Fitch Ratings has affirmed the Louisiana Transportation Authority's (LTA) $78.5 million series 2005A bonds at 'BBB'. Fitch has also downgraded the $66 million Federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to 'B-' from 'BB'. The Outlook for the Series 2005 A bonds remains Stable. The Outlook on the TIFIA loan is revised to Negative from Stable. The debt was issued to fund the construction of the LA 1 toll bridge in the vicinity of Port Fourchon, in Lafourche Parish, Louisiana.
Fitch believes the commitment by the State of Louisiana (general obligation rating 'AA' by Fitch) to replenish draws on the 1st Tier Debt Service Reserve (DSR) through a Cooperative Endeavor Agreement (CEA) with the State Department of Economic Development provides significant credit support to the senior lien Series 2005A bonds, improving the otherwise weak project fundamentals. Fitch notes that $14 million of the aggregate $18 million 1st Tier DSR is in the form of a surety bond from Ambac (unrated by Fitch) which provides a certain amount of liquidity risk to the bond holder should Ambac fail to honor draws on its policy.
RATING RATIONALE:
The downgrade of the TIFIA debt to 'B-' and the Negative Rating Outlook reflect the poor performance to date of the project relative to initial projections and continued uncertainty regarding future traffic levels. The poor performance is attributed to a series of event risks including hurricanes, BP oil spill, the economic recession, and the failure to fully complete the installation of electronic tolling equipment and software. There is continued uncertainty regarding future traffic and revenue performance on the road given the general economic climate and the enhanced regulatory environment for drilling activities in the Gulf of Mexico. There is a real possibility of a non-payment on the TIFIA debt in the next two to three years absent a debt restructuring. Unlike the senior lien bonds, the TIFIA debt does not benefit from a CEA with the DED to replenish the second tier DSR and is therefore completely dependent on toll revenue for repayment.
The 'B-' rating for the TIFIA debt reflects:
--Subordinate lien position of the TIFIA loan which springs to pari passu upon a Bankruptcy Related Event of the LDOTD, truly subordinating TIFIA.
--TIFIA debt does not benefit from a CEA from the State of Louisiana to replenish the DSR fund.
--LA1 violated its rate covenant in 2010 as result of traffic and revenue being significantly below original estimates, with truck traffic coming in 45% of initial projections. The poor traffic and revenue performance is primarily the result of event risks impacting the region including: hurricanes, economic recession, fuel price volatility, and revised regulatory requirements for oil drilling following the BP oil spill in the spring of 2010. In addition, there have been issues with the electronic tolling technology which resulted in evasion rates of 25% and 20% in 2009 and 2010, respectively.
--Uncertainty regarding future traffic levels on LA 1 due to overall macro-level economic conditions and questions regarding future oil activity in the Gulf given the enhanced regulatory environment post the BP oil spill in 2010.
--Strong likelihood of payment default in the near term if TIFIA debt is not restructured.
The 'BBB' rating for the Series 2005A bonds reflects:
--LA1 has a monopoly position serving Port Fourchon, a major contributor to Louisiana's economy and a vital facility for maintaining the nation's energy supply, and also Grand Isle, a tourist destination.
--The project benefits from significant support from the State of Louisiana with the Louisiana Department of Transportation and Development (LDOTD) paying operating and maintenance expenses. In addition, draws on the 1st tier DSR are replenished through an CEA with the DED (State general obligations 'AA', gas tax bonds 'AA-', Outlook Stable).
--Unrated $14million DSR surety from Ambac posing greater liquidity risk to bondholders than cash funded portion of DSR.
What May Trigger a Downgrade of TIFIA Debt?
--Failure to implement debt restructuring and revenue enhancement recommendations made by URS.
--Likelihood of a payment default becoming more imminent.
What May Trigger an Upgrade of TIFIA Debt?
--Debt restructuring to enable the project to comfortably meet its rate covenants.
--Improved traffic and revenue performance and toll operations in line with high case projections.
SECURITY:
The trust estate consists of gross toll revenues, interest earnings, debt service reserve and other funds on deposit, insurance earnings and liquidated damages.
CREDIT SUMMARY:
LTA failed to meet its rate covenant in 2010 with coverage on both the senior and subordinate debt of only 1.0 times (x) compared to the requirements of 1.2x (senior) and 1.1x (subordinate). Traffic and revenue performance in 2010 was significantly below original projections, with truck traffic specifically coming in at 45% of original projections. Truck revenues were originally projected to comprise 61% of total revenues from 2011 - 2040. However, revised projections indicate truck revenues will only represent 39% of total revenues. The poor traffic and revenue performance is primarily the result of event risks impacting the region including: hurricanes, economic recession, fuel price volatility, and revised regulatory requirements for drilling.
