April 12 - Overview
-- U.S. public/private partnership Elizabeth River Crossings OpCo is
issuing senior bonds and obtaining a federal loan under the Transportation
Infrastructure Finance and Innovation Act program to build, rehabilitate, and
operate a tunnel/expressway project in Virginia.
-- We are assigning our 'BBB-' rating to the debt.
-- We base the stable outlook on our assessment of current construction
arrangements and counterparty dependency assessments.
On April 12, 2012, Standard & Poor's Ratings Services assigned its 'BBB-'
rating to the $663.75 million senior-lien revenue bonds due January 2042
(issued by the Virginia Small Business Financing Authority) and to Elizabeth
River Crossings Opco LLC's (ERC) $422 million Transportation Infrastructure
Finance and Innovation Act (TIFIA) loan due January 2047. The outlook is
The rating reflects the traffic ramp-up risk, a well-mitigated construction
program, and a highly leveraged financial profile. A key credit challenge for
the project is the impact on existing traffic levels after establishing tolls
on the Midtown and Downtown tunnels. These tunnels connect the two cities,
Portsmouth and Norfolk, and run across the Elizabeth River. At the same time,
the project will build a new, two-lane tunnel adjacent to the existing Midtown
Tunnel, thereby doubling the capacity of the existing Midtown Tunnel. The
project will also build the Martin Luther King extension expressway (MLK) that
will provide links to the Midtown and Downtown tunnels.
ERC is developing and will operate the project. It is wholly owned by
Elizabeth River Crossings Holdco LLC, which is equally owned by Macquarie
Midtown Holdings Inc., wholly owned by vehicles managed by Macquarie
Infrastructure and Real Assets, and Skanska ID ERC Holdings LLC, an indirect
subsidiary of Skanska Inc. ERC will build and operate the project under the
terms of the Comprehensive Agreement (CA) with the Virginia Dept. of
Transportation (VDOT), the owner of the project assets. The CA is in place for
58 years from financial close and we believe it provides a reasonable
framework to build and operate the facilities. An unusual provision under an
amendment to the CA allows VDOT to postpone tolling of the tunnels at any
point up to substantial completion as long as VDOT replaces the toll revenue
based calculated based on the sponsor base case less operating expenses with
appropriated funds or authorized funds. Another amendment requires ERC to
allow trips considered local traffic traveling on the MLK to travel for free.
Based on the analysis by ARUP USA Inc., the independent traffic and revenue
engineer, the impact on total project revenues is less than 1%. We have
factored this into our base case. Our rating assumes that VDOT has the
authority to grant to the project the right to collect toll revenues and
opinions are being issued by the Virginia Attorney General's office on behalf
of VDOT and Hunton & Williams LLP, counsel to the project, to that effect.
The project is funding construction and rehabilitation work with bond
proceeds, the TIFIA loan, a contribution from VDOT, sponsor equity, and
expected toll revenues on the existing tunnels during the five year
construction phase. All funds are committed at closing, except the expected
toll revenues; the lack of full funding at closing is a credit weakness.
The TIFIA debt is meant to provide greater credit support to senior debt, by
having provisions that permit deferral of payments for principal and interest.
Under this loan structure, there are no TIFIA interest payments until 10 years
after financial close, and from years 11 to 18 only a portion of the interest
payments are mandatory. TIFIA principal payments begin in 2037, 25 years after
financial close. The TIFIA loan payments come after senior debt service in the
payment waterfall. However, in our analysis of financial performance, we
examine cash flow coverage of both the senior secured and mandatory TIFIA loan
payments because the distribution test is after the TIFIA loan payments in the
waterfall and failure to make two mandatory TIFIA payments, along with a
project bankruptcy filing can lead to default that cross-defaults to the
The project has the following risks:
-- The project is exposed to traffic volume risk that is tied to regional
and economic trends, including ramp-up and uncertain long-term growth trends.
-- The construction program is a large, complex project and, given the
degree of specialization, the replacement market for a new design build (DB)
contractor is limited.
-- The risk that construction costs are not fully funded at financial
close because about 17% of sources are coming from net toll revenue collected
during the construction period.
-- Uncertainty regarding people's willingness to pay the toll. While
tunnels and other area facilities had tolls, they were removed more than 20
years ago and the region does not have recent experience with tolled
facilities. We believe this factor will affect the toll ramp-up, which we have
considered in our base case.
The 'BBB-' rating reflects the following strengths:
-- Strong existing demand for the Midtown and Downtown tunnels, which are
currently untolled and are used primarily by passenger cars commuting to and
from work. While there are competing alternatives, these are equally congested
during peak hours.
-- The tunnels are in the Hampton Roads region, an employment and
residential center dominated by stable U.S. Navy and port employment and sound
healthcare and tourism sectors.
-- Construction risk of the new Midtown Tunnel is mitigated by using
commercially proven technology and building processes, performed by
experienced, top-tier design-build (DB) contractors.
-- The tolling technology is commercially proven and readily available.
Federal Signal Technologies is the tolling contractor and is capable of
installing and operating the all-electronic toll system. In addition, there is
a deep market for replacement contractors if needed.
