OREANDA-NEWS. Fitch Ratings has affirmed approximately $17.2 million in Florida Municipal Loan Council (FMLC) infrastructure improvement revenue bonds, series 2012 (9B Design Build Finance Project) at 'AA-'. The Rating Outlook on the bonds remains Stable.

The rating reflects the credit strength of the Florida Department of Transportation's (FDOT) statutorily authorized obligations under the design build finance (DBF) contract. Although the bonds are not directly exposed to completion and operating risk, the rating further reflects the progress made to date on the project with Trustee-held Project Fund inflows from FDOT and disbursements to the contractor according to schedule.

KEY RATING DRIVERS

FDOT's Solid Ability and Willingness to Meet Obligations:

Bond payments are derived from statutorily authorized payments to be made by FDOT, subject to appropriation, pursuant to a DBF contract. Pursuant to section 334.30 of Florida Statutes, FDOT can enter into DBF contracts and other Public-Private Partnerships (PPPs) for projects included in FDOT's work program.

Structured Arrangement Limits Completion Risk:

The bonds are structured similar to a receivable financing, with the bondholder isolated from the risk of the contractor failing to perform. The bonds are structured to have 1x coverage. Bond proceeds are only drawn down for FDOT-approved work, ensuring that at any time the combination of bond proceeds, contract payments due from FDOT for approved work and structured liquidity is equal to the par amount of the bonds. A termination of the DBF contract and certain other events would lead to a mandatory tender of the bonds but there is no premium should these occur, meaning that available resources should always be sum sufficient to cover debt service.

Mutual Project Benefits & Waiver of Offsets:

While the structure of the transaction isolates the bondholder from completion risk, the statutes that allow FDOT to enter into DBF contracts and FDOT's construction risk mitigation procedures indicate that the interests of all parties are aligned. The DBF approach allows for project acceleration without a short-term impact to FDOT's cash outlay. In addition, this particular financing structure includes a waiver of offsets by FDOT once work has been approved, minimizing leverage on the DBF contractor's balance sheet. In conjunction with these benefits, FDOT requires a surety bond sized to 100% of the contract price and will only be required to pay for approved work. While bondholders are not exposed to contract frustration or contract default, the proper alignment of interests between FDOT and the DBF contractor provides comfort.

RATING SENSITIVITIES

Further changes in the credit quality of FDOT's statutorily authorized obligations could impact the rating either positively or negatively.

SUMMARY OF CREDIT

The project will connect US 1 to I-95 via an extension of SR 9b from US 1 to I-95 in Florida. Due to weather-related delays and holidays, the original completion date of Dec. 15, 2015 was extended to July 1, 2016, and approved by FDOT. The contractor, Infrastructure Development Partners, is now on track and has reached 99.6% completion; they expect to reach the new completion date with no further delays. Minor change orders have also increased the contract value from $94.901 million, to $94.986 million. To date, the contractor has been paid approximately $89 million out of the project fund. The bond is scheduled to mature on Feb. 1, 2017.

To accelerate projects, FDOT has allowed contractors to procure their own financing. However, the financial crisis significantly increased the cost of obtaining funding for contractors, slowing down progress. In addition, the gap between project completion and FDOT payment has also increased, making the cost to contractors prohibitive. To help alleviate this issue, FDOT entered into a DBF agreement with the contractor that commits to a set payment schedule subject to the amount being earned by the contractor and to future appropriation by the Florida legislature where the project is scheduled in future years. The agency has agreed to advance funds to the project via the bond issue through the funding agreement with the contractor that pledges the future payments from FDOT in the DBF agreement.

As long as the contractor meets its obligations to construct the project pursuant to a fixed-price date-certain design build contract, then FDOT agrees to pay FDOT contract payments pursuant to an agreed upon schedule, subject to appropriation. Bond maturities are structured to match this schedule. The contractor is required to have a surety bond that covers 100% of the project cost plus a cushion for a 25% increase.

Pursuant to the contract, the DBF contractor submits monthly draws to the Trustee. Upon acceptance of the work and certification of the earned amount, FDOT will make a contract payment pursuant to an agreed upon schedule in the trust indenture and funding agreement. The scheduled payments are such that FDOT contract payments will first be used for interest payments and then to fund contractor draws for work completed. The gap in the schedule will be covered by bond proceeds and then FDOT contract payments will commence again and retire the bonds. Separately, the capitalized interest account will be used to cover interest on the bonds during the period when FDOT is not providing contractor payments.

A slow-down in construction progress will slow down FDOT payments, while accelerated work will only be approved at a level equal to FDOT's cash availability schedule. Pursuant to sections 4.01 and 5.01 of the indenture, a default by the contractor and surety will result in a tender of the bonds, as will a reduction in the contract price exceeding $250,000 or 15 consecutive or cumulative months of failed FDOT work certifications. A letter of credit (LOC) equal to $2.6 million has been provided to cover the use of bond proceeds for issuance costs, administrative expenses, and interest costs during the delay should this situation occur.

Bondholders are isolated from contractor risk through several features of the DBF contract, which includes by reference state of Florida DB specifications and also the DBF request for proposals (RFP) issued by FDOT. In particular, the trustee will not disburse funds in the FDOT contract payment account or the bond proceeds account of the project fund without an FDOT engineering certification that the work meets FDOT standards and has been accepted. There is no retainage under this framework as FDOT normally retains funds in the final quarter of payment. However, in the DBF arrangement, project completion will have already occurred well before. In addition, pursuant to the RFP which is part of the final DBF contract, FDOT indicates that once an approval has been granted, no offsets can be made against that payment. It can only be applied to the approval of future payments. Thus, the trustee will only disburse funds for approved work, and pursuant to the RFP, section 337.145 of the state of Florida statutes regarding offsetting payments is not applicable.

SECURITY

The bonds are secured by FDOT contract payments and all funds held by the trustee pursuant to the indenture, including the project fund and the bond fund, which includes the reserve account and capitalized interest account. The contractor has provided a $2.6 million LOC in favor of the agency and the trustee that can be used to cover administrative expenses and other items in the event of a mandatory tender. The bonds are not secured by payments made by the surety.