As a result of the covenant violation, URS was engaged in February 2011 to update its original 2005 traffic and revenue forecasts to reflect current and future economic development and oil & gas industry activities in the region. URS's report also identified ways LDOTD may be able to meet its debt service requirements; the report was presented at an LTA meeting on May 19, 2011. Among the recommendations is a revision to the toll policy beginning in 2012 in an effort to generate additional revenues. Fitch's own projections indicate even with the proposed 100% rate increase, coverage on the senior bonds will hover around the rate covenant in the near term and will drop below the covenant as debt service (D/S) ramps up. Fitch's projections also indicate a payment default on the subordinate TIFIA loan is likely upon the currently scheduled commencement of principal and interest (P&I) payments in 2013 baring an agreement to defer the payment. Fitch notes the LTA does have some flexibility to restructure the TIFIA debt in order to avoid a payment default. It is Fitch understands that preliminary discussions are underway with TIFIA regarding a restructuring. The LTA adopted a resolution after they received a URS report and directed the DOTD to carry out the URS recommendations and report back to the LTA no later than November 30, 2011.
The lower traffic levels were compounded by problems with the tolling technology which resulted in evasion rates of 25% and 20% in 2009 and 2010 respectively. In January 2010, Electronic Transactions Consultant Corporation (ETCC), discontinued work on the LA-1 project citing that LDOTD had not fully paid its bills and therefore was illegally using licensed software. LDOTD filed a lawsuit against ETCC, stating that the operator left LA-1 with an incomplete, non-functioning toll collection system. ETCC countersued. According to LDOTD, negotiations have been underway between the LDOT and ETCC for several weeks and an agreement on a settlement is expected before the end of June, 2011. LDOTD has brought in HNTB as a consultant to improve the evasion rate.
The true severity of the project's poor performance was not fully articulated to Fitch at the time of the last credit review in August 2010. At that time, LDOTD presented information to Fitch indicating traffic was approximately 80% of sponsor forecast through April 2010. No mention was made by LDOTD of any issues with its tolling technology or its ongoing disputes with ETTC. LDOTD did not respond to Fitch's subsequent attempts to gain updated traffic and revenue information until the release of the URS report at the end of May 2011.
LTA issued bonds in May 2005 to finance construction of a toll bridge and elevated roadway to replace aging infrastructure in the vicinity of Port Fourchon, located in Lafourche Parish, Louisiana. Along with the bonds, the authority issued short term notes that were later replaced by the rated federal loan. All project debt will be repaid from the toll revenues collected at the bridge. The LDOTD will operate the bridge and pay all expenses.
Port Fourchon, located about 50 miles south of New Orleans, historically served the majority of the offshore oil and gas production in the Gulf of Mexico, which provides the United States with about 30% of its domestic oil production, or roughly 15% of its total supply. This could change given stricter regulations on drilling activity. There are more than 600 drilling platforms within the port's service area. Port Fourchon also serves the Louisiana Offshore Oil Port (LOOP), a deep-water docking facility for oil tankers that handles about 15% of U.S. oil imports and connects to 40% of the nation's refining capacity. Traffic at the new bridge will depend heavily on Port Fourchon's continued servicing of oil and gas activity in the Gulf.
Total project cost was approximately $375 million and encompassed Phase 1 of the larger four-phase $1.74 billion LA1 Improvement Project. Phase 1 improved an 11 mile segment of LA1, a state highway that runs northwest from the Gulf coast to Shreveport and the Arkansas state line. Rationale for the project included the criticality of road access to the Gulf and its energy resources, the old roadway's tendency to flood and traffic delays caused by operation of the old bridge, and a lift design which had to be pulled up to accommodate passing vessels.
The Federal project loan was made under the TIFIA, a program administered by the USDOT. Although they are individually tailored, TIFIA is 35 years in length and includes a multi-year capitalized interest period and flexible repayment terms. TIFIA loans are subordinate in the project cash waterfall to other debt but are pari passu with senior bonds upon an event of default.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);
--'Rating Criteria for Toll Roads, Bridges, and Tunnel' (Aug. 10, 2010);
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--U.S. State Government Tax-Supported Rating Criteria' (Oct. 8, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543265
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
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Contacts:
Fitch Ratings
Primary Analyst (TIFIA Loan)
Scott Zuchorski,
+1-212-908-0659
Director
Fitch, Inc., 33 Whitehall Street, New
York, NY 10004
or
Secondary Analyst (TIFIA Loan)
Emari
Wydick, +1-312-606-2308
Director
or
Marcy Block (State
Analyst), +1-212-908-0239
Senior Director
or
Committee
Chairperson
Mike McDermott, +1-212-908-0605
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com