OREANDA-NEWS. Fitch Ratings has affirmed the rating on approximately $24.5 million of outstanding Buffalo and Fort Erie Public Bridge Authority, NY's, (the authority) toll bridge system revenue refunding bonds, series 2014, at 'A'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects the bridge's strategic location as an important border crossing that is exposed to local and regional economic conditions impacting traffic levels and nearby competing facilities. Mitigating that risk is the authority's strong financial performance despite recent traffic declines, full rate-making flexibility, and their ability to cash-fund a moderately large capital plan using substantial liquidity balances and excess cash flows over the next five years without the need to increase tolls. The rating is further support by historically robust debt service coverage ratios and negative net leverage (debt balances minus unrestricted cash divided by cash flow available for debt service). Near term debt issuances for a large re-decking project are likely, however, Fitch believes that the authority's projected cash flow should adequately meet expected debt service requirements, even with potential decreases in traffic and revenues.

Revenue Risk - Volume: Midrange

Important and Commercially Dependent Crossing: The Peace Bridge (the 'bridge') plays an important role in U. S. and Canada trade and leads regional passenger and truck traffic because the bridge connects northern New York interstates to the Queen Elizabeth Way in Ontario through to Toronto. The traffic profile offers limited growth prospects and remains influenced by currency fluctuation, discretionary passenger trips, and economic activity given the importance of commercial volume, which accounts for 72% of toll revenues.

Revenue Risk - Price: Stronger

Full Rate-Making Flexibility: The authority has full legal ability to increase tolls when necessary, with little historic evidence of political pushback. Past toll increases have not materially impacted the Bridge's traffic profile. Wait times are the main competitive driver at regional bridge crossings, and the bridge currently maintains the highest inspection capacity between Buffalo and Fort Erie, Ontario. The authority plans to further enhance capacity with its capital improvement program (CIP) and does not foresee a toll increase in the near future.

Infrastructure Renewal & Replacement: Midrange

Developing CIP: Of the authority's five-year $186 million capital plan, the majority (about 67%) is envisioned to be funded from current fund balances and future excess cash flows. The remainder is expected to be generated from a potential debt issuance, but timing and scope could change. Projects include replacing the aging bridge deck, expanding U. S. inspection capacity, and renovating the U. S. commercial warehouse.

Debt Structure: Stronger

Strong Conservative Debt Structure: The bonds are fixed rate and fully amortizing to final maturity in 2025. Security features include a 1.25x backward or forward-looking additional bonds test (ABT) and a fully cash-funded debt service reserve at maximum annual debt service (MADS).

Healthy Financial Performance: Fitch positively views the authority's history of conservative financial planning, the practice of maintaining high liquidity (2,325 days cash on hand [DCOH] at fiscal year-end [FYE] 2015), and strong track record of expense management. Current debt service coverage remains above 4x and leverage is well below most toll bridge facilities.

Peers: The most comparable peers in Fitch's portfolio are the three U. S.-Mexico bridge border crossings in Cameron County ('A'/Outlook Stable), Laredo ('A+'/Outlook Stable), and McAllen, Texas ('A'/Outlook Stable). Buffalo-Fort Erie exhibits a similar DSCR profile to these peers of between 4x and 6x and provides a similarly important service supporting commercial and leisure traffic. However, it is not exposed to the same level of security concerns as the Texas crossings, and largest exposed risks are to the USD-CAD exchange rate as well as voluntary traffic decisions.

RATING SENSITIVITIES

Negative: Capital projects resulting in significantly increased leverage beyond current expectations (above 8.0x) and/or materially lower coverage of debt service (below 1.7x average DSCR);

Negative: Significant declines in traffic levels and toll revenues for a sustained period that limit future financial flexibility;

Positive: Due to the Bridge's narrow service area, vulnerability to trade restrictions, and single asset, positive rating action is not likely.

SUMMARY OF CREDIT

Most bridge auto trips are discretionary instead of commuter-based but increased security after the events of 9/11, the 2008 economic downturn, new security laws in 2009, as well as fluctuating Canadian-U. S. exchange rates have all contributed to auto traffic volatility over the past decade. Fiscal year (FY) 2015 vehicle volumes dropped again across all border bridges between Ontario and the U. S. due to continued weakening of the CAD compared to the USD, making U. S. travel more expensive for Canadians. As a result, 2015 auto traffic decreased 4% from 4.4 million to 4.2 million transactions, while commercial traffic decreased about 3% from 1.27 million to 1.23 million transactions. Six month year-to-date (YTD) 2016 traffic is down 1% compared to the prior period. The bridge carried 43% of the region's auto traffic as of FYE 2015 in comparison to the Lewiston-Queenstown Bridge, Rainbow Bridge, and the Whirlpool Bridge, which are all owned and operated by the Niagara Falls Bridge Commission (NFBC).

The bridge continues to carry more autos (77% of fiscal 2015 total traffic) than trucks (23% of fiscal 2015 total traffic) but carries most (63%) of the region's truck traffic despite charging higher tolls because the bridge offers shorter wait-times and continues to upgrade its customs processing. Fiscal 2015 truck traffic decreased 2.9% to 1.2 million. The Canadian-side pilot program inspecting U. S.-bound trucks ended February 2015, and the authority is assessing various alternatives to continue to enhance customs commercial processing. FY2015 operating expenses increased 3% ($14.5 million to $15 million) due a one-time installation cost for radiation portal monitors which are expected to reduce "false positive" readings and decrease commercial processing times. Expenses are now expected to stabilize, and six month YTD operating expenses are down 18% compared to the prior period due to fewer required bridge repairs/maintenance, and lower salary/wage expense from the retirement of employees.

Tolls are only collected one-way, crossing from the U. S. into Canada, and tolls have not increased since 2007. Management does not currently plan to recommend any toll increases because the authority holds enough cash to cover capital and operating expenses. However, the authority may decide to issue additional debt in a few years to complete the bridge re-decking and enhancement of U. S. inspection capacity, depending on rehab progress. FY2015 toll revenues decreased 3% from $22.1 million to $21.4 million, as a result of the lower traffic volumes. Rental income from duty free stores also fell due to both the reduced traffic and the weaker CAD. Combined, total revenue decreased 7% from $31 million to $29 million. Six month YTD 2016 toll revenue and total revenue are both down 0.8% and 0.5%, respectively.

All four regional crossings complement each other and serve regional needs. Toll rate differentials and past changes have not changed market share, which suggests moderate rate-making flexibility continues to be maintained and is important to the bridge's dependence on higher yield commercial traffic. The U. S. Customs Inspection Plaza at the Lewiston-Queenstown Bridge may be significantly upgraded but the NFBC is searching for capital funding, and EZ-Pass is now active on all three NFBC bridges, similar to the Peace Bridge.

Complete re-decking will occur in fiscals 2016-2019, and management expects annual traffic to decrease around 3%, which Fitch tested alongside 3% annual operating expenses, and a potential $60 million issuance in the Fitch base case. Under this scenario, financial flexibility remains robust with cash flows from bridge operations that produce 2.23x average coverage, over 1,000 DCOH, and below 3.2x leverage over the next 10 years.

Fitch's rating case tested 4% traffic declines during re-decking years, slightly higher annual operating expenses at 3.5% per year, as well as the a $60 million potential debt issuance. Under this scenario, DCOH remains around 902, average coverage is at 2.05x, and maximum leverage remains below 4x over the next ten years. Fitch notes that current traffic levels can generate sufficient cash flow to maintain high debt service coverage levels even with limited traffic growth and additional debt obligations.

SECURITY

The bonds are secured by Bridge pledged net revenues.