OREANDA-NEWS. March 25, 2016. Fitch Ratings has affirmed the 'BBB-' rating on the following North Carolina Turnpike Authority (NCTA), Triangle Expressway System (the expressway) senior lien revenue bonds:

--Approximately \\$235 million revenue bonds, series 2009A (current interest bonds);
--Approximately \\$55 million revenue bonds, series 2009B (capital appreciation bonds).

Fitch also affirmed the 'BBB-' rating on NCTA's approximately \\$373 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan.

The Rating Outlook on both the senior lien revenue bonds and TIFIA loan is Stable.

KEY RATING DRIVERS

The rating reflects a newly opened commuter toll road that is supported by a stable and expanding service area and by a commitment from the North Carolina Department of Transportation (NCDOT) to fund operating, maintenance and capital costs, if needed. However, an escalating debt structure that relies on revenue growth to meet debt service obligations and periods of low debt service coverage ratios (DSCRs) as well as heighten near-term leverage have a constraining effect on the expressway's credit quality. This downside risk is somewhat mitigated by the expressway's flexibility to raise toll rates and the additional financial backstops provided by NCDOT.

Revenue Risk - Volume: Midrange
Strong Service Area, Continued Growth: The expressway serves as a major alternative to congested free roadways and also as a key route to the main employment center in the region, Research Triangle Park (RTP). Traffic continues to show strong growth through the ramp-up period. Ample economic activity in the service area should contribute to future traffic growth before toll transactions begin to stabilize around 2017. However, with the limited number of toll roads in the area, there still exists the potential for sensitivity to annually increasing toll rates, given uncertainty as to overall demand and perceived value of time savings.

Revenue Risk - Price: Midrange
Rate-Making Flexibility Available: NCTA has flexibility to increase toll rates (with board approval) without any additional legal or regulatory approvals. However, given the expressway's short life to date, there is uncertainty as to whether support exists for additional rate increases above the expressway's pre-determined rate schedule.

Infrastructure Development & Renewal Risk: Stronger
Gross Pledge Supports Newer Asset: NCDOT pledges to cover the expressway's operating, maintenance and rehabilitation expenses should toll revenues be insufficient.

Debt Structure: Midrange/Midrange
Back-Loaded, Growth Dependent Structure: The expressway is dependent on continued revenue growth to meet an escalating debt service schedule. Excluding an interest-only period, total debt service from 2019 until maximum annual debt service (MADS) in 2037 grows at a compound annual rate of 5.4%. No additional borrowing is expected, unless an expansion of the toll way is undertaken, and covenants exist to raise tolls to meet forward-looking minimum DSCRs as well as limit the fully subordinated TIFIA loan's ability to spring to senior status.

Financial Metrics:
Leveraged Asset, Backstop Supported: Fiscal 2015 total leverage (incorporating current accreted value of CABs), is high relative to peers at 16.8x, while, the minimum loan life coverage ratio (LLCR) is 1.41x in fiscal 2016 and averages 2.03x in Fitch's rating case. It is Fitch's view that, while dependent on growth, there is sufficient coverage cushion and liquidity support via the fully funded debt service reserve and NCDOT-backed renewal and replacement reserve funds to offset slower-than-expected ramp-up. Additional support for the project exists in the form of a \\$25 million annual payment from the state of North Carolina, net of state appropriation bond debt service (rated 'AA-' by Fitch), which totalled \\$9.8 million of support in fiscal 2015.

Peers: Once stabilized, the expressway's closest peers would include similar stand-alone projects such as Colorado's E-470 Public Highway Authority (E-470, 'BBB'/Stable Outlook) and San Joaquin Hills Transportation Corridor Agency (SJHTCA, 'BBB-'/'BB+'/Stable Outlook). The expressway's tolls are more favorable than those of its peers; however, the peers have greater franchise strength as they have been in service for many more years. The expressway's leverage is comparable with SJHTCA, both being above E-470, while its forecast DSCR is more in line with E-470, given SJHTCA's recent debt restructuring.