We believe a key risk is the uncertainty about the initial traffic volume and
the level of traffic reduction at the existing tunnels once tolling begins.
ERC is establishing an all-electronic toll collection infrastructure on the
Midtown and Downtown tunnels by September 2012, with a modest initial toll
rate of $1.84 during peak periods and $1.59 for passenger cars during
off-peak. In addition, we believe the ramp-up period will be longer than the
sponsor's base case, and the sponsor's long-term growth rate, a key driver to
future project revenues, is aggressive. Standard & Poor's base case adjusts
for these aggressive assumptions. Under our base case, we believe average
annual daily traffic will decline by 44% in 2012 when tolls go into effect,
compared with a 28% decline under the sponsor base case. Our assumptions
include a 12-month toll rate ramp-up and a six-month traffic ramp up. Our
long-term growth rate averages 1.3% from 2016-2045, lower than the 1.5% growth
rate under the sponsor's case. One reason for our lower initial traffic is we
assume a lower number of electronic toll collection transactions and higher
number of video toll transaction with a toll rate that is double the
electronic rate. This difference creates a higher average toll rate and drives
more users to the free alternatives.
Traffic at the tunnels grew by an average rate of 1.5% from 1993 through 2010,
slower than the region's employment and population growth. Traffic growth was
relatively stable during the period of heavy military spending. Tunnel users
are primarily commuting passenger cars (about 60% during peak hours) in the
Hampton Roads region, providing sound demand for the tunnels with limited
alternatives. The U.S. Navy and port operations account for most employment in
Hampton Roads, and the city also has sound healthcare and tourism sectors.
During the recent recession, traffic dropped by just under 1%, mirroring
regional and national trends when regional unemployment doubled to 7% and
population growth was flat to declining. We expect that traffic trends will
continue to reflect regional and national economic trends and also be heavily
influenced by changes in the region's military bases and centers. While
several bases may close over the next few years, we have assessed the
essentiality of the bases and consider them to be moderately to highly
ERC has mitigated construction risk by passing it to the DB contractors
through a fixed-priced, date-certain, DB contract with SKW Constructors, a
joint venture of Skanska USA Civil Southeast (45%), Kiewit Infrastructure Co.
(40%), and Weeks Marine (15%), with obligations guaranteed by Skanska AB and
Kiewit Infrastructure Group Inc. The DB contract has liquidated damages
provisions to provide appropriate incentive to perform and adequate liquidity
under the parent guarantee to fund needs through the long stop date (final
completion), or 18 months after the project reaches scheduled substantial
completion. While the guarantors' credit profiles are above that of the
project, the parent guarantees cover 45% of the DB contract, not the full
value of the construction works. However, we concluded that ERC can replace
SKW and meet the requirements under the CA. Therefore, under our counterparty
criteria, the project rating is not linked to the assessment of the DB
Construction is not fully funded at financial close and will rely on a portion
of net toll revenues for $368 million, or 17%, of total funding generated
during the six years of construction. The sponsor is providing a $50.6 million
letter of credit to backstop a shortfall in toll revenues. Starting with our
base case, if traffic declined by another 24%, the full letter of credit would
be drawn and construction and reserve funds would still be fully funded.
Under our base case, the minimum debt service coverage ratio (DSCR) of senior
obligations and mandatory TIFIA loan payments is 1.48x, with an average of
1.93x, and will average 1.79x during the senior debt's term. Additionally, all
except for $1 million of the contingent equity is used to fund the
construction works. If the project delays toll implementation for six months,
then the minimum DSCR drops to 1.15x. We believe the project can withstand
several downside stress scenarios. Under our downside stresses, including
changes in inflation, operating and capital expenses, toll escalation, and
competing facilities, cash flow is able to cover project obligations, and fund
the construction and reserve funds.
The project's level of funding is adequate, and funds the reserves slightly
higher than similar projects. Lenders can access a debt service reserve fund
that will get funding at financial close at an amount equal to the next six
months of senior debt service and mandatory TIFIA loan payments. In addition,
the project has a major maintenance reserve that initially is required to be
funded for the projected requirements for the period between substantial
completion of the new project assets and 10 years after financial close. In
year 11, the requirements change to a four-year rolling need, in line with
other similar projects.
We base the stable outlook on our assessment of current construction
arrangements and counterparty dependency assessments. A higher rating is not
likely during construction, even if counterparty ratings increase, based on
the construction, ramp-up, and operating risks. After construction, an
improvement in the rating would require comfort that performance would well
exceed our current expectations over the debt and loan's tenor. Factors that
could lower the rating are major construction problems that seem remote
presently, the debt service or major maintenance funds are not fully funded at
substantial completion, or the initial traffic is significantly lower than our
Related Criteria And Research
Project Finance Construction and Operations Counterparty Methodology, Dec. 20,
Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007
Elizabeth River Crossing Opco LLC (obligor)
$422 million debt BBB-/Stable
Virginia Small Business Financing Authority
$663.75 mil senior lien revenue bonds BBB-/Stable
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
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