OREANDA-NEWS. Fitch Ratings has upgraded the rating on Elizabeth River Crossing's, LLC (ERC) $626.3 million in private activity bonds (PABs), issued by the Virginia Small Business Financing Authority, to 'BBB' from 'BBB-'. In addition, Fitch has upgraded the rating on the $441.2 million TIFIA loan to 'BBB' from 'BBB-'.

The Rating Outlook for both the PABs and TIFIA loan is Stable.

The upgrade to 'BBB' reflects ERC's significantly reduced exposure to completion risk, as construction works are in an advanced stage with the most complex activities more than 90% complete. Fitch anticipates significant de-risking of the project with the completion of the Midtown Tunnels and MLK Extension, which are scheduled for completion in August 2016 and December 2016, respectively. The remaining portion of the project comprises the refurbishment of the existing tunnels, which is currently projected to be completed a year in advance of the Substantial Completion Date of May 2018. The rating further reflects standard project finance covenants and updated forecast which project high coverage (combined Senior and Mandatory TIFIA debt) levels that exceed Fitch's original Base and Rating Cases. The rating is, constrained, however, by the relatively high leverage levels for an asset of this nature.

KEY RATING DRIVERS

Advanced Stage of Construction (Completion Risk: Stronger - revised from Midrange): Completion of the complex immersed underwater New Midtown Tunnels and the MLK Extension is scheduled for August and December of 2016, respectively, significantly de-risking the entire project. Overall, the project benefits from an experienced design build team comprised of: Skanska AB; Kiewit Infrastructure Group; and Weeks Marine. The security package is considered adequate with a letter of credit (LOC) equal to 6% of the contract price and 45% liability cap supported by joint and several parent guarantees from Skanska and Kiewit.

Established Traffic Base, Uncertain Price Elasticity (Revenue Risk - Volume: Midrange): Revenue will be generated from a well-established transportation corridor serving primarily commuter traffic with above-average wealth levels, into and out of Norfolk and Portsmouth, VA. The level of diversion following the implementation of tolls is uncertain but is partially mitigated by the distance to free alternatives which are operating at capacity.

Tolling Framework Provides Financial Flexibility (Revenue Risk - Price: Midrange): The comprehensive agreement (CA) enables ERC to raise tolls at the greater of 3.5% or CPI annually following substantial completion of new project assets. The initial peak passenger vehicle toll for the tunnels will be set at $1.95, if using a transponder, which Fitch views as reasonable compared to other tolled bridges in the area and nationwide. Toll risk during the construction period has been partially mitigated by VDOT compensation related to the delay of toll implementation and subsequent reduction in toll rates. Contingent equity, backed by an LOC, remains available to cover a drop in revenue equivalent to a 40% reduction in traffic from existing levels.

Detailed Capex Plans in Place (Infrastructure Development & Renewal: Stronger): Upon completion, the project will have one new and three fully refurbished tunnels. Detailed capex plans are in place to meet performance and hand-back requirements under the concession agreement.

Fixed-rate Debt, Tail Mitigates Financing Risk (Debt Structure: Midrange): Fixed-rate PAB and TIFIA financing fully amortize over their respective tenors and, furthermore, a tail of 23 years provides cushion to refinance if needed. TIFIA is structured to require minimum interest payments in the event revenues are insufficient to make scheduled debt service payment amounts. Cash lock-up provisions and additional bonds are tied to meeting a 1.3x coverage test of senior debt service and scheduled TIFIA debt service.

Financial Metrics

High Leverage, Sufficient Coverage: Leverage is elevated but comparable to urban center peers at approximately $107 million per lane-mile. Under Fitch's Rating Case, net debt-to-cash flow available for debt service (CFADS) is considered high at 19x during the first full year of operations of the new asset in 2017, before evolving down to approximately 17x in 2022. Under Fitch's rating case scenario, combined coverage on senior and mandatory debt service averages 1.69x while minimum total coverage is 1.45x over the total term of the bonds.

Peer Group: ERC's peers include Chesapeake Transportation System (Chesapeake Expressway, Virginia, CTS, rated 'BBB'/Stable Outlook) and Kentucky Public Infrastructure Transportation Authority (KPTIA, rated 'A'/Stable). Both ERC and KPTIA are under construction and they serve a commuter traffic base. These projects have comparable coverage and leverage metrics. CTS' is also partially under construction with comparable total leverage that is anticipated to be 22x on the senior lien during the first operating year before evolving down to 16x post-ramp-up.

