Fitch Affirms North Carolina Turnpike Authority's System Revs at 'BBB-'; Outlook Stable
Fitch Ratings affirms the 'BBB-' rating on the North Carolina Turnpike Authority's (NCTA) approximately $294.5 million Triangle Expressway System senior lien revenue bonds consisting of:
--Approximately $235 million revenue bonds, series 2009A (current interest bonds);
--Approximately $35 revenue bonds, series 2009B (capital appreciation bonds).
Fitch also affirms the 'BBB-' rating on the NCTA's approximately $400 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The Rating Outlook is Stable.
KEY RATING DRIVERS:
Strong Service Area but Uncertain Demand: The Triangle Expressway will serve as a major alternative to congested free roads and as a key route to the main employment center in the region, the Research Triangle Park (RTP). Solid historical county and corridor population and employment growth is expected to continue and should support assumed traffic growth rates.
Low Initial Toll Rates and NCDOT Planned Annual Increases: There exists the potential for lower traffic and revenue given uncertainty with perceived value of time savings and potential sensitivity to toll rates given the limited number of toll roads in the area. In Fitch's opinion the road has moderate economic ratemaking flexibility given higher-than-average wealth levels and a 2013 toll of approximately $0.15/mile.
All Fixed-Rate Debt and Solid Legal Covenants: The senior bonds and TIFIA Loan are all fixed-rate obligations; however, annual debt service obligations do escalate. Strong legal provisions include a rate covenant that requires action by NCTA to raise tolls in a downside scenario and a forward-looking loan life coverage ratio (LLCR) requirement of 1.3 times (x) on the TIFIA loan.
Significant State Support: Significant state support for the project will be in the form of a $25 million annual payment from the state of North Carolina, which will support debt-service payments, after paying debt service on state appropriation bonds (rated 'AA?' by Fitch) (largely on the back-end of the toll revenue /TIFIA loan debt amortization), a construction assurance agreement, an operations and maintenance guaranty agreement, and a guarantee on the renewal and replacement reserve.
Highly Leveraged Asset Partially Mitigated by NCDOT Backup and TIFIA Flexibility: The Triangle Expressway is leveraged at about 25x and 27x in Fitch's base and stress cases, respectively, which builds in a high level of sensitivity to time savings, fuel prices, a delayed opening and high ramp-up. TIFIA does have some, albeit limited, flexibility should traffic and revenue levels not come to fruition.
Good Physical Condition of Assets and NCDOT R&R Backup: The road will be new upon completion and there is a back-up pledge from the NCDOT to refill the R&R reserve on an annual basis should revenues not be sufficient.
What Could Trigger A Rating Action:
-- The authority's ability to proactively manage construction according to the proposed schedule;
-- Management's willingness to increase toll rates should traffic levels not materialize such that debt service coverage and loan life coverage ratio expectations are met;
--Changes in near-to-medium term economic conditions, gas prices and population and employment growth projections that do materially differ from Fitch's rating case assumptions.
The bonds are secured by a gross lien on toll revenues generated from the proposed Triangle Expressway. The TIFIA loan is secured on by a gross line on toll revenues after the payment of the senior lien bonds.
Construction on the Triangle Expressway project commenced in late 2009, and progress is currently tracking favorably to projections from both a schedule and cost perspective. The Triangle Parkway (3.4 miles) opened in November 2011 and the construction on the Western Wake to US 64 is expected to be completed in August 2012 with the completion of the remaining section to the NC 55 Bypass expected in December 2012. The project is currently tracking around $53 million below the original budget due primarily to favorable right-of-way acquisition; however, tolling equipment and related installation costs have been higher than projected.
Initial traffic counts taken on the off-ramps in the northern-most section of the completed road and on the currently untolled section of I-540 have been mixed. Current average daily traffic counts for the ramps are tracking around 50% of initial estimates. Fitch does note that this section does not currently benefit from the entire completed Western Wake portion of the road, thus time savings are extremely limited. In addition, this section is forecast to account for only approximately 10% of total revenues. Conversely, initial toll counts on I-540 currently indicate around 22,000 average daily vehicles. Initial estimates provided by the traffic and revenue consultant prior to construction assumed traffic levels on this section of the road would be around 14,000 average daily vehicles. As the final two segments open in the next 5-7 months, Fitch will closely monitor traffic levels and monthly increases related to Fitch's assumed ramp-up levels. At this stage, Fitch views any additional delays or cost overruns as highly unlikely.
