted liquidity, but will not materially affect the high coverage levels or ability to fund necessary capex on the SR-91 express lanes.

The authority regularly updates its 10-year CIP for the express lanes, which is manageable at $66 million, and fully funded without additional debt. With the completion of the pavement rehabilitation project in FY17, the next major capital expenditure is approx. $10.5 million to upgrade the electronic toll collection system in FY 2018 and a back office software upgrade in FY2020. Not included in the CIP is a "direct connector" from SR-241 to the 91 express lanes, estimated to cost $180 million. OCTA does not expect to bear any of the costs of this project given the collaborative role with SR-241 operator, TCAs. The project still requires joint approval from OCTA, RCTC and the TCAs. OCTA has budgeted for $0 share of the project.

Also not included in the CIP is a plan to provide a minor expansion of capacity along SR-91 between SR-55 and SR-57, primarily involving better ingress/egress for merging vehicles. There are no major plans for GP lane expansion along the OCTA express lane span within the term of the debt (2030). The current proposed project is expected to be completed in 2025 at a cost of $250 million-$350 million and funded via Measure M2 (sales taxes) with additional support from the SR91 Measure M2 toll revenue reserve fund.

Fitch Cases

Fitch's base case is modeled on the updated OCTA sponsor case prepared in mid-2017, when some positive data from the RCTC connection was available. The base case assumes traffic growth in line with historical levels, at a CAGR of 1.5% from 2018-2031 compared with the historical CAGR of 2% from 2005-2018. The base case assumes expenditure growth of 3% and toll revenue growth at a CAGR of 4%, reflecting inflationary increases on top of projected traffic growth. Base case metrics indicate that the Express Lanes' DSCR will remain above 3x through final maturity, and not fall below 4x from FY 2022 onward. Average DSCR and maximum leverage for the remaining life of the debt are 4.6x and -0.8x, respectively

Fitch's rating case is conservatively modeled off the base case with a negative traffic stress scenario, to mirror recessionary losses. The rating case assumes an 8% recessionary decline in toll revenue in FY2019, a 4% decline in FY2020, and recovery to FY18 levels by FY23 for revenue and FY25 for traffic. Traffic following the modeled downturn grows at a CAGR of 2%, with revenue throughout the forecast growing at 2.7% CAGR. The rating case assumes expenditure growth of 3.9% per year, as well as a significant decline in liquidity in order to fund other SR-91 corridor projects. For Fitch's rating case, DSCR averages 3.6x and never falls below 3x, while maximum leverage reaches 0.9x.

Asset Description

The 91 Express Lanes, opened in 1995, are managed by OCTA as an enterprise fund under a long-term franchise agreement with the California Department of Transportation. The lanes span 10 miles, connecting the employment market of Orange County to the large and growing commuter base of Riverside County in Southern California. The bonds are payable from senior lien net revenues of the authority's 91 Express Lanes.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U9CA
Date:Dec 24, 2018
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