DBRS Morningstar Confirms Texas Transportation Commission – IH 35E Managed Lanes Project at BBB (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed its rating on the 35.5-year $285 million revenue loan (the TIFIA Loan), which was issued under the Transportation Infrastructure Finance and Innovation Act (TIFIA) program to fund part of the Texas Department of Transportation’s Interstate Highway (I) 35 East (35E) Managed Lanes (MLs) Project (the Project), at BBB (high) with a Stable trend. The Project corridor is approximately 28 miles, of which the managed lanes are for approximately 17 miles.

The rating confirmation stems from DBRS Morningstar's view that the Project's financial metrics, along with liquidity, remain relatively resilient, and traffic volumes are showing recovery from the negative impact of the Coronavirus Disease (COVID-19) pandemic. Toll revenues, which were only 63% of the 2019 levels in 2020 because of the pandemic, increased to US$23.4 million, or 78% of the 2019 levels in 2021, which was slightly better than the DBRS Morningstar base case forecast of June 2021. Traffic volumes in 2021 were 86% of the 2019 levels. During the first three months of 2022, the toll revenues were 92% of the toll revenues in the corresponding period in 2019, reflecting recovery of toll revenues close to pre-pandemic levels.

The DBRS Morningstar base case forecast remains similar to last year's forecast, except for a slight increase in the revenues for 2022, reflecting the 2021 and Q1 2022 performance. It is assumed toll revenues will recover to 88% of the 2019 levels in 2023 and reach 106% in 2024. DBRS Morningstar's base-case scenario reflects the construction impact of the Phase 2 project, which is expected to be completed in 2025, though assumes no material pandemic impact on the long-term traffic and toll revenue projections on the Project. The minimum forecast debt service coverage ratio (DSCR) of 2.40 times (x) remain supportive of the rating.

The Project has not made any debt-service payments (interest and principal) since the opening of traffic in May 2017 because the first five years of interest are capitalized; therefore, no DSCR was calculated for the period. It is anticipated that the Project will make its first mandatory and scheduled principal payments in May 2027.

DBRS Morningstar believes the Project has robust liquidity with more than $85 million in reserves and other funds (e.g., TIFIA Debt Reserve Fund, Operation and Maintenance (O&M) Fund, Major Maintenance Fund, General Fund, Rate Stabilization Fund, and Revenue Fund) as of May 31, 2022.

DBRS Morningstar could take a negative rating action if long-term traffic and toll revenue projections weaken more than anticipated, resulting in compressed financial metrics that are no longer commensurate with the current rating. Furthermore, a change in tolling policy, a material improvement to local road networks, or other events that substantially depress traffic and revenues could result in a negative rating action. Although highly unlikely, DBRS Morningstar could take a positive rating action if traffic and toll revenues were to increase significantly over time, leading to a substantial improvement in the projected credit metrics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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