Fitch Ratings-Chicago-20 May 2015: Fitch Ratings has assigned an ‘A’ rating to $193 million in senior lien revenue bond anticipation notes (BANs), series 2015, being issued by the Central Florida Expressway Authority (CFX). The Rating Outlook on both the TIFIA loan and senior bonds is Stable.
Fitch also rates CFX’s $2.5 billion outstanding senior revenue bonds, and $193 million junior lien TIFIA loan. For more information, please see the press release ‘Fitch Rates Central Florida Expressway Auth TIFIA Loan ‘A-‘; Outstanding Senior Bonds Affirmed at ‘A”, dated March 18, 2015.
Rating Rationale
The rating reflects the essentiality of the CFX system to commuters in the Orlando area, coupled with a demonstrated willingness and ability to implement toll increases even during challenging economic times. CFX’s continued efforts to improve its liquidity position add strength to CFX’s debt structure. The upcoming capital plan, while sizable and requiring additional borrowing, is manageable and will serve to enhance the essentiality of the system.
Key Rating Drivers
Revenue Risk Volume: Stronger
Established Road System: CFX’s roadway system is a critical component of the Orlando area’s transportation network, supporting a largely commuter traffic base. Recent legislation creating the new agency (formerly Orlando Orange County Expressway Authority) expands the authority’s jurisdiction to include Orange, Seminole, Lake, and Osceola Counties and the City of Orlando, providing a broader traffic base while also allowing for greater operating efficiencies.
Revenue Risk Price: Midrange
Proven Ability To Manage Tolls: CFX successfully introduced toll increases through the recent recession and, furthermore, implemented its first planned CPI-linked toll increase in July 2012 with limited impact on traffic. CFX maintains moderate levels of economic ratemaking flexibility, with board approval to implement future CPI-linked increases at regular five-year intervals (next increase slated for 2017).
Infrastructure Development Renewal: Stronger
Good Physical Condition Of Assets: CFX’s management team has maintained the facilities to a high standard, with robust historical financial performance supporting a sizable portion of pay-as-you-go and debt-funded capital investment. CFX’s $861 million capital program through 2020 is considerable, with 44% of funds going to the Wekiva Parkway. However, CFX’s track record of delivering capital improvements is strong. Existing projects from other counties newly under CFX jurisdiction have not yet transferred to the authority; when they do, they will be considered ‘non system projects’ and will not have claim to system pledged revenues under the bond resolution.
Debt Structure (senior lien): Midrange; Debt Structure (junior lien): Midrange
Some Surety Exposure: CFX’s debt is currently 80.4% fixed rate, with the remainder in synthetically fixed mode. In addition, the majority of debt service reserve fund (DSRF) requirements are met with surety policies, with $162 million in the form of surety backing versus $58.2 million cash funded. The series 2015 BANs will benefit from a fully funded DSRF of $10.6 million sized at maximum annual debt service (MADS) on the TIFIA loan. Going forward, new money issues are expected to benefit from reserves funded from proceeds. CFX has also established a $160 million cash reserve for debt management. Notably, the junior TIFIA loan does not feature a ‘springing lien’ mechanism, ensuring that it remains fully-subordinated to senior debt in all circumstances.
Financial Metrics
Relatively High Leverage: The system carries relatively high leverage at 7.3x net debt to cash flow available for debt service (CFADS), and is likely to maintain relatively high leverage in the medium term given continued capital needs. The senior debt service coverage ratio (DSCR) was 1.99x in 2014. Management targets coverage of 1.60x on the senior lien and 1.50x on the second lien, well above the covenanted level of 1.20x. Leverage is expected to remain in the 7x-8x range for the next five years due to borrowing for the capital improvement plan (CIP) but will fall to more moderate levels over the next 10 years.
Peers
Comparable peers include other large expressway systems such as Miami Dade Expressway (MDX; ‘A-‘/Outlook Stable) and Harris County Toll Road Authority (HCTRA; ‘AA’/Outlook Stable). CFX’s lower rating relative to HCTRA reflects its higher leverage, lower revenues, and lower coverage; its higher rating relative to MDX reflects more robust revenues and coverage levels.
Rating Sensitivities
Negative: An inability to control expenses and manage its capital program would pressure the current rating.
Positive: Traffic and revenue perform significantly above expectations.
Transaction Summary
CFX is issuing $193 million in series 2015 BANs in order to finance system capital improvements related to the Wekiva Parkway Project on an interim basis. Proceeds from the BANs will also fund capitalized interest and pay costs of issuance. The BANs have a single maturity in January 2019, and are expected to be callable without penalty on July 1, 2018. Interest is capitalized through maturity, and the notes benefit from a cash funded debt service reserve sized to MADS on the Authority’s TIFIA loan. The authority plans to take out the BANs by drawing on its junior TIFIA loan in July 2018, with the reserve fund transferring to the TIFIA loan at takeout.
