DBRS Morningstar Confirms I-77 Mobility Partners LLC at BBB with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of I-77 Mobility Partners LLC (ProjectCo) at BBB with a Stable Trend. DBRS Morningstar also confirmed the BBB ratings and Stable trends of the $100.0 million Private Activity Bonds (PABs) and $189.0 million TIFIA Loan issued by ProjectCo under the Transportation Infrastructure Finance and Innovation Act (TIFIA), which fund the design and construction of the I-77 managed lanes (ML) project (the Project) in North Carolina and a 50-year concession under a Comprehensive Agreement (CA) with the North Carolina Department of Transportation (NCDOT). Despite construction delays, the ratings remain supported by the Design-Build (DB) security package, the substantial time left in the schedule before the Longstop dates, and the substantial improvement in the projected financial metrics.

The rating confirmation is based on the achievement of Substantial Completion on November 16, 2019, when the entirety of the ML opened to traffic and became fully operational. Construction began in late 2015, although progress has been slower than expected mainly because of delays caused by change orders, a slow construction ramp-up, and adverse weather conditions. The scheduled Final Acceptance Date was missed, but DBRS Morningstar remains comfortable with the Stable trend because Final Acceptance is expected to be achieved by the end of summer 2020 and Final Completion during Q1 2021 (180 days after Final Acceptance). DBRS Morningstar notes that a failure to meet the Final Completion deadline would not result in the termination of the CA but would instead trigger liquidated damages payments to NCDOT, which would be passed down to the DB Contractor.

Q1 2020 was the first full quarter of operations after reaching Substantial Completion and traffic and revenues have been severely affected by the Coronavirus Disease (COVID-19) pandemic and stay-at-home orders, with 23.3% and 23.8% less revenues and traffic transactions, respectively, compared with the budget. Revenues for Q1 2020 equalled $5.3 million and traffic volume was 7.0 million transactions. March alone has seen a 46.4% reduction when compared with the budget; from March 28, 2020, to April 3, 2020, traffic plummeted an 85.4% versus the budget. According to DBRS Morningstar’s current moderate case scenario (published on June 1, 2020), DBRS Morningstar anticipates most economies will begin a gradual economic recovery in Q3 2020, and an average of up to two years to fully recover to their 2019 economic output levels. Based on historical performance, traffic on U.S. toll roads have generally tracked in line with economic growth (e.g., real GDP growth). I-77 is in the midst of the ramp-up period, which is expected to last from 2023 to 2025, because of the economic slowdown expected as a consequence of coronavirus pandemic. DBRS Morningstar’s base case scenario predicts the Project will be back on the initial forecast by 2024. For 2020, DBRS Morningstar’s base-case scenario projects a 36.9% decline in toll revenues when compared with the initial forecast, followed by declines of 28.2% in 2021, 19.4% in 2022, and 13.1% in 2023 when compared with the initial forecast. Based on DBRS Morningstar’s base-case scenario assumptions, DBRS Morningstar is projecting a global debt service coverage ratio of 2.9 times (x) for 2020, increasing to 6.1x in 2023, and going back down to 3.2x in 2024 because of the commencement of TIFIA debt service (interest only).

As at the end of May 2020, I-77 has robust liquidity with $17 million in restricted cash (debt service reserve account (DSRA) of $10 million, Major Maintenance Reserve of $0.96 million, and TIFIA DSRA of $6 million) as well as $28.5 million in the operating account. There is no debt service payment on the TIFIA loan until 2024, and PAB bonds start maturing in 2025. Therefore, the DSRA is sufficient to cover two years of mandatory and scheduled interest payments for PABs in the event that there are no toll transactions for two years during this pandemic. Additionally, no distributions are permitted before the fifth anniversary of Substantial Completion and after four semesters of full cash TIFIA interest payments have been paid.

The state government previously explored revising or terminating the CA, and ProjectCo has indicated that NCDOT continues to review opportunities to improve the Project as it periodically meets with the local advisory group. Notwithstanding, DBRS Morningstar expects that any cancellation or modification of the CA would result in compensation for the lenders in accordance with its termination provisions. Any action taken by NCDOT to modify the CA that would be materially prejudicial to the Project’s revenue model would likely cause a negative rating action. If it becomes apparent that Final Completion will be delayed, a negative rating action may also result. DBRS Morningstar could also take a negative rating action in the case of significantly pronounced and extended decline in revenues than predicted in its base case, leading to lower financial metrics that no longer correspond to the current rating. A positive rating action is not expected at this time.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

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