Fitch Rates Grand Pkwy Trans Corp TELA Bonds 'AA-'; Outlook Stable

Wed Jun 26, 2013 7:03pm EDT

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Fitch Rates Grand Pkwy Trans Corp TELA Bonds 'AA-'; Outlook Stable

Fitch Ratings assigns an 'AA-' rating to $2.66 billion in Grand Parkway Transportation Corporation (GPTC) Grand Parkway System toll revenue bonds supported by a toll equity loan agreement (TELA) with the Texas Department of Transportation (TxDOT) as follows:

--$1.355 billion in series 2013B (TELA supported);
--$839.2 million tender bonds series 2013C (TELA supported - interim construction financing);
--$107.4 million tender bonds taxable series 2013D (TELA supported); and
--$360.8 million taxable series 2013E (TELA supported).

The bonds are expected to price via negotiated sale the week of July 15, 2013.

In addition, Fitch affirms at 'AA-' the rating on the following outstanding bonds likewise supported by a TELA with TxDOT:

--$1.3 billion North Texas Tollway Authority special project system revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from toll revenues of the Grand Parkway System, other funds under the trust agreement, and payments of advances under the TELA, subject to legislative appropriation. Under the trust agreement, GPTC's pledge and assignment to the trustee for bondholders includes its right, title and interest in the TELA.

KEY RATING DRIVERS

CREDIT ENHANCEMENT OF TXDOT: The rating is based on the credit enhancement provided by TxDOT in the form of toll equity loan (TEL) advances. TEL advances have been made available to date only to the GPTC and to two other projects of the North Texas Tollway Authority (NTTA).

SUBJECT TO STATE APPROPRIATION: TxDOT's obligation to provide TELA advances to GPTC subordinate tier bonds is subject to biennial legislative appropriation. Advances would likely derive from the state highway fund (SHF), TxDOT's main operating fund to which various transportation-related taxes and fees are constitutionally dedicated. SHF revenues are relatively stable, although slow growing. Amounts available for TEL advances in each year are sized at a minimum to cover debt service and projected operating and maintenance expenses.

SUBORDINATE TO HIGHWAY OBLIGATIONS: TEL advances from the SHF would be subordinate to TxDOT's existing debt programs, including an authorized $6 billion in SHF first-tier revenue bonds and short-term subordinate lien borrowing authorized at 2 times average monthly deposits. TxDOT has the ability to establish additional revenue bond liens for which debt service payments would be senior to its TELA obligation. While there is no current plan to establish another lien senior to the TELA, Texas has significant transportation needs. TEL advances would be parity with various other TxDOT commitments. Further leveraging of the SHF could affect credit quality.

AUTHORIZATION FOR TOLL ROADS: TxDOT is statutorily authorized to participate in toll road projects.

RATING SENSITIVITIES

The rating is sensitive to the sufficiency of state resources in the SHF to support the current TELA and other parity commitments. Narrowing of SHF resources or a material expansion of senior or parity obligations with a claim to the SHF could pressure the rating.

CREDIT PROFILE

The $2.66 billion in subordinate tier TELA toll revenue bonds currently being issued are part of a larger, $2.86 billion financing by GPTC. Another $200 million in first tier toll revenue bonds, series 2013A, are secured by a senior claim to pledged toll and other revenues ahead of the subordinate tier bonds, but do not benefit from the TELA credit enhancement of TxDOT, Texas' transportation agency.

Bond proceeds will fund construction of a 55-mile portion of a planned 180-mile circumferential highway around greater Houston. The financed segments are expected to open between January 2014 and January 2016. (For further information on the first tier bonds, pledged toll revenues and the project, see Fitch's rating action commentary, 'Fitch Expects to Rate Grand Parkway Transp Corp., TX's $200MM 1st-Tier Toll Revs, Ser 2013A 'BBB+'', dated June 26, 2013.)

SUBJECT TO LEGISLATIVE APPROPRIATION

TxDOT's commitment to enhance TELA bonds is subject to legislative appropriation. TxDOT covenants to submit an appropriation request to the legislature as part of its biennial budget submission, not to exceed the TELA maximum amounts for the budget period. Failure of the legislature to appropriate is not an event of default.

For the current transaction, only GPTC's subordinate tier toll revenue bonds have the additional security of the TELA with TxDOT. In the event that toll and other pledged revenues of the system are insufficient, the TELA provides that the trustee may draw upon TxDOT's resources to cover eligible expenses, including debt service and certain operating and other expenses of the Grand Parkway System. Any draw on the TELA would become a loan obligation of GPTC subject to repayment on a subordinate basis to the current bonds.

ENHANCEMENT SIZED TO DEBT SERVICE AND OPERATING EXPENSES

The TELA enhancement for GPTC is sized at a maximum $9.6 billion over the life of the bonds. Final maturity is expected in fiscal 2054, although the series 2013C tender bonds are intended to be refunded either via a federal TIFIA loan or a longer term TELA bond. Within the $9.6 billion aggregate maximum TELA commitment, annual and aggregate maximum advances are established in varying amounts each year at levels intended to cover annual debt service and junior operating expenses. Annual TELA maximums are currently expected (after FY 2014) to range from $103.9 million to $552 million. Any amounts not drawn effectively expire and are no longer available.

