DBRS Changes Trend on Texas Transportation Commission - IH 35E Managed Lanes Project to Positive, Confirms Rating at BBB

DBRS Limited (DBRS) confirmed the BBB rating on the 35.5-year $285 million revenue loan issued under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to fund part of the IH 35E Managed Lanes Project (the Project) of the Texas Department of Transportation (TxDOT) and changed the trend to Positive from Stable.

The trend change reflects the continued material outperformance of the traffic forecast since the opening of the managed lanes in May 2017. For F2018 (September 2017 to August 2018), actual toll revenue was about $20.6 million, which exceeded forecast by about 82%, while the actual number of toll transactions was about 23 million, or approximately 78% above forecast. From September 2018 to October 2018, actual toll transactions and actual toll revenue continued to significantly outpace forecasts by an average of about 78% and 94%, respectively. Based on 18 months of observed traffic data, the Project has already achieved and exceeded its projected steady-state traffic volume of about 18 million toll transactions, which was expected to occur in 2020 based on the traffic study conducted by CDM Smith in 2013. The Project was able to reach its steady-state traffic level at a much quicker pace than expected (the traffic forecast assumed a three-year ramp-up period). As mentioned in DBRS’s rating report published in June 2018, the significant traffic growth observed in the corridor can be explained by a combination of four factors: (1) Population growth in the region exceeded expectations in 2017; (2) Actual value-of-time is higher than assumed in the forecast; (3) Actual number of revenue days was higher than anticipated (midday and weekend toll revenues have been exceeding forecast); and (4) HOV 3+ traffic volume was lower than assumed in the forecast.

It is anticipated that the Project will make its first mandatory and scheduled interest payments in 2022 and mandatory and scheduled principal payments in 2027. As a result, once the capitalized interest ends, the minimum TIFIA debt service coverage ratio (DSCR) is projected to be 1.99 times (x) (based on the financial model at financial close).

DBRS believes that under the following assumptions, the minimum TIFIA DSCR will rise above 3.0x and annual real revenue growth breakeven of about 1.9%, which is commensurate with a higher rating: (1) The Project has completed ramp-up as of October 2018; (2) Annual real revenue will grow in line with steady-state growth rates as per the financial model at financial close; (3) No change in maintenance and tolling operations costs and fees; and (4) No change to the debt service profile. However, DBRS understands that TxDOT has engaged CDM Smith to update its traffic forecast, which is expected to be available in Q2 2019. Consequently, DBRS will review the traffic consultant’s updated traffic forecast and will update its own rating case (currently DBRS’s rating case is equivalent to CDM Smith’s traffic forecast at financial close) and assess and confirm the implications for the financial metrics. DBRS believes that given the robust financial performance observed in the past 18 months, it is likely that the Project’s updated traffic forecast will have a positive impact on the credit metrics.

DBRS may upgrade the rating if traffic continues to grow significantly prior to receiving CDM Smith’s updated traffic forecast, resulting in a substantial improvement in the credit metrics that is commensurate with a higher rating. DBRS may revise the trend back to Stable if the minimum TIFIA DSCR remains below 3.0x after the application of the updated traffic forecast, or the traffic volume reduces considerably such that the associated credit metrics remain in line with the Project’s current rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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