In Fitch's fantasy world Kasich plan for Ohio Turnpike "conservative" won't affect rating COMMENT
By Peter Samuel
Fitch Ratings say that an extra $1.5 billion in debt "is not expected to negatively impact the quality of existing OTC debt" and that they view the plan as "conservative." The money will be used for a mix of reconstruction and for off-Turnpike untolled projects.
Announcing his plan in mid-December Governor Kasich promised:
- no layoffs of Turnpike personnel
- a freeze on tolls on local trips, hikes on other trips capped at inflation for ten years
The first limits the ability of the Turnpike to lower costs, while the second means that overall toll rates will increase at less than inflation. And having imposed all these political commitments on the Turnpike the Governor has the effrontery to claim he has preserved the "independence" of the Turnpike Commission!
Kasich's commitments on toll rates will squeeze the Turnpike's margins. And it isn't as though costs can be spread over increased traffic.
In the last ten years traffic has been on a flat trend line at around 50m annual transactions, 135k to 140k/per day. And why expect an increase now?
Revenue has risen from $194m in 2002 to $251m this year or just shy of 30% - a modest increase in a decade.
Are these people at Fitch Ratings stupid, or bought?
I don't know. But I DO know they are utterly wrong.
No mature asset in a slow growth business making a modest return on investment like the Ohio Turnpike Commission can add $1.5 billion in new debt to fund projects that add not a single little cent to its cash flow, be subjected to promises not to hike tolls or make layoffs, and not be financially weakened.
Everything negative for pike-$s
Every single aspect of the Kasich plan, everything, is negative for the Turnpike's finances.
There is a big big blowout in debt.
We'll round the numbers. $1,500m new debt compares to the Turnpike's present debt of $700 and to total assets of $1,500m.
Net worth of the Turnpike is currently $800m (p22 latest annual report, rounding numbers.)
With $1500m extra, debt will go from $700m to $2,200m under the Kasich plan. Nothing adds to prospective revenues. Improvements to parallel 'free' (tax supported) routes will detract from toll revenues.
Interest expense on Turnpike debt will go from about $30m to $100m a year at the current interest rate of 5%. That's $70m extra annual cost.
The increase in interest expense is greater than the current annual profit of the Turnpike ($58m.)
The Kasich plan:
- triples Turnpike debt
- turns the Turnpike's net worth from +$800m to negative worth (liabilities exceeding assets) of $700m
- adds annual interest expense greater than the current annual profit
- commits to limit toll rate hikes to less than inflation over the next ten years
- finances improvement in competitive untolled roads
An old P3 alright
Kasich's plan is a very old fashioned P3 alright - a Poisonous Political Pander.
And Fitch says it is financially "conservative." And it won't negatively affect the Turnpike's bond ratings.
But these are the same clowns who in the summer of 2007, even as housing prices were crashing, said of mortgage-based securities: "We continue to be confident that 'AAA' ratings reflect the high credit quality of those bonds." (Glenn Costello, co-head of Fitch's residential mortgage group on a conference call quoted by Reuters.)
These people inhabit a part of the New York Financial District dubbed L3 - for La La Land.