Fitch Affirms NTE Mobility Partners LLC's Revs at 'BBB-'; Outlook Stable
KEY RATING DRIVERS
Summary: The affirmations reflect the newly opened managed lanes (ML) project that is supported by its strategic location within a congested commuting corridor servicing Dallas-Fort Worth metropolitan area. While the length and extent of ramp-up is still unknown, early indications are strong. The ratings also reflect the lack of demand history and uncertainty associated with price sensitivity to increasing toll rates, as well as the inherent volatility and long-term forecast risk associated with ML projects. Revenue risk is partially offset in the medium term by the flexibility afforded by the TIFIA loan structure and the project's strong liquidity position, currently at $113 million, although an escalating debt structure that relies on revenue growth to meet debt service obligations has a constraining effect on the project's credit quality.
In Fitch's rating case, total senior and TIFIA coverage averages 1.46x during the period when senior debt fully amortizes through 2039, which is consistent with the 'BBB' category for smaller networks. Under Fitch's rating case stressed full ramp-up revenue assumptions, a reasonable revenue growth breakeven post ramp-up of approximately 4.5% CAGR provides further comfort at this rating level, considering Fitch's expectations of solid population and economic growth in the area.
Revenue Risk - Volume: Midrange (Corridor Volume - Stronger, ML Characteristics - Weaker)
Congested Commuting Corridor: The NTE 1&2 project is a key route connecting Fort Worth, TX area with the city of Dallas and Dallas-Fort Worth Airport. This strategic location is further enhanced by the area's solid economic profile, which has benefited from considerable population and employment growth over the last decade resulting in corridor volume assessment of stronger. The elasticity of traffic demand to toll rate increases over the medium to longer-term has not been tested yet as the facility is in the early ramp-up phase. Typical maximum weekday passenger car toll rates of about $0.70/mile in the peak period peak direction are relatively moderate compared to other ML projects' peak period tolls. A tight free access policy is a project strength, although current ramp-up status constrains the ML characteristics assessment at weaker. Beyond ramp-up, as congestion continues to build up in the corridor, Fitch expects the project to be able to generate robust revenue growth stemming from a combination of above inflationary rate increases and traffic growth.
Revenue Risk - Price: Midrange
Dynamic Pricing, Soft Cap: The project utilizes a dynamic pricing policy with flexibility to change tolls based on real-time traffic conditions. The comprehensive developer agreement allows for revenue maximization up to a soft cap on toll rates of $0.75 per mile (2009 dollars) and rates may only be increased beyond this level if the concessionaire is unable to manage ML speeds at or above 50 miles per hour, or if traffic volumes exceed 3,300 passenger car equivalent units per hour in the two lane sections and 5,100 in the three lane sections, implying a switch to throughput maximization at these levels. While the soft cap structure limits some of the concessionaire's pricing flexibility, it may also help offset some political risk regarding rate increases in a scenario of high congestion.
Infrastructure Renewal and Replacement: Stronger
Infrastructure Risk Well Mitigated: The project contains adequate mechanisms to assess and address infrastructure requirements on an ongoing basis through the life of the debt. NTEMP is required to fund capex needs from cash flow on a rolling five-year look forward basis. The 11.5-year tail after TIFIA debt maturity provides additional financial flexibility to meet handback requirements and partially mitigates asset reinvestment needs.
Debt Structure: Midrange
Fixed Senior Debt with Flexible TIFIA Loan: Debt is all fixed rate with a back-loaded aggregate debt service schedule. The covenant package is adequate with a senior debt service reserve fund (DSRF) equal to 10% of par and an equity lockup trigger of 1.20x. The TIFIA structure includes considerable flexibility between scheduled and mandatory principal and interest payments until year 26 following substantial completion when all TIFIA debt service becomes mandatory and as senior debt is fully amortized in 2039. Still, the project is reliant on future revenue growth to support its escalating debt structure, which may be exacerbated by any necessary TIFIA scheduled debt service deferrals. In addition to the $40 million DSRF, a major maintenance reserve account (MMRA) of $20 million provides additional liquidity against revenue shortfalls in the early years of operation.
Moderate Financial Flexibility: The audited financial results in 2015 indicate a senior DSCR of 1.36x. Financial relief during ramp-up is afforded by TIFIA; no mandatory interest payments are required until 2019. Under Fitch's rating case, total senior and TIFIA scheduled DSCR average 1.46x during the period when senior debt fully amortizes through 2039. The project is reliant on future revenue growth (in excess of inflation) to support its escalating debt structure, which may be exacerbated by any necessary TIFIA scheduled debt service deferrals. The 4.5% breakeven revenue growth rate from Fitch's rating case first fully ramped-up year revenue provide additional comfort, particularly in light of expectations of further population and employment growth in the service area.
Peer Group:
Peers from Fitch's rated portfolio at the same rating level include other ML facilities along arterial corridors that are highly congested, particularly during peak hours such as the neighboring LBJ Infrastructure Group LLC (LBJ, 'BBB-'/Outlook Stable), 95 Express Lanes LLC in Virginia (95 Express, 'BBB-'/Outlook Stable) and Riverside County Transportation Commission's (RCTC SR-91, 'BBB-'/Outlook Stable) MLs in California. These projects also serve areas with relatively strong demographic characteristics and limited alternative routes. 95 Express and LBJ are in different stages of ramp-up, while RCTC's SR-91 project is under construction. Despite some differences in tolling mechanisms, policy and lane configuration, Fitch believes all three facilities should, in the medium term, build up moderate-high pricing power and be in a position to levy relatively high toll rates of over $0.50 per mile (real) in peak periods, on average.
