Tuesday, June 01, 2010

LBJ Infrastructure Group: Debt for freeway toll road conversion (managed lanes) project rated barely above junk bond status

Press Release

Fitch Rates LBJ Infrastructure Group LLC Revs 'BBB-'


Fitch Ratings
Copyright 2010

NEW YORK - (Business Wire) Fitch Ratings assigns a 'BBB-' rating to the LBJ Infrastructure Group, LLC's approximately $600 million senior lien revenue bonds series 2010 issued by the Texas Private Activity Bond (PAB) Surface Transportation Corporation. Fitch also assigns a 'BBB-' rating to the LBJ Infrastructure Group, LLC's approximately $850 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. The senior lien revenue bonds are expected to price in mid-June. The Rating Outlook is Stable.

The bonds are secured by net toll revenues generated from the proposed IH-635 managed lanes (ML) project in Dallas, TX. The proceeds of the senior PABs and TIFIA loan combined with approximately $500 million in public funds (Texas Department of Transportation), depending on the interest rate adjustment outcome and equity of at least $570 million from Cintra de Infraestructuras, S.A (Cintra); Meridiam Infrastructure Finance S.A.R.L (societe a responsabilite limitee) (Meridiam) and the Dallas Fire and Police Pension System, will be used to fund the planning, development, design and construction of the IH-635 Managed Lanes Project located in Dallas County, TX.

The construction includes the reconstruction of IH-635, which will result in an 8-lane general purpose freeway and a 4-6-lane managed lane facility and a continuous 2-to 3-lane frontage road system with access ramps as well as construction of two 2-lane elevated direct connector managed lanes along IH-35E that will interface with the IH-635/IH-35E interchange direct connectors. LBJ Infrastructure Group LLC is a single purpose entity comprising the aforementioned equity partners and has been granted a winning proposal by Texas Department of Transportation (TxDOT) to develop, operate, maintain, and toll the IH-635 managed lanes project for a period of 52 years pursuant to a comprehensive development agreement (CDA).

The 'BBB-' rating is based on the strategic location of the asset, in a highly congested area north of the city of Dallas and near the Dallas-Fort Worth Airport, which along with the solid economics of the service area has benefited from considerable population and employment growth over the last decade. The demonstrated traffic congestion in both directions during weekday AM and PM peak periods, weekday inter-peak, and weekend daytime provides strong ratemaking ability. The rating also reflects the competitively priced tolls for a managed lane facility that retains pricing flexibility and an equity contribution of at least 28% of the total capital structure, excluding public funds.

Primary risks for the transaction include the limited amount of meaningful history for this type of asset class and uncertainty associated with toll rates given the highly demand driven nature of toll rates. The presence of free alternative competing general purpose lanes (GPLs) directly next to the managed lanes, along with uncertainty relating to the current economic recession which could materially impact the congestion on the GPLs. While the project is in a non-urban area, completion risk does exist and includes: the need to keep the majority of the GPLs open during most daytime periods, and the relocation of certain existing infrastructure and complex connecting and overpass features. Fitch additionally notes the overall high leverage associated with the project at an estimated $23 million in total debt per lane mile (senior debt plus TIFIA loan) despite significant public contributions and sponsor equity. The construction contract with Trinity Infrastructure LLC (owned by Ferrovial Agroman US Corp and W.W. Webber LLC) is a fixed-price turn-key contract containing adequate construction risk mitigants including a 50% parent guarantee (Ferrovial Agroman S.A.) and liquidated damages scheduled to cover fixed obligations up to 12 months. While the CDA and construction contract is on a back-to-back basis with Ferrovial, Fitch notes the presence of some upfront liquidity to partially mitigate the potential for a temporary cash shortfall due to cost and time overruns.

Equity is not contributed upfront, but instead over time from the equity partners on a pro rata basis with amount of debt excluding the amount committed for reserves. Importantly, equity and/or cost-overruns provided by Cintra (majority partner) are supported by a letter-of-credit-like product that is unconditional, irrevocable and sized to an amount equal to the lesser of 51% of the debt proceeds spent on the project or the amount to be contributed per Cintra's equity commitment. This provision will dissolve if Ferrovial has an investment grade rating from the rating agencies that rate the IH-635/LBJ debt. It is Fitch's view that Cintra's demonstrated track record of project completion and successful operations of transportation assets globally are key mitigants to the lack of 100% of equity being funded at financial close.

