OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-'/Stable Outlook rating on the following Riverside County Transportation Commission, California (RCTC, or the commission) bonds:

--$176.7 million 2013 series A and Series B senior lien revenue bonds;

--$421.1 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan.

The senior lien revenue bonds and subordinated TIFIA loan are secured by a pledge of project net toll revenues derived from the operation of the project and the related senior and TIFIA debt service reserve funds. The priority of the TIFIA loan springs to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.

RATING RATIONALE

The rating reflects the greater Inland Empire service area which has below average income levels but high population growth with robust demonstrated congestion levels along the corridor which should support expected traffic on the managed lanes and assumed toll rates. Offsetting these rating factors are construction risks and the lack of an operating profile.

Financial metrics are just adequate overall in Fitch's rating case, with a loan life coverage ratio (LLCR) of 1.24x and very high leverage (net debt to cash flow) that falls over time. The financial metrics are weaker than a typical stand-alone toll road based on Fitch's indicative rating guidance; however, mitigating factors include an extremely congested corridor, strong long-term growth prospects, and the commission's unlimited legal rate-setting authority. RCTC's closest peer is OCTA (senior lien revenue refunding bonds rated 'A'/Stable Outlook), whose lanes will connect to RCTC near its western terminus. OCTA's higher rating reflects its long operational history and substantially stronger financial metrics.

KEY RATING DRIVERS

Completion Risk - Midrange

Moderate Completion Risk: The terms of the fixed priced design-build (DB) construction contract with a joint venture consisting of Atkinson Contractors, LP and Walsh Construction Company, including cost and schedule contingencies, are consistent with other investment grade projects. An adequate security package, including parent guarantees and liquidated damages, further mitigates completion risk. Project construction is viewed to be straightforward and consists mostly of lane widening. However, continued road operation during construction and relocation of certain existing infrastructure adds some complexity to the project.

Revenue Risk: Volume - Midrange

Demonstrated Traffic Volumes: The highly congested SR-91 corridor is the only major surface transportation facility connecting Orange County and Riverside County. The project represents an extension of existing express lanes in Orange County with 20 years of operating history and established traffic demand. These strengths are offset by the expansion of free alternative competing general purpose lanes directly next to the express lanes, further future corridor improvements, and a lack of an operating history. (Corridor: Stronger, Managed Lane Characteristics: Weaker)

Revenue Risk: Price - Stronger

Substantial Rate-Setting Flexibility: RCTC has unlimited legal flexibility to raise rates at the discretion of its board. The toll policy allows for frequent adjustments based on traffic volume and the formulaic nature of the process somewhat insulates rates from political considerations.

Infrastructure Renewal and Replacement - Stronger

New Asset, Sound Maintenance Plan: Once completed, the managed lanes will be in new condition with minimal capital needs for some time. Renewal and replacement (R&R) expenditures are validated by an independent engineer and will be paid from a forward-looking R&R reserve. A 16-year tail after debt maturity further mitigates asset reinvestment risk.

Debt Structure - Midrange

Strong Features Mitigate Back-Loading: All debt is fixed rate and amortizing, and the TIFIA structure allows for some flexibility between mandatory and scheduled interest payments. The debt service schedule is back loaded, with maximum annual debt service (MADS) occurring in 2049, and such back loading will be exacerbated by any scheduled interest deferral. The additional bonds test (1.30x) and distribution test (1.30x) reference TIFIA scheduled debt service, which provides additional flexibility. All obligations must be met at 1.0x, including R&R expenditures.

High Leverage, Adequate Coverage: The Fitch's rating case yields minimum debt service coverage, including senior and mandatory TIFIA debt service, of 1.30x in the years between 2022 and 2049. Given the inherent TIFIA flexibility, adequate financial cushion to deal with weaker conditions exists on both liens of debt. The financial metrics indicate a minimum loan life coverage ratio of 2.05x in the sponsor case and 1.24x in the Fitch rating case. Leverage is initially very high and evolves down overtime, as would be expected immediately post-construction for such a facility.

Peer Analysis: The closest peers from Fitch's rated portfolio include other ML facilities along arterial corridors that are highly congested, particularly during peak hours, particularly the neighboring Orange County Transportation Authority (OCTA, toll revenue bonds rated 'A'/Stable Outlook) that will connect into RCTC's lanes once completed and have similar tolling mechanics, HOV policy and lane configuration. OCTA's MLs have an established traffic demand, tested through economic cycles and capacity expansions with a healthy 12-year CAGR through 2015 of approximately 2% and average tolls in excess of $0.50 per mile in peak periods.

RATING SENSITIVITIES

Negative:

--Substantial and unexpected construction delays and cost overruns;

--Financial performance expected to remain below the Fitch rating case, which could be caused by lower than expected traffic volumes or pricing power.

Positive:

--Financial performance close to or in line with the sponsor case, with no additional debt issuances, which could be supported by solid traffic volumes and pricing power.

SUMMARY OF CREDIT

As of June 30, 2016 (the most recent data available), project construction is running substantively on-budget and approximately two months behind its scheduled substantial completion date of Jan. 9, 2017. Fitch views the two month delay as largely mitigated by a number of factors. These include a robust construction security package with liquidated damages sized to one year, the commission's ongoing efforts with the contractor to shorten if not eliminate the delay, capitalized interest sized to one year past scheduled substantial completion, and a ten month revenue delay already incorporated into RCTC's sponsor case cash flow projections. Fitch will continue monitoring the commission's construction progress and would take negative rating action in the event that the delay became substantially longer.

The project is 80% complete with some of the riskiest aspects behind it, including the acquisition and handover of all parcels required for an expanded right-of-way, all required permits have been obtained, and over 90% of private utilities are under construction or have been relocated. Of 32 bridges, 14 have been completed and 18 are under construction, and the roadway is over 70% complete. Design-build change orders have resulted in immaterial cost escalations of less than 1% of the contract value. Total project costs have not changed from $1.4 billion since they were revised in 2014. Under the hypothetical event that costs rise unexpectedly and substantially from current projections, the project has $59.8 million of contingency reserves, some miscellaneous cash resources, and ultimately could draw from its Measure A sales tax program (sales tax revenue bonds rated 'AA'/Stable Outlook).

The proceeds of the senior lien revenue bonds and the TIFIA loan, along with $462 million in sales tax bonds and about $211 million in RCTC and state funds are being used to fund the project. The project consists of the development, design, finance, construction, maintenance and operation of SR-91 express lanes in Riverside County. Expansion of the corridor includes extension of the two existing SR-91 express lanes from the Orange/Riverside County line approximately eight miles to the Interstate 15/SR-91 interchange in Riverside County. The project also involves the construction of one new general purpose lane in each direction from SR-71 to I-15, ultimately providing two tolled express lanes, five general purpose lanes and an auxiliary lane in each direction. There will only be three points of ingress/egress: at the Riverside County/Orange County line; west of I-15; and, I-15, south of the SR 91. The project also includes future improvements (2035) including an additional general purpose lane and improvements to the SR91/SR71 interchange.