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 35 East Managed Lanes 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 traffic volume has essentially returned to its pre-Coronavirus Disease (COVID-19) pandemic level, at a much faster recovery rate than DBRS Morningstar’s expectations. As a result, the Project's debt service coverage ratio (DSCR) of 2.7 times (x; for the 12 months ended November 30, 2022) was materially higher than DBRS Morningstar's base case forecast of about 2.2x. Despite the significant uptick in traffic and toll revenue in 2022 (and in the first four months of 2023), the Project's traffic and toll revenue projection will still be negatively affected by the ongoing construction of the Phase 2 project. Once the Phase 2 project is complete, it is expected to reduce traffic on the Project, resulting in a minimum DSCR of 2.4x in 2035. Furthermore, DBRS Morningstar notes the current traffic and toll revenue projection is still considerably lower than CDM Smith's projection in 2019 (prior to the incorporation of the significant expansion of the Phase 2 project).

Traffic and toll revenue in 2022 recovered considerably faster than DBRS Morningstar's expectation last year. Total traffic (cars and trucks) reached about 28.7 million in 2022, which was about 1% lower than 2019 level. Toll revenue in 2022 exceeded the 2019 level by nearly 2%, which could be attributed to the considerable increase in truck traffic (truck toll rates are significantly higher than cars). The positive traffic momentum in 2022 has continued, with traffic volume reaching 10.3 million in the first four months of 2023. This level of traffic is equivalent to more than 10% of the traffic volume recorded for the same period in 2019. Toll revenue generated from January 2023 to April 2023 was about $11.9 million, which is more than 25% of the toll revenue earned for the same period in 2019.

The Project continues to maintain robust liquidity with about $105 million in reserves and other funds (e.g., TIFIA Debt Reserve Fund, Operation and Maintenance Fund, Major Maintenance Fund, General Fund, Rate Stabilization Fund, and Revenue Fund) as of May 31, 2023.

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 and highway 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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (https://www.dbrsmorningstar.com/research/402155; August 30, 2022)

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The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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