DBRS Morningstar Confirms Rating of BBB (low) With a Stable Trend on San Bernardino County Transportation Authority I-10 Express Lanes Project

DBRS Limited (DBRS Morningstar) confirmed its rating of BBB (low) on the $225.0 million TIFIA Loan (the 2021 TIFIA Loan) issued by San Bernardino County Transportation Authority (SBCTA). The trend is Stable. The TIFIA Loan was raised 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). When the agreement for the 2021 TIFIA Loan was entered into on June 17, 2021, the previous $225.0 million 2019 TIFIA Loan was cancelled.

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 4.4-year scheduled 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.

As of April 30, 2023, 75% of the construction project costs were expended. The Construction Contractor's schedule as per the monthly progress report of March 31, 2023, shows a substantial completion date of March 17, 2024, which represents a 7.3-month delay from the previously accepted date of August 9, 2023, and an 8.5-month delay from the original date of July 3, 2023. The delays arose due to the Coronavirus Disease (COVID-19) pandemic, replacement of non conforming girders, and other construction delays in bridges and retaining walls. SBCTA has not accepted the extended date and is working on implementing opportunities for schedule recovery, and estimates the project could be completed by January 2024. Despite the construction delays, DBRS Morningstar notes that the debt servicing is less affected by delays in construction because the TIFIA repayment starts only 4.4 years after the substantial completion deadline date, and the construction phase security is considered strong.

Traffic on the corridor, which was affected by the pandemic, has recovered to near pre-pandemic levels. In the first four months of 2023, traffic volumes in sample sections were 96% of the traffic volumes in the same period in 2019. DBRS Morningstar has not received a revised traffic forecast by the Traffic & Revenue (T&R) forecaster, which is expected only after the project is completed. The revised forecast is also expected to factor in the longer-term impacts from permanent work-from-home policies, which are still unfolding. The lower interest rates under the 2021 TIFIA Loan, compared with the previous financing, provide greater ability to withstand traffic shocks, with a minimum debt service coverage ratio of 1.76 times and a revenue breakeven of 48%. 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 because of the managed-lanes nature of the asset and the forecast financial 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 (May 17, 2022).

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/global-methodology-for-rating-public-private-partnerships; August 30, 2022).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 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.

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.

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