OREANDA-NEWS. Fitch Ratings has assigned 'BBB-(EXP)' rating to approximately \$100 million of senior Private Activity Bonds PABs) to be issued by North Carolina Department of Transportation (NCDOT) on behalf of I-77 Mobility Partners LLC (the project company), and a \$189 million subordinated loan granted under the Transportation Infrastructure Finance and Innovation Act (TIFIA) issued by the project company. The Rating Outlook for both the PABs and TIFIA loan is Stable.

The ratings reflect the project's strategic location, traversing a growing service area with known congestion levels. They also reflect limited familiarity with tolling and high dependence on revenue generation from a suburban corridor that comprises a mix of commuting and other trips. Similar to other managed lane (ML) projects, it is vulnerable to compounded traffic declines during economic downturns and this risk is exacerbated by a back-ended debt service profile. In addition to the standard 12-month senior and TIFIA debt service reserve accounts (DSRA), these risks are partially mitigated by the Developer Ratio Adjustment Mechanism (DRAM) and the flexible TIFIA debt service schedule.

KEY RATING DRIVERS

Construction in Operating Corridor - Completion Risk: Midrange
While construction is relatively straightforward, mostly involving adding new lanes within existing rights-of-way, construction will occur in an operating environment and traffic management will be key. The project benefits from a parent guarantee for the majority design-build (DB) contractor joint venture partner from a solid counterparty (Ferrovial Agroman SA) that supports the rating. A fixed-price, date-certain contract from an experienced construction firm backed by adequate performance security adequately mitigates completion risk at this rating level.

Growing Market, Limited Alternatives - Volume Risk : Midrange
The solid economics of the greater Charlotte service area have led to considerable population and employment growth over the last decade, which is expected to continue into the medium-term. However, current congestion levels are driven by choke points and largely limited to directional peak periods. Currently lower population densities in the north of the facility's service area are expected to increase over time as the area continues to grow, with these segments expected to generate more than 70% of transactions. There are no meaningful competing routes parallel to the north-south I-77 corridor, or likely corridors to build new routes.

Uncertain Price Sensitivity - Price Risk: Midrange
The comprehensive agreement granted by NCDOT provides relative freedom for toll-setting, with the framework allowing for dynamic tolling unhindered by toll rate caps or floors after the first six months of operations, during which period tolls will be set according to a schedule set in advance. Given lack of other tolled facilities in the region, the project does potentially face some political risk. The initial proposed tolls in the sponsor case are reasonable for this type of asset (between \$0.14/mile and \$0.40/mile in 2012\$), and lower in Fitch's scenarios.

Infrastructure Risk Well Mitigated - Infrastructure Development & Renewal: Stronger
The five-year forward-looking major maintenance reserve account (MMRA) and a 14-year debt-free tail mitigate maintenance risks during the operational and hand-back periods, respectively.

Structural Features Support Rating - Debt Structure: Midrange
Debt service flexibility provided for in the TIFIA loan, along with the DRAM facility and other structural protections including an expected \$31 million held in reserve accounts above stipulated funding requirements at completion, provides protection against protracted ramp-up and cash flow volatility. Nevertheless, a somewhat back-ended debt service profile constrains the score at midrange.

High Leverage, Limited Financial Flexibility - Financial Metrics
The Fitch rating case yields an average scheduled Fitch-calculated debt service cover ratio (DSCR) of 1.84x and minimum loan life cover ratio (LLCR) of 1.72x; the minimum mandatory DSCR of 1.00x occurs by design during ramp-up - in this scenario \$47 million of DRAM drawings are utilized, resulting in minimal deferral of scheduled TIFIA debt service. The net debt-to-cash flow available for debt service (CFADS) ratio is initially elevated at 19.5x in 2023 in the Fitch base case, but evolves down quickly, reaching 10.5x by 2030.

Peers: Rated peers include 95 Express Lanes LLC, North Tarrant Expressway Sections 1 and 2, and Riverside County Transportation Commission. Pricing power may take longer to build than on the peer facilities given the shorter current periods of acute congestion and a lack of familiarity with tolling in the service area, and this is reflected in the Fitch base and rating case scenarios.

RATING SENSITIVITIES

Negative - Problems During Construction: Unforeseen construction delays and cost overruns not fully mitigated by the construction security package.

Negative - Traffic and Revenue Underperformance: Materially slower ramp-up, or sustained operational performance worse than initial expectations.

Positive - Strong Operational Performance: Traffic and revenue performance at or above sponsor expectations over a sustained period.

TRANSACTION SUMMARY
The rated debt is being raised to finance the I-77 high-occupancy toll lanes project, which involves improvements to a 26-mile stretch of the existing I-77 highway running north from Charlotte, NC, through its northern suburbs, comprising the conversion of an existing high-occupancy vehicle (HOV) lane into a ML, the addition of a second ML and the extension of the new MLs to the northern and southern ends of the project. MLs will be priced using a dynamic tolling regime which changes toll rates based on traffic volume to guarantee a travel speed of 45 mph. The lanes will allow free access to vehicles with three or more travelers as well as express buses, and passage will be denied to vehicles with more than two axles.