The total Wekiva Parkway Project has an estimated project cost of $2.106 billion. CFX’s portions of the project have a current estimated project cost of $630.7 million per the Cost and Schedule Risk Assessment Report published in August 2014 and prepared by HDR. Of the $630.7 million of project costs, $534 million are TIFIA eligible, as are additional financing costs of $53 million. CFX is funding approximately 33% of total eligible costs for the Wekiva Parkway Project with a second lien TIFIA loan. The TIFIA loan is sized at $193 million, with interest payments beginning on July 1, 2023, principal payments beginning July 1, 2028, and level debt service through final maturity on July 1, 2049.
There are a number of conditions present for disbursement of the TIFIA loan to redeem the project notes. While these conditions are largely administrative, the obligation to disburse funds is not a full guarantee, and thus the rating on the junior TIFIA loan reflects the risks associated with CFX meeting all conditions precedent. However, CFX has proven market access on its senior lien, with the remainder of its CIP assumed to be funded with senior revenue bonds. Should CFX fail to meet any of the conditions precedent preventing disbursement of the TIFIA loan, Fitch believes that CFX
would have the ability to refinance the BANs with senior debt.
Management targets coverage of 1.6x on the senior lien and 1.5x on the second lien. The senior DSCR was 1.99x in 2014, and under the current five-year work plan remains at or above 1.74x for the senior lien and 1.68x for the second lien going forward under the base case which assumes moderate 1%-3% traffic growth (1.1% compound annual growth rate [CAGR] for 2015-2034), programmed, inflationary toll increases every five years (3.5% toll revenue CAGR), and operating expense growth above historic averages (CAGR of 4.6%). Under a downside scenario which assumes a recession resulting in a one-time 8% drop in transactions and 3% drop in toll revenue (0.6% traffic CAGR, 2.9% toll revenue CAGR), half of expected revenue growth for Wekiva following ramp-up, and higher expense growth (5.1% CAGR), senior DSCR remains above 1.58x and second lien remains at or above 1.52x. Under all sensitivity scenarios, coverage levels remain well above the covenanted level of 1.2x. However, should coverage on the senior and second lien fall meaningfully below management’s target levels, the ratings would be pressured. Leverage is relatively high for CFX at 7.3x in fiscal 2014, and rises to 8x in the near term under the Fitch downside scenarios as borrowing for the capital program comes online. However, leverage moderates over time and is anticipated to fall over the next 10 years. The authority is working on an updated five-year work plan, and Fitch will evaluate the plan when it becomes available.
CFX’s overall traffic increased 6.8% in fiscal 2014 (ending June 30) following the 3.2% increase in 2013. On a year-to-date basis for fiscal 2015 through March, traffic is up a further 7.7%. Revenues showed a similar trend, increasing 7.1% for fiscal 2014, and rising 7.4% on a year-to-date basis for 2015 through March. In July 2012, CFX implemented a CPI-linked toll increase of approximately 98% at toll collection sites across its system. For the first time, cash toll rates were increased to a higher level than the electronic toll rates and, as a result, E-PASS participation went up 3.4% following the toll increase. E-PASS accounted for 80% of transactions in 2014, and 77% of revenues. As Wekiva is completed, participation may increase further as additional commuter-based toll plazas come online. CFX plans to implement toll increases every five years, with the next increase scheduled for 2017.
On May 14, 2015, CFX announced the selection of the agency’s first Executive Director. The new Executive Director has considerable experience with the authority, previously serving as Deputy Executive Director of Finance and Administration, and having been with CFX, and its predecessor OOCEA, since 2006. The executive director position had been vacant since 2014, and Fitch views this development positively, further fostering stability and continuity in CFX’s management as it executes its capital program.
For more information on the TIFIA loan and governance developments leading to the establishment of CFX, please refer to Fitch’s March 18 press release.
Security
The bond anticipation notes and outstanding senior bonds are secured by a pledge of, and lien on, CFX System Revenues net of Operations, Maintenance and Administrative Expenses.
The TIFIA loan is secured by a second lien pledge of, and lien on, CFX System Revenues net of Operations, Maintenance and Administrative Expenses.
Contact
Primary Analyst
Emma W. Griffith, Director
+1-212-908-9124
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Chad Lewis, Senior Director
+1-212-908-0886
Committee Chairperson
Saavan Gatfield, Senior Director
+1-212-908-0542
Media Relations
Elizabeth Fogerty, New York,
Tel: +1-212-908-0526, Email: elizabeth.fogerty@fitchratings.com.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research
–‘Rating Criteria for Infrastructure and Project Finance’ (July 12, 2012);
–‘Rating Criteria for Toll Roads, Bridges, and Tunnels’ (Aug. 20, 2014).
Applicable Criteria and Related Research
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges and Tunnels
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