DBRS Upgrades Rating on Texas Transportation Commission IH 35E Managed Lanes Project to BBB (high), Changes Trend to Stable

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

The rating upgrade stems from the Project’s significant outperformance of the traffic and toll revenue forecasts since the opening of the managed lanes (MLs) in May 2017. Total toll transactions for the past 24 months exceeded forecast by 77% and single and two-occupant vehicle transactions represented about 95% of the total toll transactions while trucks (three or more axles) represented the remaining 5%. For the year ended April 2019, total toll transactions reached 26.6 million, which was 31% higher than last year. High-occupancy vehicle (HOV) 2+ traffic volume was only approximately 1% of total toll transactions compared with a forecast of about 2.5%, even though HOV 2+ receives a 50% discount during the morning and evening peak hours until 2027.

The significant increase in toll transactions has also resulted in a substantial increase in the Project’s financial performance. Since the opening of the MLs in May 2017, the Project has not been required to raise the toll rate above the soft cap while maintaining the minimum average corridor speed of 50 miles per hour. Toll revenues earned from May 2017 to April 2019 exceeded forecast by approximately 83%, attributable to higher-than-expected toll rates and ML usage. Electronic toll collection revenue represented 91% of toll revenue and the remaining 9% represented video tolling compared with a forecast of about 85% and 15%, respectively. Although video-tolling revenue as a proportion of toll revenue was lower than forecast because of higher transponder penetration, video-tolling revenue collected from May 2017 to April 2019 still exceeded forecast by approximately 12%, given the higher number of trips. Toll revenues earned in the past 12 months (from May 2018 to April 2019) were about $25.8 million, 49% higher than last year.

According to CDM Smith and TxDOT, the Project’s significant outperformance of the traffic forecast is the result of a combination of factors: (1) demographic and economic growth in the region has exceeded expectations; (2) actual value of time is higher than forecast as median household incomes in Dallas, Denton and Collin County in Texas increased at a faster-than-expected pace; (3) actual number of revenue days has been higher than anticipated (285 revenue days compared with a forecast of 265 revenue days) because midday and weekend toll revenues have exceeded forecast; and (4) HOV 2+ traffic volume has been lower than forecast.

The Executive Summary of the Comprehensive Traffic and Revenue (T&R) Study Update dated May 2019 indicates that the Project is still in its ramp-up phase with ramp-up volume assumed to be 95% in 2019 and 100% of full potential in 2020. Compared with the 2013 T&R Study, the ramp-up volume in 2019 is slightly above the 90% projected at financial close. Toll transactions are expected to reach approximately 31.1 million in F2020 (from September 2019 to August 2020) and increase to 39.8 million in F2052. The annual average toll transaction growth rate is projected to be about 0.8%, which DBRS views as conservative, given the strong demographic and economic fundamentals in the region.

In accordance with the updated financial model provided by TxDOT, toll revenue is projected to reach $34.7 million in F2020 and rise above $170 million in F2052. The average annual toll revenue growth rate from F2020 to F2052 is projected to be about 7%, which is in line with the financial model at financial close; therefore, DBRS believes that the Project’s financial risk profile has not changed materially with the implementation of the updated traffic forecast provided by CDM Smith.

Given that interest is capitalized during the first five years of operations, no debt service was payable and, hence, no debt service coverage ratio (DSCR) was calculated. Because the financing features the ability to defer of a portion of the debt servicing, DBRS considers the most relevant DSCR measurement to be the ratio of ML revenue less operating and maintenance expenses to mandatory and scheduled (deferrable) debt servicing (the TIFIA DSCR). The minimum TIFIA DSCR is expected to rise significantly to 3.23 times (x) from 1.99x at financial close and is expected to occur on November 1, 2034. The TIFIA DSCR is expected to remain in the range of 3.23x to 3.54x until May 2042, the last scheduled principal payment date. Thereafter, the updated financial model projects that the TIFIA DSCR will rise significantly to more than 7.00x until the final maturity date.

In addition to the strong projected TIFIA DSCR, the nominal revenue break-even (as calculated by DBRS) is expected to be around 60% compared with 45% at financial close. Furthermore, the real revenue growth break-even – the minimum annual real revenue growth required to maintain a DSCR of 1.0x after ramp-up completion in 2020 – is expected to be less than 1%. In DBRS’s view, this is considered a credit strength as it places minimal reliance on revenue growth in real terms to enable the Project to fully discharge its principal and interest obligations. DBRS considers the TIFIA DSCR and the break-even ratios to be appropriate for the BBB (high) rating.

DBRS believes that the rating on the TIFIA Loan will remain relatively stable as the credit metrics are well positioned within the current rating level. Given the rating upgrade and traffic which appears to be approaching steady-state levels, DBRS believes that further positive rating action is unlikely in the near term. DBRS could take a positive rating action, however, if traffic and toll revenues continue to increase significantly over time, leading to a substantial improvement in the projected credit metrics. Conversely, DBRS could take a negative rating action if there is a change in tolling policy, an economic downturn, a material improvement to local road networks or another event that substantially depresses traffic and toll revenues.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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