Fitch Upgrades Orange County Transportation Authority, CA's $187.6MM SR91 Revs To 'A'

Business Wire, May 3, 2006

NEW YORK -- Fitch Ratings upgrades the underlying rating on $187.6 million outstanding Orange County Transportation Authority, CA (OCTA) toll road refunding bonds (91 Express Lanes) series 2003-A to 'A' from 'A-' and $100 million outstanding series 2003-B-1 and B-2 bonds. The series 2003 bonds are insured by Ambac Assurance Corporation, whose insurer financial strength is rated 'AAA' by Fitch. Payments of purchase price on the series 2003 B-1 and B-2 variable rate bonds are secured by a standby bond purchase agreement, issued on a several basis by JP Morgan Chase Bank and Dexia Credit Local, acting through its New York agency, which expires on Nov. 12, 2008. The bonds were sold through negotiation via a syndicate led by Lehman Brothers. The Rating Outlook is Stable.

The upgrade to 'A' reflects traffic and revenue performance well above forecast, the continued economic strength and growth potential of the region, growing liquidity, strong debt service coverage and management's demonstrated commitment to its toll policy. The rating also incorporates the ability to cover maximum annual debt service with current net revenues and minimal dependence on growth to meet future operating, capital and debt service obligations.

In addition, the senior lien prohibits the issuance of additional parity debt and requires all excess funds to be used to repay outstanding obligations and to fund improvements in the corridor. Key credit risks include political risk from very high and rapidly growing toll rates during super peak hours, the construction of additional general purpose lane capacity in the next decade, a fundamental shift in travel patterns between Orange and Riverside counties, and future economic cycles.

Given the growth of congestion in the corridor, the super peak hour toll rate stands at $8.50, nearly double the $4.75 charged in July of 2003, making the 91 express lanes the most expensive toll facility in the country at $0.85/mile during the Thursday and Friday evening rush hour. Such significant toll increases - which are formula driven to maintain free flow conditions - have slowed growth in the super peak hours temporarily by moving traffic to the hours before and after the super peak charge. However, as evidenced by the growing super peak hour toll rate, traffic continues to grow. Fiscal year 2006 traffic and revenue are expected to be 14.5% and 18.6%, respectively, above fiscal year 2005, which saw growth of 13.6% and 20.6%, respectively above fiscal year 2004. Traffic and revenue performance since OCTA's acquisition of the 91 express lanes has been at or above the traffic and revenue forecast used in conjunction with the issuance of the 2003 bonds.

Coverage of debt service by net revenues is expected to be 2.1 times (x) in fiscal year 2006 and is expected to continue growing. The combined level of reserves for debt service, operations, and major maintenance required by the indenture is $38 million. Total reserves equaled $25.3 million as of March 31, 2006, and are expected to be fully funded by fiscal year 2011. In addition, OCTA has established an internal reserve that equaled $3.5 million as of the same date. In Fitch's view, this level of reserves provides a significant amount of financial flexibility to deal with significant capacity expansion or a significant change in economic and travel patterns fundamentals within the region.

The current SR 91 Improvement Plan (the plan) assumes the addition of one eastbound auxiliary lane from SR 241 in Orange County (junction with Foothill/Eastern), to SR 71 in Riverside County, no earlier than 2011, or three years later than originally planned. One additional general purpose lane in each direction is also scheduled to be added, but that date has moved from 2013 to 2015 at the earliest. Environmental approval on constructing the auxiliary lane is expected next year. Given the current schedule for additional capacity, Fitch expects the super peak hour toll rates to continue to climb rapidly over the next several years. The delay in delivering additional capacity has begun to lower the risk of weak performance in 2015 when it is currently scheduled to be constructed.

The express lanes are located in the median of SR91 between the boundary line separating Orange County and Riverside County on the east and the interchange of SR91 and SR55 on the west. In order to relieve traffic congestion and improve commute times in the corridor, the state legislature authorized OCTA's acquisition and the elimination of non-compete provisions in the franchise agreement that precluded important corridor improvements from a public policy perspective. OCTA acquired the franchise from the California Private Transportation Company, L.P. (CPTC) on Jan. 3, 2003. The bonds mature between August 15, 2004 and Dec. 15, 2030. The franchise agreement statutorily terminates after the bonds are paid off or on Dec. 27, 2030, whichever occurs earlier.

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