Fitch Ratings has affirmed LBJ Infrastructure Group, LLC's (LBJ)
approximately $615 million senior lien revenue bonds series 2010
issued by the Texas Private Activity Bond (PAB) Surface
Transportation Corporation and $850 million Transportation
Infrastructure Finance and Innovation Act (TIFIA) loan at 'BBB-'.
The Rating Outlook is Stable.
The affirmation reflects Fitch's expectation that the project
will be delivered on schedule and on budget. Segments 1 and 3 were
delivered on time while segment 2 remains on schedule. Regional
macroeconomic demographics and development in the Dallas-Fort Worth
metropolitan area is broadly in line with Fitch's expectations at
closing. Corridor traffic and congestion levels continue to support
Fitch's base and rating case traffic and revenue assumptions.
KEY RATING DRIVERS
Moderate Completion Risk: Construction has proceeded on schedule
and on budget, and operations are on target to begin during 2015.
Nevertheless, construction is occurring in an operating
environment, and general purpose lanes (GPLs) must be kept open
during most daytime periods. The fixed price turn-key contract has
adequate protections that mitigate completion risk at the current
rating level, as does the project's advanced stage. Completion
Risk: Mid-Range
Strategic Asset Location With Competing Alternatives: As with
all managed lane (ML) projects, the adjoining, free, competing GPLs
will naturally make ML performance highly volatile. However, the
facility is strategically located in a highly congested area north
of Dallas and near Dallas-Fort Worth Airport. Continued population,
and therefore traffic, growth in the area is widely expected over
forthcoming years on top of the considerable population and
employment growth experienced over the last decade. Revenue -
Volume: Mid-Range
Expected to Have Some Rate-Making Flexibility: Demonstrated
traffic congestion in both directions during weekday am and pm peak
periods, weekday inter-peak, and weekend daytime supports the
expectation of strong ratemaking ability. The price sensitivity to
toll rates is uncertain given the highly demand-driven nature of
toll rates; however, the proposed ML tolls are competitively priced
and subject to a cap that can only be exceeded when the ability to
manage travel speeds is demonstrably impaired. Fitch assumes
operation close to the point of revenue maximization. Revenue -
Price: Midrange
Infrastructure Renewal And Replacement: Upon completion, the
project will have four-six new MLs, significantly increasing the
capacity of the existing road and one-way frontage roads will be
added. Infra/Renewal: Mid-Range
Debt Structure: The capital structure features both senior PABs
and TIFIA loan, typical for this project type. All debt is fixed
rate and fully amortizing. While the leverage and debt service
coverage ratio (DSCR) tests in the equity contribution agreement
are weak, a rating trigger exists whereby equity contributions will
be met through a letter of credit should Cintra's financial health
deteriorate (provided by its parent, Ferrovial, S.A., 'BBB'/Outlook
Stable). High initial leverage is mitigated by equity contribution
of at least 28% of the total capital structure, excluding public
funds, that reduces leverage and provides for a strong sponsor
incentive to remain committed to the project. Debt Structure:
Stronger
Moderate Financial Flexibility and High Leverage: The project
features an estimated $23 million total debt per lane mile, despite
significant public contributions and sponsor equity. In addition,
net debt to cash flow available for debt service is high in 2016 at
25x, declining to 18x in 2017 according to analysis undertaken by
Fitch when ratings were assigned. No future borrowing is expected.
Fitch's analysis at financial close indicated a loan life coverage
ratio of 1.6x in 2015 and a minimum project life coverage ratio of
2.2x, with both growing over time.
Peers: The closest peers from Fitch's rated portfolio include
other ML facilities that are highly congested, particularly during
peak hours such as the neighboring North Tarrant Express Segments
1&2 (NTE) and 95 Express Lanes LLC (95 Express), both of which
have recently opened to traffic, and also serve areas with
relatively strong demographic characteristics and limited
alternative routes. Although still in the very early stages of
ramp-up, early ML performance on both peers appears to be
encouraging. Despite some differences in tolling mechanisms, policy
and lane configuration, Fitch believes all three facilities should,
in the medium term, build up moderate-high pricing power and be in
a position to levy relatively high toll rates of over $0.50 per
mile (real) in peak periods.
RATING SENSITIVITIES
Negative: Sustained material traffic underperformance, or
inability to raise tolls close to forecast levels, once operational
that signifies more than just ramp-up issues, or a significantly
prolonged ramp-up period that stretches liquidity/flexibility
support.
Negative: Operating and capital expenditures during the
operational period significantly above expectations that cause
financial flexibility to be reduced and coverage profile lower.
Negative: Although increasingly unlikely, given the advances
stage of construction, material construction delays or cost
over-runs, which are not able to be passed down to the contractor,
affect financial metrics and flexibility through the operational
phase.
Positive: Sustained material traffic and/or toll rate
over-performance once that results in a coverage profile
significantly above Fitch expectations.
TRANSACTION SUMMARY
As of Dec. 31, 2014, the value of work completed was $1.969
billion - approximately 94.9% of the total project cost. This
reflects $162 million of design work completed (97.7% of the
budgeted $165.9 million) and $1.807 billion of construction work
completed (94.7% of $1,908.2m). Fitch understands that progress has
since maintained this trajectory and that it is likely the MLs will
be fully operational ahead of the official December 2015 service
commencement date. The project also remains on budget. Outstanding
works include the laying of decking on one remaining structure,
putting down the final layer of asphalt along section 2 of the
road, installation of gantries and signage, as well as painting and
making other aesthetic improvements.
Sections 3 and 1 opened on schedule in December 2013 and July
2014 respectively. The project company has been operating both
sections in order to test tolling systems, dynamic pricing, signage
and advertising strategies before the road becomes fully
operational, on completion of section 2. Importantly, no revenue
was included in projections relating to this period, so any
revenues collected are in addition to forecast. Both operational
segments are now operating on a dynamic pricing basis.
It should be noted that no formal traffic update has been
received since financial close and Fitch has not renewed its
traffic, revenue and financial analysis since originally assigning
its rating. Once the road is fully operational, Fitch will pay
close attention to traffic and revenue development over time in
order to benchmark against previous expectations and to inform
updated analysis.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', July
11, 2012;
--'Rating Criteria for Toll Roads, Bridges and Tunnels', Aug.
20, 2014.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Toll Roads, Bridges and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=758708
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980613
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Fitch RatingsPrimary AnalystSaavan GatfieldSenior
Director+1-212-908-0542Fitch Ratings, Inc.33 Whitehall StreetNew
York, NY 10004orSecondary AnalystRaymond WuAssociate
Director+1-212-908-0845orCommittee ChairpersonScott ZuchorskiSenior
Director+1-212-908-0659orMedia Relations:Elizabeth Fogerty, New
York, +1 212-908-0526Email: elizabeth.fogerty@fitchratings.com