DBRS Morningstar Confirms High-Performance Transportation Enterprise – C-470 Express Lanes Project at BBB, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Senior Revenue Bonds and the TIFIA Loan issued under the Transportation Infrastructure Finance and Innovation Act program (TIFIA) to partially fund the Colorado 470 (C-470) express lanes project (the Project) of the Colorado Department of Transportation (CDOT) at BBB. All trends remain Stable. The borrower is Colorado High-Performance Transportation Enterprise (HPTE), a government-owned business within, and a division of, CDOT, created by the Funding Advancements for Surface Transportation and Economic Recovery Act of 2009 (FASTER) and structured as an enterprise, pursuant to FASTER, to be exempt from Colorado Taxpayer Bill of Rights laws limiting public indebtedness. The rating is supported by CDOT’s direct involvement in the Project but bounded by the uncertainty related to traffic volume levels on the managed lanes and the risk that traffic materially underperforms projections.

The Coronavirus Disease (COVID-19) pandemic continues to affect overall toll road and express-lane traffic in the state of Colorado. For example, toll transaction volumes and revenues for the E-470, a fully tolled corridor that connects the C-470 to the Denver International Airport, were roughly 30% lower from January 2021 to April 2021 compared with 2019 on a monthly basis, while some recovery was observed month over month in March 2021 and April 2021. On the U.S. Route 36 corridor, which connects downtown Denver to Boulder, Colorado, volumes between January 2021 and April 2021 were roughly 70% of 2019 volumes, although recovery was noted in February 2021 and March 2021 with month-over-month uplift of 30% and 25%, respectively. Toll transaction volumes on the I-25 Segment 2 managed lanes recovered to 2019 levels by April 2021. Generally, DBRS Morningstar expects material traffic volume recovery for Colorado as vaccination levels continue to rise and as people return to offices and schools at the end of Q3 2021.

The Project began a two-month period of tolling equipment testing in mid-June 2020 and achieved toll commencement on August 18, 2020. C-470 traffic has been depressed since toll commencement was achieved and was below forecast transaction volumes by 47% on average and below revenue forecasts by $2.0 million, or 65%, in 2020 (semiannual period from July 1, 2020, to December 31, 2020). The availability of undrawn TIFIA proceeds (originally intended for construction) resulted in a $4.045 million draw to fund additional capitalized interest on senior bonds, providing additional liquidity for debt service in 2021. The additional funds increased total draws on TIFIA to approximately $102 million, relative to a maximum TIFIA Loan amount of $107 million. HPTE does not anticipate any further draws on the TIFIA Loan.

Additional liquidity is available in the form of the Ramp-Up Reserve Account of $6.0 million, senior debt service reserve account (DSRA) of $4.0 million, TIFIA DSRA of $2.7 million, and the operations and maintenance (O&M) reserve account of $2.0 million. HPTE also saw significant savings (roughly $1.0 million) on O&M costs, primarily because of low transaction processing expenses during the pandemic. In the event that cash flow after debt service is insufficient to fully cover O&M in any given year, liquidity could also be available, if needed, from a subordinate O&M backup loan. The O&M backup loan can be used to cover O&M and lifecycle expenses; draws from the loan to cover O&M cost overruns do not trigger an event of default.

The long-term forecast for the Project has not been revised pending additional performance data and a return to normalized demand following pandemic recovery. For the current 2021–22 fiscal year (July 2021 to June 2022), HPTE has revised its budget to reflect a 75% reduction in revenue from the forecast for July 2021 to December 2021 and a 50% reduction in revenue from the forecast for January 2022 to June 2022. At this time, HPTE expects forecast volumes and revenue to return by the end of F2023 (July 1, 2022, to June 30, 2023) with sufficient liquidity expected to carry through to the originally forecast levels.

Under HPTE revenue assumptions for 2021, the debt service coverage ratios (DSCRs) are 1.07 times (x) and 2.20x for 2021 and 2022, respectively, when the ramp-up reserve of $6.0 million in 2022 is considered. DBRS Morningstar notes that, while the $6.0 million Ramp-Up Reserve Account is considered to be drawn in 2022 for comparative purposes under both the HPTE case and the DBRS Morningstar base case, HPTE does not expect to draw on any amounts from the account during the ramp-up period. If the ramp-up reserve were to be fully drawn and considered cash available for debt service in 2021, the DSCR would be 1.81x and 1.46x in 2021 and 2022, respectively.

The DBRS Morningstar base case assumes underlying traffic volume and HPTE revenue assumptions for the remainder of 2021 that result in a DSCR of 1.07x; however, DBRS Morningstar expects a 20% reduction in forecast toll revenues in 2022 and a 15% reduction in 2023 and beyond, resulting in a DSCR of 1.91x in 2022, with the full amount of the ramp-up reserve assumed to be drawn in 2022. While the pandemic has placed more pressure than expected on traffic volumes and revenue since toll commencement in 2020, the availability of the ramp-up reserve liquidity over the ramp-up period, along with projected revenue resiliency, are still supportive of the current ratings. The DBRS Morningstar downside stress case assumes a 30% reduction in forecast toll revenues in 2022 and a 20% reduction in 2023 and going forward, resulting in a DSCR of 1.76x in 2022, assuming full use of the ramp-up reserve. Please note that the Master Trust Indenture excludes CDOT contributions in the calculation of DSCR but includes the ramp-up reserve balance of $6.0 million, which is available during the ramp-up period that ends in 2024. DBRS Morningstar notes that, as per the Master Trust Indenture, coverage ratios are tested starting from the first day of the first full fiscal year following the substantial completion date; therefore, the first reporting period is for the 12-month period ending June 30, 2022. DBRS Morningstar will continue to monitor traffic volumes, and significantly lower-than-expected volumes in the near term or lower forecast volumes in the medium to long term could lead to a negative rating action. DBRS Morningstar currently views an upgrade as unlikely because of the managed-lanes nature of the asset and the forecast financial metrics.

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; https://www.dbrsmorningstar.com/research/365975), 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577