OREANDA-NEWS. Fitch Ratings has upgraded approximately \\$38.7 million in Space Coast Infrastructure Agency (the Agency) infrastructure improvement revenue bonds (I-95 Brevard County DBF Project), series 2012 to 'AA-' from 'A'. The Rating Outlook on the bonds remains Stable.

The upgrade reflects implementation of new criteria ('Rating Public-Sector Counterparty Obligations in PPP Transactions, dated July 23, 2015') that links the credit quality of payment streams in public-private partnership (PPP) structures directly to that of the public sector grantor, in this case the Florida Department of Transportation (FDOT). Based on the new criteria, Fitch has assigned an 'AA-' rating to FDOT's counterparty obligation.

KEY RATING DRIVERS

SOLID ABILITY & WILLINGNESS OF FDOT TO MEET OBLIGATIONS: Bond payments are derived from statutorily authorized payments to be made by the FDOT, subject to appropriation, pursuant to a design build finance (DBF) contract. Pursuant to section 334.30 of Florida Statutes, FDOT can enter into DBF contracts and other PPPs for projects included in FDOT's work program.

STRUCTURED ARRANGEMENT LIMITS COMPLETION RISK: The bonds are structured similar to a receivable financing, with the bondholder isolated from the risk of the contractor failing to perform. The bonds are structured to have 1.0 times (x) coverage. Bond proceeds are only drawn down for FDOT approved work, ensuring that at any time the combination of bond proceeds, contract payments due from FDOT for approved work and structured liquidity is equal to the par amount of the bonds. A termination of the DBF contract and certain other events would lead to a mandatory tender of the bonds but there is no premium should these occur, meaning that available resources should always be sum sufficient to cover debt service.

MUTUAL PROJECT BENEFITS & WAIVER OF OFFSETS: While the structure of the transaction isolates the bondholder from completion risk, the statutes that allow FDOT to enter into DBF contracts and FDOT's construction risk mitigation procedures indicate that the interests of all parties are aligned. The DBF approach allows for project acceleration without a short-term impact to FDOT's cash outlay. In addition, this particular financing structure includes a waiver of offsets by FDOT once work has been approved, minimizing leverage on the DBF contractor's balance sheet. In conjunction with these benefits, FDOT does require a surety bond sized to 100% of the contract price and is only required to pay for work approved. While bondholders are not exposed to contract frustration or contract default, the proper alignment of interests between FDOT and the DBF contractor provides comfort.

RATING SENSITIVITIES

Further changes in the credit quality of FDOT's statutorily authorized obligations could impact the rating either positively or negatively.

SUMMARY OF CREDIT

The contractor, Lane Construction, has expressed that the I-95 DBF Project is progressing as scheduled and within budget. Change orders of over \\$9 million have increased the contract amount to approximately \\$128 million from \\$118 million. Lane Construction has been paid \\$100.6 million out of updated contract value of \\$128 million.

To accelerate projects, FDOT has allowed contractors to procure their own financing. However, the financial crisis significantly increased the cost of obtaining funding for contractors, slowing down progress. In addition, the gap between project completion and FDOT payment has also increased, making the cost to contractors prohibitive. To help alleviate this issue, FDOT entered into a DBF agreement with the contractor that commits to a set payment schedule subject to the amount being earned by the contractor and to future appropriation by the Florida legislature where the project is scheduled in future years. The agency has agreed to advance funds to the project via the bond issue through the funding agreement with the contractor that pledges the future payments from FDOT in the DBF agreement.

As long as the contractor meets its obligations to construct the project pursuant to a fixed price date certain design build contract, then FDOT agrees to pay FDOT contract payments pursuant to an agreed upon schedule, subject to appropriation. Bond maturities are structured to match this schedule. The contractor is required to have a surety bond that covers 100% of the project cost plus a cushion for a 25% increase.

Pursuant to the contract, the DBF contractor submits monthly draws to FDOT. Upon acceptance of the work and approval of the draw by FDOT, FDOT will make a contract payment pursuant to an agreed upon schedule in the trust indenture and funding agreement. The scheduled payments are such that FDOT contract payments will first be used for interest payments and then to fund contractor draws for work completed. The gap in the schedule will be covered by bond proceeds and then FDOT contract payments will commence again and retire the bonds. Separately, the capitalized interest account will be used to cover interest on the bonds during the period when FDOT is not providing contractor payments.

A slow-down in construction progress will slow down FDOT payments while accelerated work will only be approved at a level equal to FDOT's cash availability schedule. Pursuant to sections 4.01 and 5.01 of the indenture, a default by the contractor and surety will result in a tender of the bonds, as will a reduction in the contract price exceeding \\$250,000 or 15 consecutive or cumulative months of failed FDOT work certifications. A letter of credit (LOC) equal to \\$2 million has been provided to cover the use of bond proceeds for issuance costs, administrative expenses, and interest costs during the delay should this situation occur.

Bondholders are isolated from contractor risk through several features of the DBF contract, which includes by reference State of Florida DB specifications and also the DBF request for proposals (RFP) issued by FDOT. In particular, the trustee will not disburse funds in the FDOT contract payment account or the bond proceeds account of the project fund without an FDOT engineering certification that the work meets FDOT standards and has been accepted. There is no retainage under this framework as FDOT normally retains funds in the final quarter of payment. However, in the DBF arrangement, project completion will have already occurred well before. In addition, pursuant to the RFP which is part of the final DBF contract, FDOT indicates that once an approval has been granted, no offsets can be made against that payment. It can only be applied to the approval of future payments. Thus, the trustee will only disburse funds for approved work and pursuant to the RFP, section 337.145 of the State of Florida statutes regarding offsetting payments is not applicable.

SECURITY
The bonds are secured by FDOT contract payments and all funds held by the trustee pursuant to the indenture, including the project fund and the bond fund, which includes the reserve account and capitalized interest account. The contractor provided a \\$2 million LOC in favor of the agency and the trustee that can be used to cover administrative expenses and other items in the event of a mandatory tender. The bonds are not secured by payments made by the surety.