Grand Parkway system toll receipts are deposited in the revenue account, with monthly transfers five days in advance for first lien revenue bond debt service and then for subordinate tier debt service. (Any future TIFIA refunding of the tender bonds would hold a second lien position, ahead of the subordinate tier bonds.)

Other GPTC expenses are eligible for the TELA draw, including operations, routine maintenance, major maintenance and replenishment of reserves; all such eligible expenses are subordinate to debt service accounts within the flow of funds. Because payment of subordinate tier debt service is senior to all other TELA-eligible expenses, any shortfall in the subordinate tier debt service account would be fully replenished by a draw before shortfalls for any other TELA-eligible cost are addressed. Excess receipts are held in the Grand Parkway enhancement fund.

SUFFICIENT TIMING IN EVENT OF DEFICIENCY

In the event of an insufficiency in the subordinate tier debt service account or other eligible expenses, five days before the payment date the trustee would sweep balances from various subordinate funds, including reserves, then request a draw from TxDOT. TxDOT is required to advance funds up to the maximum annual amount within three days, or two days before the payment date.

For the GPTC financing, TELA maximum annual draw amounts are higher in the early years of the project, corresponding to any potential stepped up interest rates for planned tender bonds. The current TELA allows GPTC, with approval of the Texas Transportation Commission, TxDOT's governing body, to adjust current or future annual maximums if future TELA enhanced debt service and junior operating expenses are above the maximum annual amount.

In addition to the subordinated revenue bonds of GPTC, the TELA enhancement has only been applied to $1.3 billion in special project system bonds of the North Texas Tollway Authority (NTTA). No draws have been made for the two NTTA projects, and one of the two projects is open to traffic.

TxDOT maintains close oversight of TELA-supported projects and would have considerable advanced notice and the means to pursue corrective action before a TELA draw would be needed. In the case of the Grand Parkway project, GPTC is closely linked to TxDOT, with governance and staffing by TxDOT and considerable TxDOT oversight of budgeting and financial performance.

SIZABLE SENIOR AND PARITY COMMITMENTS

The SHF, as the general operating fund of TxDOT and the main source of state transportation funding, is the likely source of funding for any TELA draw. About 90% of SHF funds support TxDOT, with the remainder supporting other departments, including the Department of Public Safety and the Department of Motor Vehicles (DMV). Texas' Constitution requires that 75% of motor fuel taxes, motor lubricant taxes and registration fees be dedicated to transportation. Any related federal reimbursements are also dedicated. Certain other receipts are deposited to the SHF, but are not constitutionally dedicated.

TELA draws from the SHF would be subordinate to payment of various senior debt obligations and on parity with basic operating expenses and certain other commitments. Debt programs with a priority claim include first-tier SHF revenue bonds; potential subordinate SHF revenue bonds, subordinate lien short-term obligations, and highway tax and revenue anticipation notes (HTRANs). Issuance on the first-tier SHF revenue bonds has totaled $4.6 billion out of $6 billion authorized, and is limited by a 4x ABT and a 10x statutory ABT. To date, TxDOT has not pursued additional liens, but Fitch views this as possible at a future date. TxDOT is authorized up to have up to two times average deposits in short-term borrowing outstanding on a subordinate lien basis (equal to approximately $1 billion), although there is no outstanding balance, nor has TxDOT issued HTRANs for cash flow needs.

Expenses of the SHF that would be parity to a TELA draw include an array of administrative, maintenance and pay-go capital costs, as well as certain TxDOT commitments, such as pass-through financing agreements and toll equity grants. The maximum draws on both the NTTA and GPTC TELA commitments would equal a manageable share of SHF resources after senior obligations and based on reasonable revenue growth forecasts (averaging 4.75% going forward). Fitch expects only limited additional use of TELA enhancement for future projects, although other parity commitments to leverage available SHF resources are likely.

TXDOT FLEXIBILITY TO MANAGE COMMITMENTS

State appropriations for transportation are generally for categories of expenditure, and thus TxDOT has significant flexibility to plan for an expected draw during each fiscal year, including deferring, reducing or eliminating construction lettings for projects and deferring or reducing the amounts of planned pass-through financing commitments.

Fitch expects transportation taxes to be a slow-growing revenue stream going forward, with available resources also affected by legislative actions. Under the Comptroller's January 2013 forecast, SHF receipts grow 19% in fiscal 2014 from fiscal 2013, to $8.9 billion, and fall 5.2% in fiscal 2015, to $8.5 billion. To date, the SHF has experienced only minimal cuts in federal receipts related to federal sequestration.

Legislative action in the recently ended regular session is resulting in the shift of approximately $104 million annually to a new fund for the DMV. The legislature has also considered a measure to divert a portion of future oil and gas tax receipts to the SHF beginning in fiscal 2015, subject to voter approval. Fitch expects future legislative action to augment SHF receipts given the state's growing transportation needs.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria'(Aug. 14, 2012);
--'Rating Guidelines for State Credit Enhancement Programs' (June 19, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794751
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