RATING SENSITIVITIES
Positive - Traffic/Revenue Above Expectations: Sustained traffic and revenue performance above Fitch's base case that improve financial metrics.
Negative - Traffic/Revenue Underperformance: Weaker than expected continued ramp-up that stretches liquidity support or post-ramp-up traffic and revenue performance at or below the Fitch rating case on a sustained basis.
Negative - Operating Costs Above Projections: Operating costs consistently higher than expectation, or the incurrence of material additional capital investment charges to those currently anticipated.
Negative - Underperformance from Planned Improvements: Planned capacity improvements by 2031 that materially impact congestion levels in the corridor resulting in reduced ML demand.
SUMMARY OF CREDIT
The project opened to traffic in October 2014, more than eight months ahead of scheduled completion, and it is performing better than Fitch's original expectations. ML traffic and revenue ramp-up was strong in 2015, which marked the first full year of operations, with 20.1 million transactions generating $51.6 million in toll revenues that year. Toll revenues exceeded original expectations in 2015, taking into account additional six months of operations due to earlier than expected construction completion.
Demand has reportedly returned to the corridor rapidly post opening, fully offsetting traffic losses from traffic diversion during construction. The corridor volume is now estimated to exceed pre-construction levels, and although no new free capacity has been added, new tolled capacity and strong population growth have contributed to additional project corridor demand.
The project's configuration allows access to MLs at 11 different locations, primarily from frontage lanes. Importantly, the drivers pay for the full length of each of the two segments regardless where they enter it which mitigates the exposure to short distance trips within individual segments from multiple access and exit points. Additionally, the project is not materially exposed to free access. High-occupancy vehicles (HOV) with two or more passengers receive a discounted toll rate during peak periods until 2025, subsidized by TXDOT, and trucks pay a higher toll rate, based on shape.
Total traffic and revenue ramp-up remained strong in the first five months of 2016, with revenues increasing by 62% over the same period last year to $28 million, averaging $5.6 million per month during through May. Year-over-year traffic growth was strong at 35%, reaching 9.8 million transactions in the first five months. Given performance to date, in Fitch's view the project remains on track to achieve the sponsor's budgeted revenues of $65 million by the end of the year. The sponsor case assumes a relatively optimistic ramp-up through 2018, reaching $116 million. Post ramp-up, toll revenue growth rates average about 6.4% through 2049 when the TIFIA debt matures.
The project remains in ramp-up with several more years of significant growth expected, before stabilizing, with these later years being more indicative of long-term performance. Fitch undertook a revenue growth break-even analysis, assessing the rate at which total revenue could grow from fully ramped-up year and still service all debt obligations, taking into account dedicated debt service reserves. When considering Fitch's rating case ramp-up assumption, reaching $79 million in 2017 and stabilizing thereafter, the project would require a 4.5% revenue growth rate in order to maintain at least 1.0x global debt service coverage. This compares to about 1.2% breakeven growth required in the sponsor case from 2019.
While updated traffic analysis was not completed for this review, Fitch remains comfortable as to the expected long-term traffic demand for the MLs once ramped-up, supported by solid population and economic growth expectations for Dallas-Fort Worth metropolitan area. Furthermore, the breakeven analysis is considered reasonable given the strength of the MSA.
The MLs were constructed alongside GPLs and directly compete with these lanes for market share. By design, MLs are priced specifically to move traffic efficiently, thereby giving travelers an alternative to the free, congested, GPLs. Free-flowing conditions at 50 miles per hour or higher are maintained by adjusting the toll rate to manage travel demand.
Senior bond and TIFIA loan proceeds have been used, along with approximately $570 million in public funds from TxDOT and equity of approximately $420 million from Cintra Infraestructuras, S. A, Meridiam Infrastructure Finance S. A.R. L and the Dallas Fire and Police Pension System to fund the construction of segment 1 and segment 2W of the project. Segment 1 construction consisted of two MLs in each direction of Interstate Highway (IH) 820, and segment 2W construction consisted of two MLs in each direction on State Highway (SH) 183 (both of which run east-west). NTE is a single purpose entity and was granted a winning a proposal by TXDOT to develop, operate, maintain, and toll the North Tarrant Managed Lanes project for a period of 52 years pursuant to a comprehensive development agreement.
The design-build contractor, Bluebonnet Contractors, initiated construction activity on Oct. 28, 2010, slightly ahead of the contract-specified date of Nov. 10, 2010 and construction was completed on Oct. 4, 2014, more than eight months ahead of scheduled completion date in June 2015. TXDOT's written certificate of final acceptance was received in January 2015.
SECURITY
The bonds are secured by net toll revenues generated from the NTE managed lanes project. The lien securing the TIFIA obligation is subordinated to the lien securing the PABs, except after a bankruptcy related event, after which the TIFIA loan will rank pari passu with the senior PABs.
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