OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating for the City of McAllen, Texas' approximately \\$33.2 million international toll bridge system revenue bonds series 2007A and 2007B. The Rating Outlook remains Stable.

The 'A' rating reflects the bridge system's moderate leverage of 3.2x net debt/cash flow available for debt service (CFADS) and strong debt service coverage ratios (DSCR) despite a history of volatile traffic performance. The rating further reflects the singular nature and limited catchment area of the bridge system as well as nearby competition along the Mexican border.

KEY RATING DRIVERS

Revenue Risk: Volume-Weaker
Volatile Traffic Base with Competitive Pressure: The toll bridge system is a mature facility with revenue generating capabilities limited by border crossing regulations, local violence, and competition from the neighboring Pharr-Reynosa Bridge. Bridge traffic declined 0.9% in FY'14 to 5.3 million and has decreased at a five-year CAGR of 2.7%. Higher value commercial traffic is prohibited on the system's Anzalduas Bridge until 2015 with commencement planned for FY 2018; this transition should add some stability to the traffic base thereafter.

Revenue Risk: Price-Midrange
Moderate Rate-Making Flexibility: Management has a strong record of raising rates as needed to mitigate declining traffic levels; however, proximity of competing facilities limits economic rate-making flexibility of the bridge system. Toll revenues grew 1.1% in FY '14 largely as a result of a \\$0.25 pedestrian toll increase to \\$1 and a slight increase in rates for vehicular traffic.

Infrastructure Development/Renewal-Midrange
Manageable Capital Expenditure Needs: The Anzalduas Bridge is newly completed, and the McAllen-Hidalgo Bridge is generally in good condition. Funding is covered with bridge system reserves and set-aside revenues from the June 2011 and 2014 toll increases.

Debt Structure-Stronger
Conservative Capital Structure: The debt is 100% fixed-rate with a flat amortization profile through final maturity (2032) and is further supported by an adequate level of reserves.

Low Leverage and Healthy Coverage: Robust DSCR of 4.3x for FY'14 helps to mitigate the volume risk for the bridge system. In addition, adequate cash reserves and moderate leverage equate to a relatively low net debt-to-CFADS of 2.80x, with no additional borrowing anticipated. DSCR has not fallen below 3.5x historically and is projected to remain above 2.3x in Fitch's rating case.

Peer Group: Closest Fitch-rated peers include Cameron County and Laredo, TX toll bridge systems, rated 'A'/Stable Outlook and 'A+'/Stable Outlook, respectively. All three systems maintain minimal net leverage and robust coverage levels, often exceeding 4x. Higher coverage helps to weather fluctuations in traffic levels that result from safety concerns related to border violence and economic cyclicality. Laredo's higher rating reflects its location along I-35, a vital international trade link, and its resilient traffic and revenue performance during the last recession.

RATING SENSITIVITIES

Negative: Significant traffic/toll revenue decline driven by drug violence, economic slow-down, and/or border trade conflict leading to a material change in financial metrics;

Negative: Management's reluctance to raise tolls as planned/needed or its inability to control O&M expenses which materially changes coverage and liquidity

Negative: Meaningful additional leverage.

Positive: Positive rating action is unlikely in the near term given the bridge system's history of volatile traffic levels.

SUMMARY OF CREDIT

Total crossings continued a downward trend to 5.3 million in FY15, down 0.9% from FY 14. Truck, bus and pedestrian traffic all increased in volume with growth of 38.2%, 6.2%, and 0.3% respectively for FY14; however, this was outweighed by the loss in passenger vehicle traffic which comprises the majority of the traffic. Overall traffic is down 28% since 2001, largely due to a decline in passenger vehicles which is down 36% over this period. The traffic decline is due in large part to safety concerns following border violence, the weakened economy, and, to a lesser extent, several toll increases.

Passenger vehicles represent the vast majority of transactions and revenues (71% and 87% respectively) with pedestrians accounting for virtually all of the remainder (28% and 11% respectively) and minimal commercial traffic. Although Fitch expects a shift in this profile once commercial traffic commences on the Anzalduas Bridge; the impact on traffic and revenue remains uncertain.

Toll revenues grew by 1.2% in FY14 continuing the upward momentum initiated in FY 2011; revenues have grown at a 5-year CAGR of 4.1%. Management continues to raise tolls, implementing a \\$0.25 increase to the car toll to \\$3.25 on March 1, 2014 which is being used to partially fund major capital improvements such as repairs at the McAllen-Hidalgo Bridge, and commercial truck infrastructure at the Anzalduas Bridge.

Expenses increased 5.1% during FY14 following a 5.9% decrease in FY13. Most of the system's expenses are now fixed and there should be little variance going forward, even when commercial traffic is permitted across the Anzalduas Bridge. Fitch views this cost containment as difficult to sustain over the long term and has modelled 4% - 5% annual growth in operating expenses in its rating case, more in line with historical results.

Given a slight increase in revenues and a rise in costs, debt service coverage in FY14 was 4.2x. Going forward, Fitch expects management to maintain high coverage levels, especially when commercial traffic adds to the toll revenue base beginning in 2018. Fitch views this level of cushion as necessary given the volatility in the traffic base that is tied to the performance of the maquiladora industry in Mexico, as well as border security threats.

Capital expenditure needs are modest given the recent completion of the Anzalduas Bridge and the good condition of the Hidalgo Bridge. Several projects to improve efficiency are in the pipeline for which funding is already set aside and the \\$0.25 set-aside from the 2011 toll increase plus set-aside revenues from the March 2014 toll increase should enhance the system's ability to undertake additional projects in the future.

The Fitch base case grows overall system traffic at a CAGR of 1.2% through FY 2024 while costs rise at inflationary levels throughout the projected period. This scenario results in an average and minimum DSCR of 4.3x and 4.1x respectively. The Fitch rating case decreases traffic at a CAGR of 3.75% through FY2024 and grows expenses at 5.0% per annum. This scenario results in an average and minimum DSCR of 2.7x and 2.3x respectively.