Fitch Affirms & Removes Foothill/Eastern Transportation Corridor CA's Revs from Rating Watch

Fitch Ratings has affirmed the 'BBB-' rating and removed the Rating Watch Negative from the outstanding $179.99 million senior lien series 1995A Foothill/Eastern Transportation Corridor Agency (F/ETCA), CA revenue bonds. The Rating Outlook is Stable.

The series 2013 bonds, which priced on Dec. 12, 2013, restructured all of the outstanding series 1999 bonds but excluded the senior lien series 1995A bonds. The restructuring transaction closed on Jan. 2, 2014. As noted in the Dec. 20, 2013 Fitch Rating Action Commentary, 'Fitch Rates CA's Foothill/Eastern Transportation Corridor Revs 'BBB-/BB+'; Outlook Stable,' Fitch expected to remove the Rating Watch Negative if the restructuring transaction closed successfully.

KEY RATING DRIVERS:

--Traffic Susceptible to Economic Downturns: The facility serves as a highway connection for commuters in Orange and Riverside Counties. Traffic volume has grown marginally over the last decade, partly due to seven mostly above-inflation toll increases since fiscal 2000. Future growth potential, reliant on residential development activity, is limited in part by the narrow corridor in which development can take place. Revenue Risk Volume: Midrange.

--Price-Sensitive Commuter Traffic: F/ETCA has limited economic rate-making flexibility with an average toll rate that is now close to the revenue maximization point. Nevertheless, it is Fitch's view that inflationary increases will become achievable once again over time. A history of proactive decisions by management to raise rates is considered a credit strength. Revenue Risk Price: Midrange.

--Back-Loaded and Long-Dated Debt: The project's debt burden is high. Nevertheless, the restructuring extends final maturity by 13 years and debt service will now grow at a compound annual growth rate (CAGR) of 3.56% (fiscal 2015-2039, the year in which maximum annual debt service [MADS] occurs at $226.7 million). F/ETCA has a fully funded debt service reserve and an additional reserve mechanism that provides some mitigation against the sharply escalating debt service profile. It also provides for further enhancement should traffic or revenue underperform. There are no cross default or acceleration provisions between the senior and junior liens, which protects the senior debt. Debt Structure Risk: Weaker.

--Stable Financial Flexibility: F/ETCA is dependent on continued revenue growth throughout the life of the debt to maintain coverage levels at or above 1.30x. In fiscal 2013, the debt service coverage ratio (DSCR) was 1.17x ignoring the effect of the escrow defeasance fund (EDF). The Fitch base case minimum combined senior/junior lien DSCR is 1.17x in fiscal 2014 and averages 1.37x through 2053 ignoring the use of the EDF. Total leverage is high at 17x.

--Relatively New Asset: F/ETC is less than 15 years old and does not currently have any material state of good repair needs. The state of California's Department of Transportation (Caltrans) has an obligation to maintain the physical assets and a covenant to budget for capital expenditures annually which provides some protection. Importantly, as part of the agreement with Caltrans, F/ETCA is not authorized to toll or operate any segment of the corridor south of the existing terminus (Oso Parkway) beyond Jan. 1, 2040. Infrastructure Development/Renewal Risk: Stronger.

RATING SENSITIVITIES:

--Weaker traffic growth than projected by the traffic and revenue consultant over a sustained period;

--Toll rate increases that are materially below inflation for a sustained period;

--A decision to increase leverage or reduce liquidity to support any extension projects without commensurate financial mitigants;

--Dependence on the EDF for a prolonged period of time to meet the 1.30x/1.15x rate covenants.

SECURITY:

The bonds are secured by a pledge of net toll revenues derived from the operation of the project and certain other pledged revenues such as development impact fees (DIF). F/ETCA has the right to withdraw the first $5 million of DIF amounts collected annually to be used for any lawful purpose, including debt service.

TRANSACTION SUMMARY:

F/ETCA issued $2.08 billion of second senior series 2013A and 2013B term-rate bonds and $198.1 million of junior lien series 2013C bonds with respective 1.3x and 1.15x rate covenants. These bonds refinanced $2.2 billion in outstanding series 1999 bonds; however, the outstanding senior series 1995 bonds will remain in place.

Final pricing for the bonds provided an all-in interest cost of 6.07%, which was lower than expected resulting in slightly lower average annual debt service and MADS costs. These factors result in slightly higher coverage levels, consistent with the rating levels.

For a complete review of Fitch's analysis please refer to Fitch's Rating Action Commentary 'Fitch Expects to Rate CA's Foothill/Eastern Transportation Corridor Revs 'BBB-/BB+'; Outlook Stable dated Nov. 15, 2013, and Fitch's presale report issued on Nov. 21, 2013, both available at 'www.fitchratings.com'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Toll Roads, Bridges and Tunnels' (Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814543

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