OREANDA-NEWS. Fitch Ratings has upgraded Orange County Transportation Authority, California's (OCTA) $114.4 million of (91 Express Lanes) senior lien revenue refunding bonds, series 2013 to 'A' from 'A-'. The Rating Outlook is Stable.

RATING RATIONALE
The upgrade reflects a recent criteria revision that resulted in an improvement to Fitch's assessment of the authority's 'Revenue Risk: Price.' It also reflects stronger than expected traffic and revenue performance driven by improved economic conditions and low gas prices. 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 solid and growing debt coverage ratios (DSCR) heading into RCTC's project completion provide a sizable level of financial cushion in case of lower revenues.

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 (Corridor Volume: Stronger). Fitch views these strengths as somewhat offset by high peak toll rates, 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 (Managed Lanes Characteristics: Midrange).

Revenue Risk: Price - Stronger
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.

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, partnered with the Transportation Corridor Agencies, 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 DSCR for fiscal 2015 registering a healthy 2.86x and very low leverage (net debt to cash flow available for debt service) of 0.45x. The enterprise fund's unrestricted cash position is solid, 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 a similar operational track record. 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 leading to DSCR below 2.0x on a sustained basis could lead to negative rating action.

Positive:
--A continuation of favorable traffic volumes and toll rates could support positive rating action in the future; however, positive rating action is not likely in the near term due to the risks associated with the introduction of the RCTC connecting express lanes.

CREDIT UPDATE
The upgrade to 'A' from 'A-' reflects a combination of a criteria revision that strengthened Fitch's view of the authority's 'Revenue Risk: Price' key rating driver (KRD) and stronger than anticipated traffic and revenue performance. The criteria revision was modest, moving Fitch's price elasticity consideration from the price KRD to the volume KRD. The criteria revision was only sufficiently positive to result in OCTA's positive rating action when combined with strong traffic and revenue performance over the past six months.

Express lane traffic and revenue increased 6.8% and 9.3%, respectively, in fiscal 2015, modestly above the 6% and 8.5% growth rates Fitch expected during the prior credit review. As a result, actual DSCR for fiscal 2015 increased to 2.86x from Fitch's prior estimate of 2.64x. Traffic for the first four months of fiscal 2016 was up 7.4%, well out-stripping the 1.2% gain in Fitch's prior base case scenario. Year to date gross toll revenues are also higher, at 8.3% compared to Fitch's prior 4.1% projection. Should revenue performance for the remainder of fiscal 2016 match year to date performance, then Fitch's DSCR estimate for fiscal 2016 would rise to 2.99x from 2.85x from the prior review.