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TEXT-Fitch affirms Regional Transportation District, Colo. bonds
July 25, 2012 / 4:52 PM / 5 years ago

TEXT-Fitch affirms Regional Transportation District, Colo. bonds

(The following statement was released by the rating agency)

July 23 - Fitch Ratings affirms the ‘BBB-’ rating on approximately $398 million in tax-exempt private activity bonds (PABs), series 2010 issued by the Regional Transportation District (RTD, or the district) on behalf of Denver Transit Partners, LLC (DTP, or the concessionaire). The Rating Outlook is Stable. The proceeds of the series 2010 bonds were loaned to DTP to pay a portion of costs of the Eagle Project through a public private partnership to design, build, finance, operate and maintain (DBFOM) the project. The Eagle Project is part of the district’s broader transportation capital program called FasTracks. KEY RATING DRIVERS --Availability Payment: DTP’s cash flows are predictable due to a fixed and indexed availability payment structure from an investment grade grantor (RTD, a regional transportation entity) which is not a constraint on the project’s rating. The availability payment deduction regime provides an incentive to the operator to provide adequate service and limits termination of the agreement to severe underperformance. Bondholders are not exposed to patronage risk. --Operating Expenses Passed Through Via Contract: Back-to-back pass through of operating expenses to investment grade contractor. The contracts mature four years after debt maturity. --Moderate Debt Structure: The bonds are fixed-rate and mature in 2041. The debt service profile slightly rises over time but no refinance risk exists. The debt service reserve fund (DSRF) is low (equal to six months principal and interest). However, the DSRF was funded at financial close and is available through the life of the debt. Equity is locked up if the DSCR or the loan life coverage ratio (LLCR) falls below 1.10 times (x) and 1.20x, respectively. --High Leverage and Thin Debt Service Coverage Ratios: High leverage with a debt to equity ratio of 88%/12%. Relatively narrow debt service coverage of total obligations if performance and availability deductions are not passed to the operating and maintenance (O&M) operator. --Provisions For Hand Back: The project looks forward five-years to budget for renewal and has a reserve for lifecycle costs. --Adequate Construction Package: Experienced counterparties with fixed-price back-to-back design-build (DB) and operating contracts through the life of the concession (2044); a strong construction package with sufficient mitigants provided by the DB contractor, including a liability cap on damages of 45% of total construction costs backed by joint and several performance and financial guarantees from qualified counterparties including Fluor Corp. (rated ‘A-’ by Fitch) and Balfour Beatty plc; and liquidated damages sufficient to cover delay costs through the concession long-stop date equal to an 18-month delay that will be partially supported by a letter of credit (LOC) equal to 6% of the DB contract sum. The construction period is long which requires interaction with two class 1 railroads, integration with the RTD’s existing system, and ongoing work at Denver Union Station (DUS) but the scope of construction does not involve significant tunneling, seismic retrofitting, or substantial relocation of existing utilities. WHAT COULD TRIGGER A RATING ACTION --Failure of DTP to receive a relief event or uncompensated damages related to vacant possession of land and grantor proposed scope changes. --Disputes related to right-of-way, vacant possession, or other design and construction delays that remain unresolved for the next six months. --Unsuccessful completion and integration of the Eagle Project on time and within budget. --Significant payment deductions during the construction and operating phases that reduce coverage levels below current projections for a sustained period. --Operating and capital expenditures during the operational period significantly higher than projected. SECURITY The PABs are secured by the base annual service payment (or availability payment) made by the RTD which is derived from sales tax revenues and is subordinate to the RTD’s outstanding senior and FasTracks bonds and other required deposits. This payment source is voter approved and included in Colorado’s Tax Payer Bill of Rights, or TABOR. In addition, the payment source is not subject to any appropriation risk of the RTD. The base annual service payment is projected to cover annual debt service at a minimum of 1.38x and will be subject to DTP making the system available for use. The bonds are expected to mature on Jan. 15, 2041, four years before the expiration of the Concession Agreement (CA). CREDIT UPDATE The Phase 1 notice to proceed (NTP) was given at financial close. In addition, after the $1.03 billion full funding grant agreement award was announced, the Phase 2 NTP was provided as of Aug. 31, 2011, well before the Dec. 31, 2011 deadline per the CA. Currently, ROW acquisition and a significant RTD proposed change (RPC) are primary concerns for the project. As of March 2012, the CA required 79% of closings to have occurred compared to actual closings of 36%. The CA includes provisions for any delay in granting vacant possession beyond certain specified time limits to result in a relief event for DTP and a payment by RTD. However, RTD and DTP have yet to agree whether these qualify. Meanwhile, RTD submitted an RPC as a result of re-design suggestions by the city and county of Denver (CCD) and Denver International Airport (DIA) including several grade separations, installation of double track where currently only single track is contemplated, and bridge widenings. These changes affect a large portion of the design in an area where DTP had scheduled to start significant field operations and would cause both operating and maintenance costs and the service payment to increase. These issues, left unmitigated, would have materially delayed the project in terms of cost and schedule. As a result, DTP and RTD agreed to re-plan and re-design the project to substantially mitigate schedule impacts and have essentially agreed upon a revised baseline schedule (RBS). The revenue service target dates are still expected to occur in 2016 but are delayed by three to four months: the East Corridor (April 22 from Jan. 29), Northwest Electrified Segment (NWES; July 25 from March 31), and Gold Line (Oct. 26 from July 1). Given the RBS, the design of the Eagle Project was approximately 93% complete in June 2012 and is now on track for an August 2012 completion date, delayed from the original December 2011 date. Should these or future delays begin to materially affect the cost to DTP or significantly impact construction and thus receipt of timely service payments, the rating could be pressured. The CA was executed on July 9, 2010 and financial close occurred on Aug. 12, 2010. The CA has allocated project risks between the RTD and the concessionaire, assigning the RTD the responsibility to provide the concessionaire with vacant possession of each section of the project sites. In addition, the RTD is responsible for providing DTP with rights of access, which encompasses easements, and ROWs over and across public and private roadways, streets, and highways located on the project site. The Eagle Project forms a critical part of the RTD’s FasTracks plan which was approved by voters in 2004 and includes the DBFOM of the East Corridor, Gold Line, and Commuter Rail Maintenance Facility (CRMF), and a section of the Northwest Electrification Segment (NWES). The scope of the project also entails the concessionaire to procure and install several aspects of the DUS segment and dispatch heavy rail movements. However, the project will not share any rail lines with the RTD

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