DBRS Morningstar Confirms Texas Transportation Commission – IH 35E Managed Lanes Project at BBB (high) with a Stable Trend

On June 29, 2020, DBRS Limited (DBRS Morningstar) confirmed its rating on the 35.5-year $285 million revenue loan (the TIFIA 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) Interstate Highway (IH) 35 East (35E) Managed Lanes (MLs) Project (the Project), at BBB (high) with a Stable trend.

The rating confirmation stems from the Project’s continued strong traffic and revenue performance prior to the Coronavirus Disease (COVID-19) pandemic. In addition, the Project's financial performance under DBRS Morningstar’s revised base-case scenario (to reflect the impact of the pandemic on traffic and revenue growth in the next several years) is projected to be relatively resilient and commensurate with the current rating.

For the twelve months ended February 29, 2020 (prior to the pandemic), the total number of toll transactions and toll revenue reached 29.5 million and $31.2 million, respectively. These results represent increases of about 14% and 28%, respectively, compared with the same period last year. When compared with forecasts, the total number of toll transactions and toll revenue has been exceeded by 27% and 24%, respectively. High-occupancy vehicle (HOV) 2+ traffic volume as a proportion of total toll transactions remained consistently below 1% in the past two years, even though HOV 2+ receives a 50% discount during the morning and evening peak hours until 2027. Prior to the pandemic, the composition of the traffic remained relatively stable as single- and two-occupant vehicles (cars) transactions represented about 95% of the total toll transactions while vehicles with three or more axles (trucks) represented the remaining 5%.

The impact of the pandemic caused a severe decline in the total number of toll transactions in March and April. Car transactions fell sharply during this period while truck transactions were relatively more resilient. The Project had a decline of about 34% in car transactions in March 2020 compared with the same month in 2019. The decline accelerated in April 2020 as the stay-at-home order at the State level was implemented for the entire month which resulted in a dramatic drop of about 76% in car transactions compared with 2019. Truck transactions were also affected by the lockdown but the adverse effect was considerably less with a decline of about 21% in April 2020 compared with the same month in 2019. Overall, the total number of toll transactions plummeted by 31% and 74% in March and April 2020, respectively, compared with the same months in 2019.

Given the unprecedented situation, most of the major economies (e.g., U.S., Canada, France, Germany, United Kingdom, Spain, Italy) are currently in recession. In DBRS Morningstar’s moderate case scenario, we anticipate most countries will take up to two years to fully recover to their 2019 economic output levels. Based on historical performance, traffic on U.S. toll roads has generally tracked in line with economic growth (e.g., real GDP growth). Therefore, DBRS Morningstar believes it will take two years for the Project to recover to its 2019 toll revenue level. Under DBRS Morningstar’s revised base-case scenario, we are now projecting a decline of 40% in toll revenue in 2020, or 60% of the 2019 toll revenue level, rising to 80% in 2021 and 100% in 2022. In addition, we are assuming a 20% and 10% reduction in toll revenue projection in 2023 and 2024, respectively. Based on DBRS Morningstar’s revised base-case scenario assumptions, we are projecting a minimum TIFIA debt service coverage ratio (DSCR) below 3.0 times (x) in November 2022. However, we expect the TIFIA DSCR will recover to above 3.0x for the remainder of the TIFIA loan term.

DBRS Morningstar believes the Project has robust liquidity with more than $60 million in reserves (e.g., TIFIA Debt Reserve Fund, Major Maintenance Reserve Fund, General Fund, Rate Stabilization Fund, Revenue Fund) as at the end of May 2020. In DBRS Morningstar's downside case scenario, we believe there is sufficient liquidity to weather any prolonged decline in traffic without affecting the Project’s ability to meet its debt service obligations in the next several years. Furthermore, the TIFIA DSCR is projected to fall below 3.0x for three semi-annual debt service payment dates (May and November) in 2022–23 and we expect the TIFIA DSCR to be above 3.0x for the remainder of the TIFIA loan term. Thus, DBRS Morningstar believes the Project is relatively resilient under our downside case scenario.

DBRS Morningstar could take a positive rating action if traffic and toll revenues continue to increase significantly over time, leading to a substantial improvement in the projected credit metrics. Conversely, DBRS Morningstar could take a negative rating action if the coronavirus pandemic causes a more severe and prolonged decline in traffic than anticipated, resulting in significantly compressed financial metrics that are no longer commensurate with the current rating. Furthermore, a change in tolling policy, a material improvement to local road networks, or other events that substantially depress traffic and toll revenues could result in a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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