Fitch Affirms Kentucky Public Transportation Infrastructure Authority at 'BBB-'
Additionally, Fitch has affirmed the 'BBB-' rating on the $452.2 million Downtown Crossing project notes 2013 series comprised of $426 million tax-exempt 2013 series A and $26.2 million taxable 2013 series B and to the third tier toll revenue bond $452.2 million Transportation Infrastructure and Innovation Financing Act (TIFIA) loan 2013.
The Rating Outlook is Stable for all debt.
RATING RATIONALE
The 'BBB-' ratings reflect the advanced stages of construction of a complex overall project which is expected to be delivered largely on budget and on schedule to meet the substantial completion date in December 2016 for both the Downtown Crossing and East End portions. The ratings also reflect the stable greater Louisville service area and demonstrated regional traffic; however, the inherent uncertainty as to the level of demand with introduction of tolls, especially considering limited tolling familiarity in the region and the presence of free alternatives partially mitigates this. Revenue risk is somewhat offset by the project's proven historical demand profile and essentiality aimed to reduce high congestion between the states of Kentucky and Indiana. Still, uncertainty regarding the extent and length of ramp-up coupled with initially high leverage and increasing debt service profile has a constraining effect on the overall credit quality. Fitch rating case senior coverage is projected to average 2.3x debt service coverage ratio (DSCR) post ramp-up, with an average all-in coverage of 1.3x DSCR and 1.4x loan life coverage ratio (LLCR). The moral obligation by Kentucky Transportation Cabinet (KYTC) on maintenance costs provides comfort at this rating level.
KEY RATING DRIVERS
Advanced Construction; Completion Guarantees [Completion Risk: Stronger]:
While the project initially involved a complex water crossing and interchange between three major U. S. interstates, completion risk is largely offset by the advanced stage of construction, approximately 90% complete, and a fixed-price, date-certain contract with Walsh Construction Company (part of the Walsh Group), an experienced design builder whose credit quality does not pose a rating constraint. Liquidity is sufficient to address liquidated damages and security includes 5% project contingency. Moreover, the commonwealth provides a back-up construction completion guaranty, whose appropriation-backed debt is rated 'A+'/Outlook Stable. The project is on budget and on time to meet its scheduled substantial completion date in December 2016, with revenue collection to commence by the start of the new year.
Established Traffic Offsets Greenfield [Revenue Risk - Volume: Midrange]: The Louisville-Southern Indiana Ohio River Bridges (LSIORB) project involves expanding an existing Ohio River crossing to accommodate the I-65 interstate highway, constructing a new crossing/highway connection and the East End Bridge being constructed by Indiana that will help create a highway loop around Louisville. A toll rate policy has been finalized and initial rates are $4 roundtrip per passenger vehicle, if using a transponder, which Fitch views as reasonable compared to other tolled bridges in the area and nationwide. Commuter traffic is expected to comprise approximately 87% of total traffic. While the I-64 bridge and the U. S. 31 Bridge offer free alternatives, these facilities are expected to have very high congestion levels during peak hours leading to higher time travel.
Pricing Flexibility Limited for Bi-State [Revenue Risk - Price: Midrange]: The project benefits from unlimited tolling flexibility and the need for both the Downtown Crossing and East End portions of the project to generate sufficient revenue to cover all expenses and meet financial covenants. Per the finalized toll rate policy, beginning July 1, 2018, tolls will increase by the greater of inflation or 2.5%, for as long as tolls are in force. However, the bi-state nature of the toll approval process could result in delays to increases when requested.
State Support Mitigates M&R Shortfall Risk [Infrastructure Renewal: Stronger]:
Renovations to the JFK Bridge have extended the useful life of the asset and, upon completion, it will support six lanes of southbound traffic while the newly constructed Lincoln Bridge will accommodate six lanes of northbound traffic. Covenants require an independent engineer to determine operations and maintenance (O&M) and renewal and replacement expenditures. Fitch rating case assumes lower levels of financial flexibility and the potential for shortfalls in renewal and replacement funding. However, KYTC covenants to budget and seek a gross pledge appropriation at the next available opportunity from legally available highway funds, an amount that will restore the general O&M fund and maintenance and renewal (M&R) reserve fund to required levels.
Escalating Debt Structure; Standard Covenants [Debt Structure: Midrange]: The Kentucky Downtown Crossing portion of the project is financed with 100% fixed rate amortizing debt. The TIFIA loan, which features a springing provision, matures in 2051 while the senior bonds are amortized through 2053. Financial covenants are strong including the requirement to cover senior lien debt service by 1.5x, any TIFIA debt service by 1.25x, and all obligations under the indenture by 1.0x. Additional bonds test requires 1.75x maximum annual debt service (MADS) coverage on first tier bonds and 1.1x MADS coverage on combined senior and subordinate liens. Structural reserves are adequate and include a TIFIA cash-funded debt service reserve fund (DSRF), sized at MADS on a five-year forward looking basis from toll revenues, and cash-funded senior DSRF.