Fitch views the level of congestion, reliability and time savings as key factors considered by a commuter when deciding to take the ML. As GPL growth continues and congestion increases, the percentage traffic capture in the ML also increases and, in certain instances grows significantly upon reaching higher congestion levels. In addition to understanding the traffic movements between the GPLs and MLs, Fitch analyzed price data for other managed lane facilities, including the SR-91. From data reviewed by Fitch, between 3% and 44% of traffic moves from the GPL to the ML, as the traffic volume on the GPLs builds and speeds decline. The 3% movement was observed during off-peak hours such as late nights or early morning and the 44% movement during the peak hours of the day. While initial traffic levels are a key risk to greenfield toll roads, managed lane projects have demonstrated levels of congested traffic. The key issue is what combination of speed and price will cause drivers to shift from the GPLs into the MLs.

Dynamic tolling is being used increasingly to reduce congestion on urban highways. Toll lanes will be constructed adjacent to heavily congested free lanes providing motorists with the option to drive in the free but congested GPLs or pay an optimized and continuously changing toll rate (depending on traffic levels) to drive at predictable free flow speeds in the MLs. The projected $0.45 per mile rate during peak rush-hour periods is significantly higher than the approximately $0.20 inter-peak and $0.10 off-peak periods and reflects the value of predictable travel times during prime commuting hours. While the $0.45 per mile toll is high, other non-peak facilities in the U.S. do charge $0.30 per mile and the peak hour toll on the SR-91 managed lanes in California is $0.95 per mile.

Given the additional risks associated with a managed lanes project compared to a traditional toll road Fitch has assumed a number of conservative assumptions. Fitch's analysis assumed that as traffic reaches 70% of total GPL capacity, approximately 25% of that traffic would flow into the ML. To be conservative, Fitch has capped the percentage of traffic moving into the ML at 44% when the traffic volume on the GPL is greater than or equal to 100% of GPL capacity. Although the base toll rate allowed as per the concession is $0.75/mile (2007 dollars), it is worth noting that the sponsor expects the maximum toll to be approximately $0.45/mile (2007 dollars). Fitch estimates that the time savings analyzed is commensurate with the expected toll rates. Fitch views that the developer's proposed toll rates are reasonable compared to that of the SR 91, where the value of time is $18.49/hr and the maximum toll rate charged is $0.95/mile. With actual traffic statistics and information from the traffic & revenue consultants report, Fitch developed base and stress case traffic and revenue lines to test potential scenarios assuming the aforementioned conservative assumptions combined with lower shares ML of traffic, lower toll rates and lower overall corridor growth. The addition of a flexible TIFIA loan with scheduled and mandatory debt service allows for a debt profile that should prove resilient in the face of lower prices and GPL congestion.

The Dallas-Fort Worth metro area has experienced a compounded annual growth rate (CAGR) in population of around 2.5% since 2000 and has been consistently ranked in the top 10 metro areas in the country, with a median income of $53,304, 19% higher than average Texas median income. This is an important factor in understanding the economic strength of the metro area. A large part of the Dallas-Fort Worth metro area is very spread out, and although mass transit exists, it does not cater to most of the suburban population.

The application of the following criteria was used to derive the rating of the above referenced bonds: 'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009; 'Global Toll Road Rating Guidelines' dated March 6, 2007. Both are available on the Fitch Ratings web site at 'www.fitchratings.com'. There are two areas where assumptions differ from criteria. First, managed lane projects by definition have toll rates that are driven by congestion levels, meaning that rate increases can be well above the rate of inflation and will be multiples of traffic growth, since free flow speeds must be maintained at all times. Second, the fact that the existing asset is capacity constrained means that the addition of MLs will likely result in a one-time jump in traffic to reflect added capacity but future overall corridor growth going forward will be low.

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

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