The project has been granted as a concession maturing 50 years after substantial completion to the project company, a bankruptcy-remote, special-purpose vehicle. NCDOT will provide an up-front subsidy of \$91.4 million to help fund construction works and the project will also benefit from \$249.8 million in equity commitments from the project's ultimate sponsors, Cintra Infraestructuras, S.A. and Aberdeen Global Infrastructure II LLP. NCDOT will also provide additional liquidity support to the project during operations in the form of the DRAM, under which NCDOT will provide up to \$12 million per annum and, in total, no more than \$75 million as an additional subsidy to the project to support operations, debt service, and reserve funding in the case that the global DSCR would otherwise be below 1.0x.

Although traffic conditions in the project corridor are well understood, there remains a great deal of uncertainty as to the willingness to use the MLs in the service area given the lack of any other toll roads in the region. Current traffic patterns on the project road, particularly south of I-85, reflect those of a classic commuter facility, with traffic surges in the AM peak southbound into downtown Charlotte and in the PM peak northbound out of the city. Excess road capacity in the south segment is able to absorb these surges without significant prolonged congestion. In the central and north sections traffic levels are reasonably steady throughout the day, with congestion occurring during peaks, particularly at bottlenecks north of I-485 and the Lake Norman crossing. In Fitch's view, the I-77 ML project's ability to generate significant revenue will initially be driven largely by the identified bottlenecks until congestion in the corridor increases as the service area population grows. This relatively narrow revenue generating capability is reflected in the expectation of moderate average toll rates per mile in comparison to peer ML projects.

In Fitch's view the project's capital structure provides a high degree of credit support Flexibility in the TIFIA loan debt service schedule, whereby up to 50%-90% of scheduled interest in any given year to 2037 can be deferred if operating cash flows are insufficient to make such payments in full, is a standard feature of U.S. ML project financings, and provides a substantial mitigant to ramp-up risk as well as risk related to the inherently volatile cash flows of ML projects. Furthermore, the unique DRAM facility provides valuable credit support; this feature further bolsters cash flows in scenarios reflecting weaker initial cash flows and, furthermore, ensures debt service deferrals are kept to a minimum. Nevertheless, the debt service profile is somewhat back-ended.

The sponsor's case traffic and revenue forecast is based on assumptions including: population growth rates across the service area of between 2.2% and 4.3% over the period 2012-18, slowing to 1.0%-2.4% thereafter; employment growth rates of 2.8%-8.6% in the period 2012-18 and 1.8%-2.5% thereafter; value of time for passenger vehicles of \$12-\$19, and for two-axle trucks of \$45 (all 2012\$), growing at a rate of CPI + 1% per annum; three-year ramp up; and significant revenue generation outside peak hours. In Fitch's view, some of the assumptions adopted by the sponsor are optimistic. First, fully ramped-up revenue in 2021 of \$40.6 million (2021) is considered optimistic, as is the resulting compounded annual growth rate (CAGR) for revenue from the first fully ramped-up year of 6.3% in the context of the high starting point. The resulting average scheduled DSCR metric is 6.19x and, although the minimum mandatory DSCR is 1.00x, this is by design so as to ensure utilization of the DRAM subsidy. Minimum LLCR in this scenario is 4.80x.

Fitch's base case reflects more modest assumptions than many of those adopted by the sponsor, such as: population and employment growth rates over the period 2012-18 in line with historical growth rates, reverting to the sponsor case assumptions from 2019 onwards; base value of time assumptions (2012) are in line with the sponsor case, but with no real growth assumed thereafter; five-year ramp-up period; 50% reduction to inter-peak and overnight revenue. This results in a more moderate first fully ramped-up-year revenue (in 2023) of \$30.6 million, growing at a CAGR of 5.8% over the rest of the projection period. Debt metrics remain solid - again, minimum mandatory DSCR is 1.0x to take advantage of the DRAM, but average scheduled DSCR of 2.66x and minimum LLCR of 2.38x indicate the resilience of the cash flow in this scenario.

In forming the Fitch rating case, Fitch modified the Fitch base case by applying relatively simple assumption adjustments. First fully ramped-up-year revenue, and revenue in each of the prior ramp-up period years, were each adjusted down by 20%, and then the first fully ramped-up-year revenue was grown at a CAGR of 6.0%. Resulting debt metrics are supportive of an investment grade rating, and reflect the benefit of structural features included in the capital structure. Similar to other scenarios, minimum mandatory DSCR is 1.0x, but the average scheduled DSCR of 1.84x is consistent with criteria, and this is supported by the minimum LLCR of 1.71x. Furthermore, breakeven analysis illustrates the headroom in the rating case - the breakeven revenue CAGR from the Fitch rating case first fully ramped-up-year revenue of \$24.6 million of 3.66% is considered robust for a project of this nature, as is the tolerance for a first fully ramped-up revenue number 23% below the Fitch rating case level (assuming the Fitch rating case revenue growth rates thereafter).

SECURITY
The PABs will be secured by a first priority interest in the project company's right, title, and interest in the project. The lien securing the TIFIA obligation is subordinated to the lien securing the bonds, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with senior PABs.