Elevated Leverage, Adequate Coverage [Financial Metrics]: Under Fitch's rating case scenario, projected senior lien DSCR and LLCR are solid, averaging 2.3x and 2.2x, respectively, post ramp-up. Coverage of the subordinate TIFIA lien, inclusive of the senior lien, averages 1.3x DSCR and 1.4x LLCR. Project total leverage, calculated as net debt to cash-flow-available-for-debt-service (CFADS), is initially elevated but gradually declines in the medium term to 13x-14x range as revenues stabilize.
PEERS: Comparable projects in small network, moderate service areas include Elizabeth River Crossings ('BBB-'/Outlook Stable), a complex tunnel and refurbishment project still under construction, and Rhode Island Turnpike and Bridge Authority ('A'/Outlook Stable), a bridge that primarily serves commuters, with exposure to high leisure traffic during summer months. Rhode Island's rating category is supported by its low toll rates, lower leverage and higher coverage, as compared with the LSIORB project. Elizabeth River and the LSIORB project each contain adequate contingency to mitigate completion risk and, once operational, project similar coverage and leverage metrics.
RATING SENSITIVITIES
Negative: Construction delays beyond scheduled December 2016 substantial completion date resulting in additional leverage or delays that would allow tolls to be collected;
Negative: Performance at or below rating case due to greater traffic diversions and higher price elasticity;
Negative: A material change in TIFIA's ability to meet its disbursement obligation of loan proceeds under the loan agreement in order to redeem the Downtown Crossing project notes, or a material increase in leverage, not currently anticipated;
Positive: Successful project completion and sustained operating performance exceeding Fitch's medium term base case coverage and leverage forecasts.
CREDIT UPDATE
The Abraham Lincoln Bridge, also known as the Downtown Crossing, opened to traffic on Dec. 6, 2015. The Lincoln Bridge is currently facilitating traffic northbound (NB) and southbound (SB) while the adjacent JFK Bridge renovation continues. In late 2015, a $22 million owner-induced change order was issued to replace the entire original floor system of the JFK Bridge, as opposed to spot improvements, which had been deemed one of the biggest risks to the project. Construction is on budget and on schedule with JFK Bridge final deck installation and interchange improvements are expected by October. Final traffic configuration will be six lanes facilitating traffic NB on the Lincoln Bridge and six lanes facilitating traffic SB on the JFK bridge. Overall, the project is currently 90% complete and on pace to meet substantial completion date on Dec. 9, 2016, with RiverLink and EZ-pass transponder electronic toll collections to begin by Jan. 1, 2017.
An updated traffic and revenue (T&R) study was conducted which integrates the newly approved tolling and vehicle classification policy, current improving economic conditions, and up-to-date interstate traffic counts for each vehicle class which exhibited 4.3% overall traffic growth in 2015 over 2012. The study has also revised its assumptions with regards to a small increase in toll leakage rates from drivers crossing the bridges without a transponder. The results are a slightly more conservative forecast during ramp-up with a 2.3% reduction in revenues through 2021, but a 3.7% forecasted increase in revenues thereafter.
In the Fitch base case, as revenue begins to stabilize post ramp-up, coverage is projected to be strong, averaging just over 3.0x DSCR on the senior lien and 1.6x all-in, which is inclusive of the senior lien and TIFIA loan. Over the same term, Fitch's rating case, which haircuts traffic growth during ramp-up and assumes 3.0%-3.5% annual O&M growth, debt service coverage averages 2.3x on the senior lien and 1.3x all-in. Leverage is expected to be in the 13x-14x range post-ramp up and moderately declines thereafter.
The Louisville-Southern Indiana Ohio River Bridges Project involves expanding an existing Ohio River crossing to accommodate interstate highway and constructing a new crossing/highway connection that will help create a highway loop around Louisville. The two-state project consists of two portions that function as one system: the Downtown portion owned by the Commonwealth of Kentucky and the East End portion owned by the State of Indiana, rated separately 'BBB'/Outlook Stable.
SECURITY
The first tier bonds are secured by a first pledge of the trust estate consisting primarily of the authority's 50% share of the toll revenues derived from the downtown and east end crossings. The project notes are secured by a pledge of the trust estate, subordinate to the payment of principal of and interest on the first tier, second tier and third tier bonds. The TIFIA loan will be secured as third tier bonds. It is expected that principal on the series 2013 subordinate notes will be paid from a disbursement made to the authority at maturity, subject to the satisfaction of certain conditions under the TIFIA loan agreement.
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