[Editor: This is the text of an announcement from Fitch Ratings.]
Fitch: Grand Parkway Performance a Positive Sign for Toll Road Projects
Fitch Ratings-Chicago-24 January 2017: The Grand Parkway Transportation Corporation (GPTC), which issued $2.9 billion of toll revenue bonds in 2013 to finance the design and construction of major sections of a third ring road around Houston, TX, is well on track to meet expectations relative to its original finance plan, according to Fitch Ratings.
The system reached substantial completion on March 29, 2016, approximately six months behind the original schedule, but within budget. Full system traffic and revenue levels through eight months of operation indicate that the first full year will be substantially greater relative to the original forecast at financial close. In addition, with the completion of construction, the GPTC was able to make its planned draw on the TIFIA loan and pay off the subordinate series 2014A bond anticipation notes (BANs) at maturity as well as the subordinate series 2014C bonds.
Greenfield toll roads globally have historically struggled to meet projections. Importantly, recent experience for traditional toll roads has been a departure from these long-term trends with North Carolina Turnpike (Triangle Expressway), Central Texas Turnpike System, and the Grand Parkway at or close to original projections. This experience has extended to the more unproven area of managed lanes where a number of facilities have opened in the past two years and most have performed closer to initial forecasted projections. It is too early to call this a meaningful shift in the standards and quality of forecasts as there are projects like SH130 near Austin, Texas that have severely underperformed; however, it does indicate that greater conservatism is being incorporated to address opening year and facility ramp up risks. Only success on new projects over a period of a decade or more will provide greater confidence that forecasting techniques and input assumptions are more reliable and that this performance may in fact be sustainable.
The portion of Grand Parkway’s segment D in Harris County and the entirety of segment E opened in December 2013 with tolling commencing Feb. 1, 2014. Segments F-1 and F-2 followed, opening on Feb. 5, 2016, with tolling beginning February 15. Segment G was the last to be completed on March 29, 2016 with tolling commencing April 4, 2016. Substantial completion of March 29, 2016 was an approximately six-month lag from the original Oct. 3, 2015 date due to adverse and unexpected weather conditions in the Houston area. Importantly, however, the project was completed on budget and the delay was still within the capitalized interest period and did not impact the financial profile.
Traffic on Grand Parkway has outperformed not only the Fitch base case, but also the sponsor’s forecast since opening. Through May 2016, transactions exceeded forecast by a total of 42%, and this trend has continued. For the period April through November 2016 (representing the months for which the entire system was open and tolled), transactions averaged 182% of the original forecast. Given that the majority of the system opened in 2016, a full year’s operating history is not yet available. In addition, the system remains in ramp-up, with approximately 25% growth for segments D and E in 2015 over 2014.
Consistent with Fitch Rating’s expectation, the GPTC requisitioned $841 million (the maximum amount allowable under its TIFIA loan agreement) from the U.S. DOT on Dec. 13, 2016. The funds were disbursed and the proceeds were used to pay off the GPTC’s $733 million subordinate tier toll revenue series 2014A BANs and its $107 million subordinate tier toll revenue refunding bonds, series 2014C (TELA supported). This takes advantage of the low cost of borrowing with a fixed interest rate of 3.65% and flexible amortization profile with a scheduled final maturity of fiscal 2051. While Fitch recognized there were a number of conditions precedent that had to be satisfied before the TIFIA loan could be disbursed to redeem the subordinate toll revenue BANs, the majority of the conditions were administrative. However, under the events of default, including a development default, TIFIA disbursements may have been withheld. Risks to the development default were largely mitigated by an investment grade developer, adequate completion security package, and Fitch’s completion risk analysis. To the extent that any of the conditions precedent to disburse the TIFIA loan were not met, the GPTC could have been exposed to market access and potentially higher borrowing costs.
In addition, the GPTC refunded $84 million of subordinate series 2014B bonds (TELA supported) with series 2016 refunding bonds (TELA supported) maturing in 2023 and that bear an interest rate of 2.20%. This creates annual debt service savings from the 5% previously assumed through 2023, at which point the bonds are anticipated to be refunded again with a variable rate put bond that will have a final maturity of fiscal 2044. This debt represents a very small fraction of the GPTC’s total debt creating only minimal refinance risk. It is presumed to be amortized subsequently at an assumed 5% rate through 2044.
The GPTC maintains a total of approximately $2.9 billion of toll revenue obligations outstanding ($200 million first tier bonds, $841 million second tier TIFIA loan, and $1.9 billion of TELA supported subordinate tier). Fitch currently rates both the first and second tier obligations the same at ‘BBB+’/Stable Outlook, given the TIFIA loan’s ability to spring to parity with first tier debt in a bankruptcy related event. Fitch currently rates $1.8 billion of subordinate tier revenue bonds higher at ‘AA-‘/Stable Outlook given the TELA support provided by TxDOT. The GPTC will remain in a partial capitalized interest period in fiscal 2017, with a full year of debt service becoming due beginning in fiscal 2018.
The GPTC is undertaking to develop additional Segments H and I through a Design-Build contract and to finance the project through the use of Grand Parkway system toll revenue obligations. The GPTC estimates the H&I capital costs at approximately $1.25 billion and to take around five years to construct. Fitch’s analysis incorporates the risk associated with any related additional borrowing.
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