DBRS Morningstar Assigns New Rating to San Bernardino County Transportation Authority I-10 Express Lanes Project

DBRS Limited (DBRS Morningstar) discontinued and withdrew its rating on the $225.0 million TIFIA Loan (the 2019 TIFIA Loan) issued by San Bernardino County Transportation Authority (SBCTA) under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to partially fund an expansion of approximately 10 miles of the Interstate 10 (I-10) highway in San Bernardino, California (the Project or Contract 1). The discontinuation of the rating is due to the cancellation of the 2019 TIFIA Loan. DBRS Morningstar also assigned a rating of BBB (low), Stable, to the new $225.0 million 2021 TIFIA Loan issued by SBCTA. The 2021 TIFIA Loan has the same size and materially the same terms as of the now discontinued 2019 TIFIA Loan, apart from a lower interest rate.

SBCTA acts as the County Transportation Commission of San Bernardino County, providing transportation planning and programming. The Project introduces the first tolled lanes in San Bernardino County and will have two tolled lanes and four general-purpose lanes in each direction. The Project has a 4.3-year construction period, and the land for the express lanes is leased to SBCTA by the California Department of Transportation (California DoT) for a 50-year operating period. The Project is different from typical public-private partnership (PPP) projects as it does not feature risk transfer to a special-purpose vehicle generally found in PPP transactions. DBRS Morningstar considered the construction phase, which involves the expansion of existing highway to accommodate express lanes, along with eight bridge replacements and the widening of 12 other structures, to be of low complexity. The construction obligations are being completed by The Lane-Security Paving Joint Venture (the Construction Contractor), a joint venture including Lane Construction Corp. (60%) and Security Paving Company, Inc. (40%), each with joint and several liability. TransCore, LP is the Toll Services Provider (TSP) responsible for the design, construction, and maintenance of the toll systems for the initial period, which comprises only approximately 2% of Project Costs.

The Coronavirus Disease (COVID-19) pandemic has caused construction delays due to interruptions in the approval process. The construction completion date is being extended by 30 days from July 3, 2023 to August 2, 2023, with another 26 days being shown in the Construction Contractor's current schedule. Only approximately 34% of total Project Costs have been expended up to April 30, 2021, compared with 62% expected by this time originally. SBCTA has indicated that the lag on actual spending is expected to be caught up in the coming months and they are working closely with the Construction Contractor to ensure the new dates are being met. Key activities planned for the year include the Sultana Bridge replacement work, widening of the Euclid overcrossing, and widening of the Monte Vista undercrossing. DBRS Morningstar notes that the Project is less exposed to delays in construction, as the TIFIA repayment starts only 4.4 years after the substantial completion deadline date and the construction phase security is considered strong.

The pandemic has affected traffic on the corridor, though the impact has been less than observed in other regions, and there was some recovery observed even when stay-at-home orders were still in place. Traffic volumes from sample sections on the highway were approximately 20% lower in 2020 as compared with 2019 levels, and during the first five months of 2021 were observed to be around 15% lower than during 2019. CDM Smith, the Traffic & Revenue (T&R) forecaster, has noted that congestion on I-10 appears to be close to returning to prepandemic levels. To gauge the return of activity in the express lanes usage, the T&R forecaster also looked at the traffic on express lanes on Orange and Riverside Counties, which have rebounded to over 95% of 2019 levels. Currently, California has lifted most of the restrictions for travel and gatherings, while guidance remains for large public events. Capacity restrictions of schools are expected to be known only later in the summer when decisions about returning to in-person learning are expected to be made. The longer term impacts from work-from-home policies on express lanes usage are still to be assessed, and a revised traffic forecast may be provided by the T&R forecaster before the opening of the express lanes in 2023.

DBRS Morningstar's current expectation is that the pandemic will not have a material impact on the long-term traffic and toll revenue projections on this Project, also noting the express lanes are expected to be opened only in the second half of 2023. DBRS Morningstar has not stressed the long-term traffic forecast made at the time of financial close in 2019 for the impact of the pandemic. Further, the lower interest rates under the 2021 TIFIA Loan also provide greater ability to withstand traffic shocks, with a minimum DSCR now projected at 1.76x. Upon completion of construction, traffic volumes that are significantly lower than expected could put pressure on the rating. DBRS Morningstar currently views a rating upgrade as unlikely in the near term due to the managed-lanes nature of the asset and the forecast financial metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Public-Private Partnerships (August 19, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.
 
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