Morningstar DBRS Confirms Credit Rating of BBB (low) With a Stable Trend on San Bernardino County Transportation Authority I-10 Express Lanes Project

DBRS, Inc. (Morningstar DBRS) confirmed its credit rating of BBB (low) on the $225.0 million TIFIA Loan (the 2021 TIFIA Loan) issued by San Bernardino County Transportation Authority (SBCTA). The trend is Stable. The 2021 TIFIA Loan was raised under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to partially fund an expansion of approximately 10 miles of the Interstate 10 (I-10) Highway in San Bernardino, California (the Project or Contract 1). When the agreement for the 2021 TIFIA Loan was entered into on June 17, 2021, the previous $225.0 million 2019 TIFIA Loan was cancelled.

KEY CREDIT RATING CONSIDERATIONS

SBCTA acts as the County Transportation Commission of San Bernardino County, providing transportation planning and programming. The Project introduces the first tolled lanes in San Bernardino County and will have two tolled lanes and four general-purpose lanes in each direction.

The Project has a 4.4-year scheduled construction period, and the land for the express lanes is leased to SBCTA by the California Department of Transportation (California DoT) for a 50-year operating period. 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.

Morningstar DBRS considers the construction phase, which involves the expansion of existing highway to accommodate express lanes, along with eight bridge replacements and the widening of 12 other structures, to be of low complexity. The construction obligations are being completed by the Lane-Security Paving Joint Venture (the Construction Contractor), a joint venture including Lane Construction Corp. (60%) and Security Paving Company, Inc. (40%), each with joint and several liability. TransCore, LP is the Toll Services Provider (TSP) responsible for the design, construction, and maintenance of the toll systems for the initial period, which comprises only approximately 2% of Project Costs.

The current estimated project cost at completion is approximately $963 million. As of April 30, 2024, approximately $834 million or 86.6% of the total project cost has been expended, including more than 92.6% of the Design-Builder construction cost. The expected substantial completion and revenue commencement date is August 9, 2024, which represents a one-year delay from the previously accepted date of August 9, 2023, and a 13-month delay from the original date of July 3, 2023. The delays arose due to the Coronavirus Disease (COVID-19) pandemic, replacement of nonconforming girders, work on bridges and retaining walls, and other civil construction work. Despite the construction delays, Morningstar DBRS notes that the debt servicing is less affected by delays in construction because the TIFIA loan repayment doesn't begin until December 31, 2027, and the construction phase security is considered strong.

CREDIT RATING DRIVERS
Upon completion of construction, traffic volumes that are significantly lower than expected could put pressure on the credit rating. Morningstar DBRS currently views a credit rating upgrade as unlikely in the near term because of the managed-lanes nature of the asset and the forecast financial metrics.

FINANCIAL OUTLOOK
Traffic on the corridor, which was affected by the pandemic, has recovered to near pre-pandemic levels. In the first four months of 2023, traffic volumes in sample sections were 96% of the traffic volumes in the same period in 2019. Morningstar DBRS has not received a revised traffic forecast by the Traffic & Revenue (T&R) forecaster, which is expected only after the project is completed. The revised forecast is also expected to factor in the longer-term impacts from permanent work-from-home policies, which are still unfolding. The lower interest rates under the 2021 TIFIA Loan, compared with the previous financing, provide greater ability to withstand traffic shocks, with a minimum debt service coverage ratio (DSCR) of 1.76 times (x) and a revenue breakeven of 48%.

CREDIT RATING RATIONALE
The credit ratings reflect the Project's financial outlook, underpinned by strengths that include (1) fee-setting autonomy; (2) reserves and other support mechanisms; (3) a long-dated toll facility agreement; and (4) lower risk exposure to the construction phase. The challenges include (1) the inherent volatility of managed lanes; (2) traffic forecasting error; (3) exposure to economic conditions; (4) differential metrics calculation; and (5) high leverage.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

RATING DRIVER ASSESSMENT AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Rating Driver Factors
In the analysis of San Bernardino County Transportation Authority I-10 Express Lanes Project, the Rating Driver factors listed in the volume-based section of the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of San Bernardino County Transportation Authority I-10 Express Lanes Project, the following FRA factor listed in the volume-based section of the methodology was considered more important: minimum DSCR.

(C) Weighting of the Rating Driver Factors and the FRA
In the analysis of San Bernardino County Transportation Authority I-10 Express Lanes Project, the FRA carries greater weight than the Rating Driver factors.

Notes:
All figures are in US Dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Public-Private Partnerships (15 April 2024)
https://dbrs.morningstar.com/research/431193

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186/, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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