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2/10/2009
Fitch Goes Negative on California Toll Roads
Record low traffic levels call into question the financial viability of Orange County, California toll road projects.

Transportation Corridor Agencies
A major credit rating agency sees grim times ahead for toll road operators in Orange County, California. Earlier this month Fitch Ratings downgraded to "negative" its assessment of one of tolling projects operated by the publicly run Transportation Corridor Agencies (TCA). In reaching this conclusion, Fitch considered the performance of the Foothill/Eastern Corridor (F/ETCA) toll roads -- Routes 241, 161 and 133 --which stretch twenty-four miles from Yorba Linda to Rancho Santa Margarita and Irvine.

"The Negative Outlook reflects the significant economic weakening of the F/ETCA's service area and resulting declines in traffic and revenue," the ratings report explained. "If weak economic conditions are prolonged, the lower base of traffic could make the F/ETCA much more dependent upon frequent toll increases at or above inflation to meet growing debt service obligations.... Debt service obligations on the facility are scheduled to increase by over 11 percent between fiscal 2009 and 2010, and by 47 percent from fiscal 2009-2015."

Orange County has been harder hit by the economic downturn than most other parts of California. The county's 1.8 percent loss in employment and and a 30 percent drop in housing prices both far exceed statewide averages. That hardship has translated into fewer motorists willing to pay to use the TCA's toll roads.

Traffic dropped 4.2 percent on the 241/161/133 corridor during fiscal 2008. The first half of fiscal 2009 saw an additional 7.9 percent decrease. Fewer paying customers meant a 3.8 percent revenue loss in fiscal 2008, a gap which widened 8.3 percent in the first half of fiscal 2009. Although average annual toll hikes on the corridor have been kept to just 2.1 percent, that amount is planned to jump to 7.6 percent between now and 2016. The fear of revenue loss has also created a financial incentive for public officials to ensure congestion is maintained on the nearby Interstate 5 freeway.

"The rating also incorporates the significant leverage on the project with... the need for continued traffic and revenue growth, and the vulnerability of the facility to prolonged adverse developments or capacity enhancements on competing free facilities such as I-5," Fitch noted.

The other project maintained by TCA is already rated at "BB" or junk bond status for $226 million in senior lien toll road revenue bonds covering the San Joaquin Hills Toll Road. This road, known as Route 73, stretches 17 miles from Costa Mesa to Mission Viejo. Fitch gave Route 73 a stable outlook because of the TCA's willingness to overlook the needs of the motoring public.

"The 'BB' rating reflects the strength of the SJHTCA's service area, an established base of traffic, and management's demonstrated willingness to raise rates and act in the interest of bondholders," the report stated. "In addition, the rating reflects the future financial challenges faced by the SJHTCA which are evidenced by high leverage and a continually increasing debt service schedule with a $15 million or 16 percent increase in debt service obligations in 2012, and similar increases every three to four years until 2033. Additionally, the SJHTCA will need to remain at its revenue maximization point for the foreseeable future to prevent a default, thus limiting its ability to deal with short-to-medium term disruptions from economic cycles between now and the final maturity of the debt in 2036."

The TCA toll hikes hit Route 73 travelers ten times for an average annual toll boost of 6.7 percent -- well in excess of inflation. Orange County tolls are already among the most expensive per-mile of any Fitch-rated roads. Despite the higher charge, a 10.2 percent drop in traffic revenue brought revenue down 5.3 percent in fiscal 2009. A continued economic downturn could increase the likelihood of future default.

"In Fitch's base case scenario ... traffic could be expected to continue to grow moderately over time and may very well provide the SJHTCA with enough revenue to prevent a default," Fitch stated. "Even under Fitch's stress case scenario which assumes much lower traffic and revenue growth, a payment default would be forestalled to 2025-2030, with liquidity draws beginning in the next few years."

The best case scenario, however, does not reflect the $120 million in developer fee revenue that must be repaid unless a planned southern extension of the 241 toll road begins construction by 2016. The extension was recently thwarted by anti-road activists who succeeded in convincing the right people that building the new toll road would ruin surfing in the area. Even if environmentalist factions could be satisfied by an alternate route, Fitch questioned the ultimate ability of the toll road agency to fund the new road's construction without massive toll increases well beyond the inflation rate on existing roads.



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