RATING SENSITIVITIES
Negative: Traffic Performance: Failure of traffic growth to materialize as expected, coupled with a reluctance by North Carolina Turnpike Authority to increase toll rates above the approved rate schedule, resulting in debt service coverage ratio and loan life coverage ratio profiles significantly below forecast levels;

Positive: Greater than expected growth over a sustained period coupled with evidence of minimal price elasticity among road users.

SUMMARY OF CREDIT

The expressway is performing better than Fitch's original expectations. Fiscal 2015 (FYE June 30) traffic and revenue results exceeded base case projections by 25% and 14%, respectively, representing 34.4 million transactions generating \\$25 million. These figures represent year-over-year growth of 39%, transactions, and 44%, toll revenue. It should be noted that the expressway remains in ramp-up with at least two more years of significant growth expected before stabilizing, with these later years being more indicative of long-term performance.

The Fitch base case reflects a traffic CAGR scenario of 10.7% during the remaining ramp-up through 2018 and 1.6% thereafter, which, coupled with scheduled toll increases, results in a total revenue growth CAGR of 4.3% through fiscal 2043. Minimum LLCR is 1.74x in fiscal 2016 and continues to grow throughout the forecast period while the TIFIA loan amortizes as projected in the issuer's scenario.

The Fitch rating case reflects a traffic CAGR scenario of 7.5% during ramp-up (extended through 2020) and 1.1% thereafter, that, coupled with scheduled toll increases that begin at a level reduced by 6%, results in a total revenue growth CAGR of 3.29% through fiscal 2043. Projected average and minimum DSCRs over the life of the senior debt are 2.53x and 2.04x, respectively, and 1.25x and 1.17x, at the aggregate level. Minimum LLCR is 1.41x, in fiscal 2016, slightly above the 1.30x covenant, and continues to grow throughout the forecast period. If debt service flexibility is needed, there remains four full years beyond its current schedule in which the TIFIA could amortize.

In addition to the base and rating cases, Fitch also undertook a revenue growth break-even analysis, assessing the rate at which total revenue could grow from its current level and still service senior debt obligations, taking into account dedicated liquidity support. Accordingly, in order for the senior bonds to maintain at least 1.0x coverage after depleting all available reserves, NCTA would require a 0.5% total revenue growth rate through fiscal 2039. This compares to total revenue growth rates of 5.3%, 4.6% and 3.5% in the issuer's projections, Fitch base case, and Fitch rating case, respectively.

Although the aggregate ratios are at the low end of criteria guidance for the 'BBB' category, Fitch notes the rating case scenario developed reflects a very conservative operating environment. Furthermore, the breakeven analysis is considered reasonable given the strength of the MSA, lack of direct competition as well as the ability to raise tolls above inflation if necessary. Additionally, a forward-looking LLCR covenant to raise toll rates to meet the TIFIA amortization schedule provides an additional layer of security.

The Triangle Expressway, North Carolina's first modern toll road, is an 18.8 mile all-electronic toll road that comprises the partially complete outer loop around the greater Raleigh area from I-40 in the north to the NC55 bypass in the south. The expressway is formally located in Wake and Durham counties and extends south from the NC-147/Interstate 40 interchange in Research Triangle Park to Northern Wake Expressway, and then northeast to the Northern Wake Expressway (NC-540)/NC-54 interchange and to the south to the NC-55 Bypass in Holly Springs. Construction began in late 2009, with the facility opening to traffic in three phases, beginning with the Triangle Parkway in 2012. The project was delivered on schedule and under budget, with the final phase, the Western Wake Freeway, opening on Jan. 2, 2013.

SECURITY

The senior bonds are secured by a gross lien on revenues of the expressway. Significant support is provided to both the bonds and the overall system by NCDOT's covenant to fund operating, maintenance and capital costs that cannot be supported by expressway revenues. The TIFIA loan is secured by a lien on revenues after the payment of the senior lien bonds.