TEXT-Fitch affirms Laredo, Texas international toll bridge revs at 'A+'
Jan 28 - Fitch Ratings affirms the 'A+' rating on the City of Laredo, Texas' approximately $51 million international toll bridge system (the system) revenue bonds. The Rating Outlook remains Stable. SENSITIVITY/RATING DRIVERS STRATEGIC LOCATION: The bridge system serves as a major North American Free Trade Agreement (NAFTA) gateway, providing a direct land route from Monterrey and Mexico City to major cities in Texas and along Interstate 35, the NAFTA route that traverses the U.S. north to Minnesota and the Canadian border. Traffic and revenues are susceptible to economic cycles and political decisions on both sides of the border. Overall crossings have been affected by heightened border violence and economic conditions. However, commercial traffic (at about 66% of toll revenues) has remained resilient, and the maquiladora industry may be strengthening. STRONG ECONOMIC RATE-MAKING FLEXIBILITY: The system's economic and political rate-making flexibility is demonstrated by its historical track record of raising toll rates, its relatively competitive tolls and a moderate degree of demand inelasticity. CONSERVATIVE DEBT STRUCTURE: All outstanding debt is fixed rate with a 15-year maturity profile and a flat-to-declining debt service schedule. LOW LEVERAGE AND ROBUST COVERAGE LEVELS: The system's low leverage of 0.98 times (x) net debt/cash flow available for debt service and healthy debt service coverage ratio (DSCR) of 4.13x on all debt in fiscal 2012, provide significant cushion against volatility in traffic. While the system makes deeply subordinated transfers to the city's general fund (equivalent to about 50% of toll revenues) ensuring high coverage of senior debt, it also results in low levels of liquidity being maintained (at about 261 days cash on hand) within the system. MODERATE CAPITAL PROGRAM: The bridges are generally in good condition and funding of any future enhancements are expected to be predominantly grant based. No new borrowing is anticipated to fund the system's four-year $31 million capital plan. WHAT COULD TRIGGER A RATING ACTION: --Negative rating action would be triggered by significant declines in crossings and revenue levels driven by considerable declines in manufacturing and cross-border trade or security concerns which could further restrict/slow border crossings; --Declining operating margins paired with management's reluctance to raise tolls and inability to control operating and maintenance expenses; --Meaningful additional leverage. SECURITY: The outstanding revenue bonds are secured by a senior lien pledge of net revenues on the toll bridge system. CREDIT UPDATE: Overall traffic levels declined at a compound annual growth rate (CAGR) of 4.5% between fiscal 2007 and 2012 as a result of the global economic downturn combined with border security concerns. Although total traffic continued to decline by 1.5% in fiscal 2012 to 9.1 million, commercial traffic was up 3.4% to 1.8 million trucks. Management has indicated that the bridges and surrounding areas have not experienced any direct cross-border violence, which has been restricted to Mexico. Nevertheless, Fitch notes that violence on the Mexican side has affected traffic results. The first three months of fiscal 2013 (through December) indicate a return to total traffic growth of 2.4%, with commercial traffic further increasing by 3.9%. Despite heavy traffic declines, toll revenue has continued to grow at a CAGR of 3.2% from fiscal 2007 to 2012 due to a toll increase implemented in October 2007 (fiscal 2008) and more resilient commercial traffic that made up 66% of total revenues in fiscal 2012. During the first three months of fiscal 2012 total revenues have increased 2.3%. To compensate for the traffic losses, the city historically contained the system's operating expenditures, which grew at a 0.2% CAGR between fiscal 2007 and 2012. Fiscal 2012 unaudited net revenues available for debt service of $35.9 million generated a senior DSCR of 5.13x and a total DSCR of 4.13x. Included in the total debt service coverage calculation are annual debt service payments associated with the system's outstanding $19.6 million SIB loans. The repayment of SIB loans is subordinate to the system's revenue bonds and the loans are not rated by Fitch. The bridge system supports deeply subordinated transfers to the City of Laredo's general fund. While the city's dependence on these transfers serves to ensure high coverage of senior debt, it also results in minimal levels of liquidity being maintained within the system and higher usage of the system's strong economic ratemaking flexibility. Partially mitigating these risks is the fact that transfers are made after debt service, and city council caps the general fund transfers to 50% of toll receipts and requires the maintenance of a 15% operating reserve. Bridge management transferred $22.2 million to the city's general fund in fiscal 2012, or approximately 50% of fiscal 2012 toll revenues. Should the system's surplus revenues become insufficient to accommodate such transfers, management indicated it would reduce operating and maintenance expenses before they would consider a toll increase. However, any deferral of the system's essential maintenance expenses would be viewed as a concern by Fitch. The system owns the portion of the bridges (50%) on the U.S. side of the border. The international toll bridge system is comprised of four bridges, one which primarily handles pedestrian and passenger traffic (Gateway to the Americas Bridge) and two that handle a mix of passenger and commercial traffic (Juarez-Lincoln International Bridge and Colombia Solidarity Bridge) and one which handles 100% commercial traffic (World Trade Bridge). 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,' (Jul. 12, 2012); --'Rating Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 2, 2012). Applicable Criteria and Related Research: Rating Criteria for Infrastructure and Project Finance Rating Criteria for Toll Roads, Bridges, and Tunnels
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