Rating Action: Moody's assigns Baa1 to Series 2014 Dulles Toll Road (D.C.) Second Senior Lien Refunding Bonds and affirms A2 on first lien and Baa2 on subordinate lien; outlook stable, Moody's Investors Services, April 23, 2014

Below is the substantive portion of Moody's press release announcing its ratings on the latest $446 million MWAA bond for the Silver Line construction financed by Dulles Toll Road tolls and re-affirmation of earlier bond ratings.  The Baa1 rating given this latest issuance puts it in the mid-range of investment grade bonds, three steps above "junk bond" status (Moody's Ba1).  What is most important about the ratings are the strengths and challenges Moody's identifies in the bond issuance at the end of this report. For more on this rating and related MWAA ratings, click here. 

New York, April 23, 2014 --

Moody's Rating

Issue: Dulles Toll Road Second Senior Lien Revenue Refunding Bonds, Series 2014A; Rating: Baa1; Sale Amount: $445,690,000; Expected Sale Date: 5/5/2014; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service assigns a Baa1 to the Series 2014 Second Series and affirms the A2 for the first senior, the Baa1 for the second senior and the Baa2 for the subordinate lien toll road revenue bonds of the Dulles Toll Road (DTR) operated by the Metropolitan Washington Airports Authority (MWAA). All liens have a stable outlook.

Rating Rationale

The ratings are based on adequate debt service coverage ratios (DSCRs) for all liens under various scenarios, including an expected $1.277 billion in fourth lien debt to be issued as a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. Though we think that the traffic growth forecast is optimistic given the trend of declines over the last five years, our expectation is that MWAA will raise toll rates as needed to comply with covenanted DSCRs above 1.20 times and targeted DSCRs of at least 1.25 times for all debt. The economic strength of suburban Washington DC the service area and its above average resident incomes should allow for future toll rate increases. The completion of Phase 1 and the award of a fixed-price, design-build contract for Phase 2 of the Metrorail project provide more funding certainty and this is factored into our ratings.

The bonds, along with the expected TIFIA loan, provide funding for the MWAA DTR's share of remaining Metrorail project construction costs. Though there is a risk of an operational delay for Phase 1 and the potential for higher costs to complete Phase 2, no additional DTR debt is planned or expected for either the Metrorail project. Also, MWAA has no operational or capital improvement responsibility for the Metrorail project once it is operational.

The two notch differential for the first senior lien at A2 is based on significantly stronger legal covenants than the subordinate liens and reservation of this lien for toll road only projects. The one notch differential between the second senior at Baa1 and the subordinate (third) lien at Baa2 reflects the lower standing in the flow of funds and weaker legal covenants. We note that all liens have debt service reserve funds (DSRFs).

Outlook

The stable outlook reflects reasonable assumptions for traffic and revenue growth to support high leverage and achieve forecasted DSCRs despite back-loaded debt as well as the potential for cost increases to complete Phase 2 of the Metrorail Project. Future credit reviews will focus on the adequacy of toll revenues to maintain forecasted DSCRs above 2.0 times for first senior; 1.60 times for second senior and 1.30 times for subordinate lien bonds and above 1.25 times for all debt including the expected fourth lien TIFIA bonds; as well as make reserve fund deposits, meet future DTR and Metrorail capital needs, maintain liquidity levels and deliver the Phase 2 Metrorail construction project on schedule and within the current budget.

What Could Change the Rating Up

The first senior lien bond rating is not likely to go up given the system's total leverage, but the second and subordinate liens could go up if traffic and toll revenues increase more than forecasted through growth and rate increases and these produce higher DSCRs and financial margins than currently forecast.

What Could Change the Rating Down

Lower than forecasted traffic that reduces forecasted DSCRs would place downward pressure on the rating as would any escalation of construction costs for Phase 2 that requires a significant increase in DTR debt.

STRENGTHS

*DTR is a mature commuter toll facility with a 30-year traffic and toll revenue history that is being leveraged to finance construction of the Metrorail (Silver Line) extension project. The road connects affluent residential developments with major commercial areas (Tyson's Corner) in the Metro Washington, DC MSA

*MWAA has independent toll setting ability, and has demonstrated willingness to use it, raising rates five times in the past five years in support of debt issued for the Metrorail project. Current rates are relatively low for the service area and leave room for future expected rate increases at five year intervals

*Nearly 81% electronic toll collections (ETC) in FY 2013 enhances operating efficiency and reduces elasticity when increasing rates

*Though growth slowed due to the recession and federal government budget strain, the service area in the Washington DC MSA remains strong and has favorable long-term growth prospects

*The three rated liens are adequately protected by cash flow and covenants, and debt service is paid ahead of any capital investments. Forecasted DSCRs are expected to remain above indenture requirements

*Strong federal, state and local support with committed funding for the Metrorail project from FTA FFGA as well as highly rated MWAA (A1), Virginia (Aaa), Fairfax County (Aaa) and Loudoun County (Aaa)

*Completion of Phase 1 and funding certainty for Phase 2 of the Metrorail through an executed fixed-price construction contract for a significant portion of the scope of work are credit positives

*Strong management oversight by professional management team, which has managed over $6 billion in capital projects at MWAA, including the completion of Phase 1 of the Metrorail, though slightly above budget and behind schedule

*Ten-year concession tail after final debt maturity allows further debt structuring flexibility

CHALLENGES

* The 2014 forecast is somewhat optimistic about traffic growth; however this is mitigated by no planned toll rate increases until 2019, then at five year intervals, as well as expected steady service area growth and continued development, in part spurred by Metrorail access

*Plan of finance for the back-loaded Metrorail debt relies on regular toll increases, which may result in higher elasticity and traffic diversion than foreseen, though toll rates will remain significantly lower than the Toll Road Investors Partnership II, L.P. (Ba2, stable) which connects to DTR at western end and the I-495 managed lanes to the east

* Plan of finance also relies on continued contributions from funding partners, with $1.088 billion or 19% of total project costs remaining to be received

*Higher than currently expected costs for Phase 2 could lead to more debt supported by DTR revenues or higher or more frequent rate increases than currently forecast

*Open flow of funds allows transfers to Metrorail project and VDOT, but only after all DTR operating needs and all debt service, including all required reserves and reasonable discretionary reserves for all liens is paid. No transfers are expected to be needed

The principal methodology used in this rating was Government Owned Toll Roads published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.