DBRS Assigns Provisional Rating to San Bernardino County Transportation Authority I-10 Express Lanes Project

DBRS Limited (DBRS) assigned a provisional rating of BBB (low) with a Stable trend to the proposed $220.7 million TIFIA Loan to be raised by San Bernardino County Transportation Authority (SBCTA) under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to partially fund an expansion of approximately ten miles of the Interstate 10 (I-10) highway in San Bernardino, California (the Project). The Project will have two tolled lanes and four general-purpose lanes in each direction. SBCTA is the consolidated transportation authority of San Bernardino County, providing transportation planning and programming. The Project has a 4.3-year construction period, and the land for the express lanes is leased to SBCTA by the California Department of Transportation for a 50-year operating period. While the metrics are based on a TIFIA Loan size of $220.7 million, up to $225 million may be raised, on the interest rates being lower than projected, provided there is no negative impact on the financial metrics.

The managed lanes will be the first tolled lanes in San Bernardino County. The Project is different from typical public-private partnership (PPP) projects, as it does not feature risk transfer to a special-purpose vehicle generally found in PPP transactions. DBRS considers the construction phase to be of lower risk in this Project, with the first payment on the TIFIA Loan due only around 4.5 years after the scheduled construction completion. The TIFIA Loan also has a back-ended disbursement schedule, with disbursement starting only after construction is approximately 76% complete (expected in the second half of 2021). The construction obligations are to be completed by The Lane-Security Paving Joint Venture (the Construction Contractor), a joint venture of Lane Construction Corp. (60%) and Security Paving Company, Inc. (40%), each with joint and several liability. DBRS considers the construction phase, which involves the expansion of existing highway to accommodate express lanes, along with eight bridge replacements and widening of 12 other structures, to be of low complexity. The construction phase security includes 100% payment and performance bonds and an adequate liability cap of $125 million over the costs incurred by SBCTA for replacement.

The TIFIA Loan is backed only by cash flows generated by the Project with no access to other cash flows of SBCTA, aside from certain Measure I support mechanisms. Operating and maintenance (O&M) expenses will be made from Project cash flows through the waterfall before TIFIA debt servicing, while lifecycle payments occur post-TIFIA debt servicing but still remain the responsibility of SBCTA. Transcore, LP will be the Toll Services Provider responsible for the design, construction and maintenance of the toll systems, the maintenance being for a period of five years and extendible at the option of SBCTA. A five-year Major Maintenance Reserve Fund (to be funded 100%, 80%, 60%, 40% and 20% of the budgeted amounts in each of the next five years), a six-month O&M Fund, a $45 million Measure I Cash Supplement, a $48 million Measure I Backstop, a $10 million Sweep Fund and a TIFIA Debt Service Reserve Account (DSRA) of 12 months’ mandatory payments provide support to the operations phase. Instead of being funded upfront or from substantial completion proceeds, the DSRA is to be funded from toll revenues, with approximately 2.0 times (x) cover before the debt repayment starts, with the Measure I Backstop serving as additional support.

The sponsor case uses CDM Smith’s (the Traffic Advisor) base case forecast, with an average traffic growth of 1.4% and revenue growth of 5.1% in the first ten years after the ramp-up period (i.e., during 2025 to 2035), with a minimum debt service coverage ratio (DSCR) of 1.86x and a revenue break-even of 50%. The DBRS rating case considers 20% lower trip growth (approximately 10% lower revenue growth) than the Traffic Advisor’s base case, with average traffic growth of 1.2% and revenue growth of 4.9% in the same period before ramp-up adjustments. In addition, the DBRS rating case considers (1) a slower ramp-up with traffic volumes reaching only 60% in Year 1 and 80% in Year 2 before reaching 100% in Year 3 and (2) a lower violation recovery of only 8% net addition to revenue in the first year and reducing to 4% net addition to revenue in 2043. The DBRS rating case has a minimum DSCR of 1.56x and a revenue break-even of 38%, both excluding lifecycle costs, which, along with other features of the transaction, is appropriate for the low-investment-grade rating.

Traffic volumes significantly lower than expected could lead to a downgrade in the rating. An upgrade is currently viewed as unlikely due to the managed-lanes nature of the asset and the forecast financial metrics. In addition, an upgrade is constrained by the rating agency affirmation requirements for additional debt in the financing documents, which are linked to the maintenance of only the lower of the initial or then-existing rating. Subject to the rating agency affirmation and other requirements, additional senior, second-lien or subordinate debt may be raised.

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 & Criteria.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com

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