KBRA Affirms BBB- Rating for San Bernadino County Transportation Authority’s Toll Revenue Second Lien Obligation, 2021 TIFIA Series
20 Jun 2024 | New York
KBRA affirms its BBB- rating for San Bernadino County Transportation Authority’s (SBCTA) Toll Revenue Second Lien Obligation, 2021 TIFIA Series. The Outlook is Stable.
Key Credit Considerations
(-/+) Further Construction Delays
The sponsor expects the substantial completion date and revenue service commencement date will be reached on August 9, 2024. Due to construction delays, the new expected substantial completion date is exactly one year after the original scheduled substantial completion date (August 9, 2023). Liquidated damages may be payable to SBCTA from the design-build (DB) contractor; the project and construction manager (HNTB) believes this will be addressed as part of claim negotiation.
The delayed revenue service commencement date does not currently impact KBRA’s metrics as interest accumulated from substantial completion of the project will be capitalized until December 31, 2027, when interest and principal payments on the loan will commence.
(-/+) Increase in Project Cost
As of March 2024, total project spending was $828.7 million, with DB contract payments 92.6% complete. The estimated project cost at completion is $963 million, a $14.1 million increase since KBRA last surveillance with information as of April 2023. The funding services aggregating $963 million can be considered reasonably available, with additional funds provided by the Federal Surface Transportation Block Grant Program and from Measure I.
(-/+) Outstanding Balance
As of June 3, 2024, $214.7 million of the TIFIA loan has been drawn after TIFIA Draw No. 22 was submitted on May 15, 2024. The capitalized interest currently amounts to $7.45 million. TIFIA Draw No. 23 for an amount of $3.6 million was just submitted on June 14, 2024, with an expected cash receipt date of July 1, 2024.
(+) Transaction Liquidity
The project benefits from several liquidity sources including performance and payment bonds to cover the DB contractor, each in an amount equal to 100% of the contract price under the DB contract. The transaction benefits from a debt service reserve account (DSRA), which will be funded starting in June 2027 with a target balance equal to one year of mandatory debt service. After substantial completion, the project will also fund operations and maintenance (O&M) and repair and rehabilitation costs.
Rating Sensitivities
A rating upgrade could occur in the event that after operations commence, traffic ramp-up and toll revenues are significantly better than expected and consistently outperform KBRA’s projections.
KBRA may downgrade the rating if construction does not progress according to schedule and the delay in substantial completion impacts the project’s expected financial performance. A downgrade after construction could occur if traffic volumes are significantly lower than KBRA’s projections during the operations phase.
ESG Considerations
Environmental Factors
California has set ambitious goals for carbon reduction, including achieving carbon neutrality by 2045. Traffic on the project corridor is heavily commuter-based; regulation or policies that discourage single-occupancy vehicles typically used by commuters could impact traffic levels and tolling revenues.
Social Factors
The I-10 is a critical link between Los Angeles County, San Bernardino County, and Orange County. Project revenues rely on traffic volumes, which can be influenced by a multitude of social factors including employment levels and household income. The project benefits from a diversified local economy with GDP per capita, median household incomes, and population growth all higher than their respective national averages.
Governance Factors
Funding for the I-10 Express Lanes comes from various state and federal programs. Changes to the regulatory or political environment and related policies and strategies could impact the project or the borrower’s ability to receive further funding at a later date, if necessary. Further, one of the differentiating factors of this transaction compared to similar project financings is that the borrower is not a single-purpose vehicle. Instead, SBCTA is the sole borrower of the transaction, and we view its operational history and position as a public entity as credit positives. Policy changes or a lack of transparency could negatively impact the project.
Rating Rationale
The rating is based on a KBRA Project Risk Score (KPRS) of Average, as well as the project’s ability to meet its debt service obligations under all stress and sensitivity scenarios. The resilience to the stress and sensitivity scenarios, including delays in revenue service commencement, suggests that the project will be able to service its debt, even in the event of a sudden drop in traffic. A KPRS of Average and average aggregate debt service coverage ratios (DSCR) of 1.84x are sufficient to support a BBB- rating on the loan.
Outlook
The Stable Outlook reflects KBRA’s view that the delays in construction and revenue service commencement currently projected should not impact the project’s ability to pay principal and capitalized interest commencing on December 31, 2027. Following construction, KBRA expects actual traffic volume to be in line with its current traffic forecasts. A rating upgrade is unlikely during the construction period. KBRA may lower the rating if construction is delayed further and substantial completion of the project is extended by a significant amount of time, or if traffic volumes are consistently lower than KBRA’s projections during the operations phase.
To access rating and relevant documents, click here.