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.

Tolls, Taxes, the Portsmouth Judge...and MWAA and the Dulles Toll Road?

Last week, in a surprising decision, Virginia Circuit Judge James A. Cales, Jr., ruled that the planned tolls on the Portsmouth Midtown-Downtown tunnel were unconstitutional under the Virginia Constitution because they constituted taxation without representation.  In a subsequent ruling, the judge refused to stay his decision as requested by the Commonwealth. 

The judge's rationale was that the tolls are taxes, and only the Commonwealth has the authority to levy taxes, since taxation requires representation under the Virginia Constitution.  This is essentially the same argument that has been made in a local case (Corr, Grigsby v. MWAA) against MWAA for raising tolls on the Dulles Toll Road to pay off bonds for construction of the Silver Line.  That case is now before a Virginia Appeals Court after having been rejected by the circuit court, i.e.--the opposite decision on the same basic argument made in the Portsmouth case.

In the Portsmouth case, the tolls are the result of a public-private partnership (PPP) to construct the tunnel.  In northern Virginia, MWAA's authority stems from an agreement with the Commonwealth to take over management of the DTR, including the authority to raise tolls.

Both the Portsmouth tunnel and the DTR cases stem from the utter refusal of state legislators to raise taxes or tolls of any kind anywhere for fear they will lose votes in the next election.  Increasing taxes and tolls is anathema.  So they have tried to ditch this apparently responsibility apparently dictated by the Virginia Constitution.  That way, they can just shrug their shoulders when MWAA or the PPP charges or raises tolls--"It's not my fault they did that."  But of course it is.

The Washington Examiner reacted this way editorially to the judge's decision:

A Portsmouth judge's recent ruling in a case involving Virginia's Public-Private Transportation Act has sent shock waves through the commonwealth and the financial markets, as well it should. Members of the General Assembly have been hiding behind the PPTA by allowing unaccountable bureaucrats and political appointees to do the dirty work of raising taxes to fund major transportation projects. 

The 1995, the PPTA was designed to allow the state to leverage scarce tax dollars by partnering with private companies. Under the Virginia Constitution, only elected members of the General Assembly — who are accountable to the people at the ballot box — have the authority to raise taxes. The PPTA was not supposed to supplant the legislature. But over the years, it has been used to justify what amounts to taxation without representation. . .

The Examiner editorial notes that "Fitch Ratings has already warned investors that Virginia may be on the hook for $1 billion if the Portsmouth decision is upheld."

And, yes, this case (as well as the MWAA case) are far from over.  They will no doubt go to the Virginia Supreme Court where a decision is expected before the Portsmouth tunnel opens in February 2014.

The ramifications for continuing the planned (actually, expected) toll increases on the Dulles Toll Road to cover Metrorail bond payments are not clear--and probably won't be for some time.  If the cases are ultimately rejected, there will be no change in the planned toll increases.  On the other hand, if the Portsmouth judge's ruling is upheld, there appear to be two types of outcomes for the DTR:

• The General Assembly will approve toll increases very much the same as are already planned for DTR users at the risk of being tossed out of office by their constituents.  
• The General Assembly will approve a state-wide tax hike to cover the cost the cost of the Metrorail bond payments--at the risk of legislators outside NoVa getting thrown out of office--and tolls will not rise to the astronomic levels projected.  

Either way (or some other way), the bonds will be paid.  

Stay tuned....

 

Feasibility Studies Rarely on Target, But Do Investors Know?, Bond Buyer, August 22, 2012

Looking at the second financial failure of the Pocahontas Parkway in a half-dozen years, Kyle Glazier reports in Bond Buyer on the continuing problem with inaccurate traffic and revenue (T&R) feasibility studies.  The article notes that the Pochahontas failures--based on a Wilbur Smith & Associates T&R study (now CDM Smith)--are just the latest in a long line of bad forecasts leading to bad results.  The article provides an excellent overview of the wide variety of causes for these forecasting and performance failures.  Here are some excerpts:

As industry participants know all too well, revenue forecasting, an inexact science at best, can either make or break the toll road and public-private partnership projects that are sprouting up all over the country.