RATING SENSITIVITIES

Negative - Financial Performance and Metrics: Post completion, the rating could be pressured if financial metrics are persistently below Fitch's rating case minimum expectations of 1.45x combined senior and mandatory debt service coverage ratio (DSCR) due to changes in economic conditions that lower overall corridor demand, the result of operating and maintenance expenditures that are above forecast levels, or future leverage that materially affects coverage ratios.

Negative - Construction: Unanticipated construction issues that may cause significant delay in completion of the project beyond the long-stop date would stress the rating.

Positive: Post completion, the rating may migrate upwards with sustained traffic and revenue performance resulting in leverage evolving below 12x and coverage levels above Fitch's Base Case combined senior and mandatory DSCR (minimum of 1.62x and averaging 1.88x).

SUMMARY OF CREDIT

The updated schedule included in the lender's technical advisor's (AECOM) most recent report indicates that all four phases of the project (new Midtown tunnel, MLK Extension, Existing Downtown Tunnels, and Existing Midtown Tunnel) are on schedule to be completed in advance of their respective contractual completion dates. Significant de-risking of the project follows after the new assets, the Midtown Tunnel and MLK Extension, complete construction by the end of 2016 as scheduled. The Midtown tunnel had already, introduced one lane of traffic in June 2016 and expects to complete construction by the end of August 2016 with the opening of another two lanes of traffic. The remaining work comprises simple rehabilitation of the existing tunnels which is planned for completion by the end of May 2017, ahead of substantial completion in May 2018.

The reduction of overall toll rates during the construction period, followed by the elimination of tolls on the MLK Extension, was executed per Amendment 3 and Amendment 5, respectively. The amendments and agreements subsequent to financial close do not have a material effect on the project's metrics, as the compensation arrangements were sized to maintain all economics and metrics within the transaction. Pursuant to the agreements, the compensation from the toll buy-out agreement will be used toward the redemption of $37.5 million of PABs outstanding at Substantial Completion of the project. Additionally, the project expects to cease making further draws under the TIFIA loan ($10.5 million available) and pre-pay $4.5 million of TIFIA debt outstanding at the Substantial Completion date.

In FY2015, traffic and revenue ramp-up was slower than expected due to inclement weather in the early months and tolling leakage which resulted in revenue losses. This resulted in below-budget transactions by 6.2% with total transactions at 34.5 million compared to 36.8 million. Signs of improvement were observed in YTD June 2016, with actual traffic only 0.4% below budget and performing better than 2015 actuals over the same period. Heavy vehicles account for 3.3% of total traffic as of June 2016. Toll revenues fell below budget by 13% in FY2015 and collections remain slightly under budget by approximately 10% in YTD June 2016 due to unresolved tolling issues. However, ERC continues working with 3M to achieve Final Acceptance in Fall 2016.

Fitch updated Base and Rating Case projections with actual traffic and revenue performance. The revised Base Case assumes a 5% decline in transactions while the facility continues to ramp up in traffic as well as toll revenue collections. Operating and Maintenance costs (O&M costs) and lifecycle costs are slightly above the original sponsor projections, at 3% and 10%, respectively. The resulting Total Mandatory DSCR (Senior and Mandatory TIFIA combined) in this scenario, averages 1.88x with a minimum of 1.62x throughout debt maturity. Fitch's Rating Case assumes a larger decline in traffic of 12%, and similar O&M and lifecycle costs stresses applied to the base case. This scenario represents slower ramp-up and unresolved tolling issues combined with slightly higher expenses, resulting in Total Mandatory DSCRs averaging 1.69x with a minimum of 1.45x. Post completion of the New Project Assets, rating action may be considered should coverage levels sustain or exceed DSCRs in Fitch's Base and Rating Case.

SECURITY

The PABs are secured by a first-priority lien on project net revenue and the TIFIA loan is secured by a second-priority lien on project net revenue. The priority of the TIFIA loan would spring to parity with the senior secured obligations and any other permitted senior secured indebtedness upon the occurrence of a bankruptcy related event.