The Triangle Expressway will be an all-electronic road payable by either a transponder or video toll. A video will take a picture of a license plate and a bill is mailed to the driver. The NCTA currently has a tolling policy associated with the road. Two toll rates will be set: one for transponders and one for video tolling. The rates will differ across vehicle type. Initial toll rates are estimated to be around $0.15 per mile (2013 dollars). Given wealth levels of the greater Raleigh-Durham MSA and potential time savings, Fitch views the rates as reasonable. Should traffic levels not materialize as expected, Fitch believes there is some, albeit limited, flexibility to increase rates.
Fitch developed both a base case and stress case based on certain criteria set forth in Fitch's Global Toll Road Guidelines (available at www.fitchratings.com). Additionally, Fitch developed an alternative stress scenario that applied similar factors from the Fitch stress case but also some reasonable assumptions for delayed growth in the county and region that impacts initial-year traffic, but higher levels of traffic growth in the medium term. The Fitch stress case also assumes lower value of time in the opening year, slower corridor development and a prolonged period of higher fuel prices; the latter three stress factors were determined by the various stress inputs from the CDM Smith (formerly known as Wilbur Smith Associates) traffic and revenue study.
For the first full year of operation, toll revenues are assumed to be $17.4 million, after leakage from unrecoverable toll violations and equates to approximately 67% of the traffic and revenue study amount. Toll revenue grows at a CAGR of 12.7% during years one through 10 of operation reflecting both a five-year ramp-up phase and grow 5.0% from years 11?20, and 3.4% in years 21?30 reflecting traffic and toll rate increases that taper down. In this scenario, senior debt-service coverage equals 1.5x in 2015, including excess state appropriation funds. In 2016, senior debt-service coverage equals 1.42x and the combined senior and scheduled TIFIA debt-service coverage ratio (DSCR) of 0.85x. While Fitch expects there will likely be some deferral of TIFIA, Fitch's analysis concluded that growing revenues in the medium term will adequately amortize deferred amounts. The LLCR is at approximately 1.20x through the first 20 years and grows minimally after the term of the senior revenue bonds and TIFIA loan. Under this scenario all financial covenants are met. While Fitch views favorably the flexibility to defer scheduled TIFIA loan payments and meet only the mandatory payments, the LLCR covenant provides an additional layer of security to bondholders to raise toll rates to meet the TIFIA amortization.
The Triangle Expressway project is located in Wake and Durham counties in North Carolina. The Triangle Expressway will consist of three primary sections: the Triangle Parkway, the Northern Wake Expressway (NC-540), and the Western Wake Freeway. The Triangle Expressway will extend from NC-147 at I-40 south for 3.4 miles and terminate at the interchange with the Outer Wake Expressway. The Northern Wake Expressway (NC-540) is the portion of the Outer Wake Expressway extending from NC-54 to NC-55 and is 2.8 miles long. This section was built by the NCDOT with the State Transportation Improvement Program (STIP) funds and opened to the public in 2007 and was leased to the NCTA in accordance with the right-of-way lease agreement to be executed by the parties. It will enable Triangle Parkway and Western Wake Parkway to function as a contiguous toll facility. The Western Wake Freeway, which will connect with Northern Wake Expressway (NC-540), extends 12.6 miles from a northern juncture with NC-55 near Research Triangle Park to a southern juncture with NC-55 Bypass near Holly Springs.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges and Tunnels' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels
Chad Lewis, +1-212-908-0886
33 Whitehall Street
New York, NY 10004
Scott Zuchorski, +1-212-908-0659
Mike McDermott, +1-212-908-0605
Brian Bertsch, New York, +1-212-908-0549