OREANDA-NEWS. Fitch Ratings has affirmed Orange County Transportation Authority, California's (OCTA) 'A-' rating on $119.5 million of (91 Express Lanes) senior lien revenue refunding bonds, series 2013. The Rating Outlook is Stable.

The 'A-' rating reflects the Express Lane's long operating history, solid long-term prospects for continued traffic growth, strong debt service coverage and liquidity, very low leverage, and no current plans for further debt issuances. These strengths are somewhat offset by heightened revenue and price volatility inherent to managed lanes, and concerns related to the anticipated 2017 opening of connecting managed lanes managed by Riverside County Transportation Commission (RCTC) and their potential impact on OCTA's utilization and competitive position. OCTA's continued improving debt coverage ratios heading into RCTC's project completion provide a sizable level of financial cushion in case of lower toll transactions.

The 91 Express Lanes, opened in 1995, are managed by OCTA as an enterprise fund under a long-term franchise agreement with the California Department of Transportation. The lanes span 10 miles, connecting the employment market of Orange County to the large and growing commuter base of Riverside County in Southern California.

KEY RATING DRIVERS
Revenue Risk: Volume - Midrange
Rising Congestion Driving Volume: Established traffic demand is evident, supported by commuters who traverse the corridor from their homes in Riverside County to the large employment market in Orange County. This is one of the most congested arteries in California and is likely to become even more so given long-term expectations of continued population and economic growth, particularly in Riverside County. Fitch views these strengths as somewhat offset by a history of significant demand volatility and concerns that RCTC's connecting managed lanes ultimately may compete with, rather than complement, OCTA's Express Lanes.

Revenue Risk: Price - Midrange
Solid Rate-Setting Track Record: The authority has a long and consistent record of implementing toll rate adjustments, up and down, based on formulas that consider inflation and traffic volume. The toll policy allows for frequent adjustments and the formulaic nature of the process somewhat insulates rates from political considerations. These strengths are somewhat offset by a history of falling rates under declining traffic conditions, as is typical for managed lanes, and currently high peak toll rates.

Infrastructure Renewal and Replacement - Stronger
Affordable Capital Plan: The Express Lanes have been regularly maintained in good condition, and the authority annually updates its 10-year capital improvement plan (CIP), which is manageably sized at $40 million and will be funded on a pay-as-you-go basis. The authority is considering an express lane connector to SR-241, with an estimated cost of $180 million. Management notes that the project funding would not include a parity debt issuance, though firm funding sources have not yet been formulated given the early stage of the planning process.

Debt Structure - Stronger
Rapidly Amortizing, Fixed Rate Debt: The Express Lane's debt is fully fixed rate with level debt service and a final maturity in 2030. Structural features are adequate, with a cash-funded debt service reserve fund, various other operating and maintenance related reserve requirements, and a satisfactory additional bonds test and rate covenant.

Healthy, Strengthening Financial Metrics: Rising traffic volume and toll rate hikes have improved already solid key financial metrics, with the estimated DSCR for fiscal 2015 registering a healthy 2.64x and very low leverage (net debt to cash flow available for debt service) of 0.48x. The enterprise fund's unrestricted cash position is extremely high, though a moderate portion of reserves likely will be spent down on capital expenditures.

Peer Analysis: A direct comparison with other Fitch-rated managed lanes is difficult because no other managed lanes have an operational track record over a year. Closest peers include RCTC (senior lien and TIFIA bonds rated 'BBB-', Stable Outlook) that will connect into OCTA's lanes once completed and have similar tolling mechanics, HOV policy and lane configuration. OCTA's higher rating reflects a lack of construction risk, given that its facilities have been in operation for nearly 20 years, and a demonstrated operational, financial, and traffic history. Other peers include San Joaquin Hill Transportation Corridor Agency, California (senior toll road revenue bonds rated 'BBB-', Stable Outlook) and Foothill/Eastern Transportation Corridor Agency, California (senior toll road revenue bonds rated 'BBB-', Stable Outlook) in Orange County. The lower ratings reflect the agencies' significantly higher leverage levels and weaker DSCRs.

RATING SENSITIVITIES
Negative:
--Unexpected and material deterioration of the system's operating or financial performance could lead to negative rating action.

Positive:
--A continuation of favorable traffic volumes and toll rates could support positive rating action in the future, but Fitch still considers the near-term risks associated with the introduction of the RCTC connecting express lanes.

CREDIT UPDATE
Express Lane traffic increased 2% in fiscal 2014 and is estimated by management to increase 5% in fiscal 2015 to about 13 million vehicles. Recent years' increased traffic derives from population and economic gains in the counties of Orange (implied general obligation bonds [GOs] rated 'AA+', Stable Outlook) and, to a greater extent, Riverside (implied GOs rated 'AA-', Stable Outlook). Orange County is largely built-out with relatively modest growth prospects driven largely by in-fill development and redevelopment. Riverside County is well-poised for high long-term growth with ample developable land at affordable prices within commuting distance to major employment centers. This growth dynamic is expected to increase congestion along the SR-91 corridor over the foreseeable future. Neither OCTA nor RCTC has plans to expand general purpose lanes near the OCTA Express Lanes until 2030, so rising congestion levels ought to directly benefit the Express Lanes.

Increased traffic and an inflationary toll rate hike caused fiscal 2014 pledged revenues to rise 5.5%, lifting the DSCR to a high 2.60x from 2.52x the year prior. Fitch considers this DSCR to afford the authority a significant degree of protection against potential traffic volume or rate declines, resulting in hypothetically lowered revenue levels. The DSCR would have increased further if not for a 21% year-over-year expenditure increase stemming from various one-time projects. The DSCR for fiscal 2015 is estimated to increase somewhat to 2.64x due to an estimated 6% increase in toll revenues and a 4.6% drop in operating expenditures. These gains are offset somewhat by a significant reduction in non-toll revenues, as estimated by management.

The authority enjoys impressive levels of liquidity, with a fiscal year end 2014 unrestricted cash position of $76 million, or 1,765 days cash on hand. The board of directors has designated $20 million for capital projects so liquidity is likely to fall somewhat to still very high levels. Unrestricted cash has increased in each of the past three audited years and was equal to $89 million (2,171 DCOH) as of May 31, 2015.

Fitch's base case forecast suggests that the Express Lane's already high DSCR will rise further still in each year through final maturity. The base case assumes expenditure growth of 3% in most years and average annual toll revenue growth of 5.9%, reflecting ongoing traffic gains and inflationary toll rate hikes.

Fitch's rating case scenario is conservatively modeled off of the base case scenario and layers on two negative assumptions. First, it assumes that a recession occurs in fiscal 2017 resulting in a 10% reduction of tolled revenues compared with the base case, followed by a five-year full recovery. Second, the rating case assumes that RCTC's connecting express lanes will have additional negative operational effects from the opening of the RCTC's road segment, resulting in a 15% traffic loss in fiscal 2018. Fitch recognizes that its rating case assumption runs contrary to expectations of the authority's traffic and revenue consultant, Stantec, who believes the connecting lanes will result in a traffic increase on the OCTA Express Lane segment. Although Fitch does not view Stantec's assumption as unreasonable, Fitch is currently taking a conservative approach on traffic and tolling revenues given the lack of validating data. Should traffic and revenues closely align to the sponsor assumptions or materially outperform Fitch's rating case assumptions after connecting to RCTC's express lanes, then positive rating action would be likely.

SECURITY
The bonds are payable from net revenues of the authority's 91 Express Lanes.