One need look no further than the 8.8- mile Pocahontas Parkway near Richmond, Va., to see how an inaccurate feasibility study wreaked financial havoc upon two private companies and raised questions about the viability of the toll road project. . .  

. . . The story of a traffic and revenue, or T&R, study seemingly viewed through rose-colored glasses has become a familiar one to industry leaders, financial advisors and public advocates keeping an eye on infrastructure finance trends.

Neil Gray, director of government affairs at the International Bridge, Tunnel and Turnpike Association, said the issue is attracting more and more attention.

"A recurring theme over the last couple of years has been why are T&R studies always so wrong?" he said. . .

. . . The firms conducting the studies, toll industry members and credit analysts are all aware of how frequently feasibility studies miss the mark, but most of those projections still show potential issuers what they were hoping to see.

"The problem is exacerbated by the 'confidential' or 'proprietary' nature of the forecasts and methods that are developed for toll roads, and also by 'optimism bias' on the part of the sponsor, local elected officials or other advocates of the proposed toll road," the NCHR report states.

Gray agreed, saying, "Historically, you don't get a lot of negative answers." . . .

. . . "It is important for issuers and investors to understand among other things that, at times, there are no published professional standards applied by the experts and that the experts use assumptions given to them by others without reaching their own professional judgments whether the assumptions are reasonable." Doty said.
Mwalwanda said traffic and revenue estimates should be viewed as a range of possible outcomes and not a concrete forecast.

Meanwhile, critics of toll roads fear that, for some forecasters, the desire to produce favorable revenue estimates will outweigh the necessity to produce accurate estimates.

 Click here for the full Bond Buyer article.  

Moody's: "In light of the ongoing rise in debt, our outlook for the toll road sector remains negative"

 

 

Announcement:

Moody's medians show large increase in toll road debt

Global Credit Research - 25 Jul 2011

New York, July 25, 2011 -- The rated debt of the U. S. toll roads rose 19.2% in 2010, to $72.7 billion from $61 billion, which will exert negative credit pressure on the established toll roads, according to a new report from Moody's Investors Service.

"In light of the ongoing rise in debt, our outlook for the toll road sector remains negative," says Moody's Senior Vice President Maria Matesanz, author of the report.

"As the economy recovers, toll facilities are going to issue debt to finance both upgrades for aging infrastructure and new projects to increase capacity," said Matesanz. "Both cash-strapped state and local governments will look increasingly to their toll roads to finance transportation projects that they can't or are unwilling to fund with tax revenues."

On the positive side, says the Moody's report, traffic has been stabilizing, and even recovering in some regions, and gasoline prices have declined from their peak in early 2011. In addition, increases in toll rates and cuts to operating expenses have offset some of the pressure of the higher debt service and preserved the liquidity and operating ratios of most toll roads.

Furthermore, many toll road operators are forecasting a resumption of slow-but-steady traffic growth, which is consistent with Moody's global macroeconomic GDP growth forecast for 2011 of 2.5% to 3.5%; over the long term, rekindled traffic and revenue growth are going to offset the additional leverage needed to fund new capital projects and update an aging infrastructure.

"However, " said Matesanz, "any positive, stabilizing trends have been tempered by the growing servicing costs for the rising debt, especially as, since the 2008 crisis, many issuers have had to replace their liquidity providers at higher costs or refinance debt with higher fixed rates, which raised their servicing costs and made for lower DSCRs."

At the same, despite declines, fuel prices are still volatile and could depress traffic growth, and as the toll roads start to rely more on rate increases to support their escalating debt service costs, they face the rising risk of traffic loss or diversion.

Moody's "U.S. Toll Road Sector Medians for Fiscal Year 2010: Heavy Debt Issuance Continues to Pressure Metrics" is available at www.moodys.com.

An omen as MWAA looks to add $2 billion to that top line total to finish Phase 1 and begin Phase 2 financing?