TEXT - Fitch affirms McAllen, Texas revenue bonds
Jan 28 - Fitch Ratings affirms the 'A' rating on the City of McAllen, Texas' approximately $36.8 million international toll bridge system (the system) revenue bonds, series 2007A and 2007B. The Rating Outlook remains Stable. SENSITIVITY/RATING DRIVERS: --Volatile Traffic Base With Competitive Pressure: The Hidalgo Bridge is a mature facility with strong revenue generating capabilities. However, it remains subject to the macroeconomic conditions of the U.S. and Mexico, drug cartel violence and increased border crossing regulations/security, as well as to competition from neighboring international bridges. Higher value commercial traffic volume remains limited until 2015 when the Anzalduas Bridge is authorized to accept it. --Moderate Rate-Making Flexibility: Management has a proven track record of raising rates as needed to mitigate declining traffic levels; however, the proximity of competing facilities limits economic rate-making flexibility of the bridge system to some degree. --Conservative Capital Structure: Fixed-rate debt with a flat amortization profile through maturity (2032) is further supported by an adequate level of reserves. --Low Leverage and Healthy Coverage: Strong debt service coverage (3.9 times in fiscal 2012) from the existing Hidalgo Bridge mitigates the ramp-up and traffic risk on the new Anzalduas Bridge. In addition, adequate cash reserves (365 days cash on hand) and moderate leverage equate to a relatively low net debt-to-cash flow available for debt service (CFADS) ratio of 2.9x with no additional borrowing anticipated. --Manageable Capital Expenditure Needs: The Anzalduas Bridge is newly completed and the Hidalgo Bridge is generally in good condition; funding is predominantly grant-based and any required matching is covered with bridge system reserves and a $0.25 set-aside from the June 2011 toll increase. WHAT COULD TRIGGER A RATING ACTION: --The return of sizeable declines in passenger traffic or toll revenue levels driven by violence related to drug cartels and/or a considerable contraction of the manufacturing industry and cross-border trade; --Changes in key financial metrics such as coverage and liquidity resulting from management's reluctance to raise tolls as planned/needed or its inability to control operating and maintenance (O&M) expenses; --Meaningful additional leverage. SECURITY: The outstanding revenue bonds are secured by a first lien on and pledge of net revenues of the toll bridge system. CREDIT UPDATE: Total crossings have declined over the past five fiscal years at a compound annual growth rate (CAGR) of 4.3%, but were down just 1% in fiscal 2012 to 5.4 million crossings. Prior year declines were the result of concerns over safety following the cross-border violence, the weakened economy, and, to a lesser extent, the toll increases in fiscals 2008, 2010, and 2011. Notably, however, passenger traffic was flat in fiscal 2012 with most of the decline coming from pedestrian traffic. This could indicate that a bottom has been reached. Supporting this is the fact that both vehicular and pedestrian transactions are up over 5% for the first two months of fiscal 2013. Commercial traffic is now practically non-existent and passenger vehicles represent the majority of the transactions (72%) with pedestrians accounting for the rest (28%). As a result, passenger traffic accounts for approximately 89% of toll revenues and pedestrian traffic the rest. Fitch expects a shift in this traffic profile once commercial traffic is allowed on the Anzalduas Bridge in 2015; however, the impact on traffic and revenue remains uncertain. Should material passenger volume declines return, negative rating action could be warranted. Toll revenues grew by 13% in fiscal 2012 continuing the rebound of 2.5% experienced in fiscal 2011. This growth is despite the recent toll increases and declines in transactions. After raising tolls by $0.25 in fiscal 2010, management implemented a $0.50 increase in fiscal 2011 to proactively mitigate the loss in traffic. Further, $0.25 of the $0.50 raise is being transferred to a capital improvement fund for future system improvements. Fiscal 2012 was thus the first full fiscal year of the passenger toll increase and transactions were nearly flat indicating a lower price elasticity and improving conditions in the area. Management also instituted a new tolling structure for two-axle commercial vehicles, increasing the toll to $7 from $3 in April 2012 which further supported the revenue growth. Overall, management has been able to grow toll revenues over the past five years (CAGR of 3.9%) in the face of declining traffic. Expenses have grown over the past couple of fiscal years as the Anzalduas Bridge was being brought on line, but have stabilized in fiscal 2012. O&M expenses appeared to increase by 9.9% over fiscal 2011, however, this was primarily related to an increase in maintenance expenses that were directly passed-through and recouped in the form of increased rental income. This has a cash flow neutral effect and is expected to continue going forward. Management indicated that most of its expenses are now fixed and that there should be little variance going forward, even when commercial traffic returns to the system. Fitch views this cost containment as difficult to sustain over the long term and has modeled 4%-5% annual growth in operating expenses in its base and stress cases, more in line with historical results. Given that expense growth was in line with expectations and traffic exceeded budget, the impact of toll increases improved debt service coverage to 3.9x in fiscal 2012. Going forward, Fitch expects management to maintain high coverage levels, especially when commercial traffic adds to the toll revenue base beginning in 2015. Fitch views this level of cushion as necessary given the volatility in the traffic base that is tied to the performance of the maquiladora industry in Mexico and border security threats. Capital expenditure needs are modest given the recent completion of the Anzalduas Bridge and the good condition of the Hidalgo Bridge. Several projects to improve efficiency are in the pipeline and funding is predominantly grant-funded with a 20% match required of management. Money is already set aside for these projects and the $0.25 set-aside from the toll increase should enhance the system's ability to undertake additional projects in the future.