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Rating Update:

MOODY'S AFFIRMS EAGLE PASS INTERNATIONAL TOLL BRIDGE SYSTEM'S (TX) SENIOR LIEN Baa1 REVENUE BOND RATING; ASSIGNS STABLE OUTLOOK

24 Sep 2010

Baa1 RATING AFFIRMATION AFFECTS $10.9 MILLION IN OUTSTANDING PARITY RATED DEBT

Eagle Pass (City of) TX
Toll Roads
TX

Opinion

NEW YORK, Sep 24, 2010 -- RATINGS RATIONALE

Moody's Investors Service has affirmed the City of Eagle Pass International Toll Bridge System's (TX) Baa1 senior lien revenue bond rating, affecting approximately $10.9 million of outstanding rated debt. A stable outlook has also been assigned. The affirmation of the Baa1 rating reflects the multi-asset regional bridge system that primarily serves as a border crossing for regional residents, as well as a notable international commercial trade component. The rating also factors the system's maintenance of strong financial metrics despite annual transaction declines over the last five years due to the weak regional economy. These financial margins are expected to remain strong given the city's dependence on the annual transfer for one-third of its budget and legal protections that help preserve internal liquidity, yet the margins may narrow some given the lack of transaction growth and the unlikelihood of a toll increase in the current economic climate.

LEGAL SECURITY:

The bonds are secured by a net revenue pledge of toll revenues with a 1.25x annual debt service rate covenant and a 1.4x average annual debt service additional bonds test. The debt service reserve fund requirement of average annual senior lien debt service was originally surety funded and is currently about one-third cash funded. The system is in the process of funding the remainder with monthly cash additions to meet the reserve requirement by 2017 and utilize those funds to retire the debt in 2018. The system is required to maintain a renewal and replacement account at $500,000 and an operating and maintenance reserve account at a minimum of 30% of system operations and maintenance expenses for the current fiscal year. The system has an open loop flow of funds and transfers excess revenues to the city on a monthly basis, though transfers are subordinate to debt service.

INTEREST RATE DERIVATIVES: None

Outlook:

The stable outlook reflects our belief that the toll system will continue to maintain its financial metrics given the city's dependence on the bridge system for annual operating support, so timely toll rate increases and healthy debt service coverage are expected to continue despite potential future traffic declines.

What could move the rating up:

Traffic growth resulting in stronger and sustained debt service coverage levels and an significant increase in market share relative to free alternatives

What could move the rating down:

Continued traffic declines or loss of market share that narrows debt service coverage and weakens the system's liquidity

Strengths:

*Debt service coverage has averaged 4.7x since the original debt issuance and is expected to continue to be strong due to the city's reliance on an annual transfer to support about one-third of its operations

*Strong liquidity with over 500 days cash on hand bolstered by legal requirement to maintain 30% O&M reserve

*The two bridges have solid highways on both sides of the border to help induce future trade activity

*Strong management team has improved operational efficiencies and proactively seeks new commercial business

*Eagle Pass (GO rated A2/positive outlook) has the only legal gambling casino in the state of Texas, a regional attraction for Mexican travelers

Challenges:

*Toll transactions have declined annually since 2005 with a 7% decline in 2009 and a projected 3-5% decline in 2010

*Near term toll increases may be difficult to pass given the depressed economic environment

*Eagle Pass and Piedras Negras economies remain depressed with low income levels and high unemployment despite modest signs of recovery in Mexico as manufacturing increases

*New US international land crossing identification requirements may limit future transaction growth as the bridges primarily serve local residents

*Trade activity is slowly recovering

*Maintaining the two bridges as they age with annual capital investments

*Debt service reserve requirement one-third cash funded as surety provider was downgraded below investment grade

Recent Developments:

The economic downturn coupled with a new US international land crossing identification requirements and safety concerns related to the drug trade collectively contributed to the overall 6.5% decline in all tolled transactions in fiscal 2009, following a 1.1% increase in 2008. Annual transaction declines have occurred since 2005, -3% CAGR for the last five years, and are primarily related to the weak regional economy marked by high unemployment. Officials report a projected 2% total transaction decline in fiscal 2010 (ends September 30). The majority of the systems revenues (85%) are derived from local non-commercial traffic and pedestrian crossings, while commercial traffic comprises a smaller 15% of annual revenues. In addition, about 60% of revenues come from the downtown non-commercial bridge connecting downtown Eagle Pass with downtown Piedras Negras versus the newer (completed in 1999) commercial traffic focused bridge located half a mile south of downtown. The majority of users live in the Eagle Pass region (57,000 residents) and Piedras Negras (280,000 residents), leaving the system vulnerable to discretionary travel declines, as experienced in recent history. However, in the current economic climate, this user profile resulted in lower reported transaction declines compared to other Texas border crossings that have more commercial traffic bases. Through mid-2010, transactions were down only 5% compared to larger declines of 7.5% at Del Rio (GO rated A1), 7.7% at Laredo (GO rated Aa2), and 16% at Brownsville (GO rated Aa3). As the regional economy slowly recovers, transaction volume may return, but the new US international land crossing identification requirements may temper new growth over time. Some modest signs of recovery have been reported with some manufacturing increases in Mexico and higher than anticipated sales tax figures in Eagle Pass, yet the recovery will be slow.

Given that Eagle Pass primarily serves regional residents, the Del Rio bridge crossing 55 miles north is the primary competition for this traffic segment, and Eagle Pass offers more amenities, including a casino, than Del Rio. Commercial traffic does comprise 15% of Eagle Pass' revenues and the Laredo crossings located 124 miles south are the primary competitors for this traffic segment as the largest land port of entry into the US with more favorable access to San Antonio (GO rated Aaa) via highway 35, yet Eagle Pass is marketing its bridge to commercial operators in Mexico in an effort to divert traffic away from Laredo. Of note, Eagle Pass does provide the most direct route to San Antonio via highway 57, as well as the easiest access to the City of Monclova, Mexico, which has 300,000 metropolitan residents and produces the highest amount of steel in Mexico.

All border crossings reported large declines in fiscal 2009 and continue to experience declines in fiscal 2010. Due to the uncertain economic outlook, management's efforts to control costs and raise tolls will be key to maintaining financial margins in the future. Eagle Pass instituted a weekend nightly toll crossing rate of $3 in November 2009 and doubled the pedestrian crossing rate in 2008 to 50 cents, while the vehicle toll rate was last increased in 2006 by 50 cents. No toll rate increases are expected in the near term due to the depressed economy.

Despite the transaction declines, the system's financial performance has remained solid with debt service coverage averaging a strong 4.8x on a bond ordinance basis (pre city transfer), but a more narrow 1.3x on a net revenue basis (post city transfer) from 2005 to 2009. The system's liquidity has declined by 50% over the last five years from a substantial 1,000 days cash on hand in fiscal 2005 to a still significant 511 days cash in fiscal 2009. Fiscal 2010 (ending September 30) year-to-date performance is about 2% to 3% below budget, but recent increases in commercial traffic may help offset some of the revenue decline. Year-end results are expected to be at or near those of fiscal 2009, and future financial metrics are expected to remain sound given the city's dependence on the system for one-third of its budget. While legally subordinate to debt service, the transfer is made on a monthly basis after the monthly debt service and operating reserve requirements are segregated. Management is working on the 2011 budget and expects to budget toll transactions at the 2010 actual level and a toll increase may occur, but is unlikely in the current environment.

The bridge system has no future debt issuance plans as the two bridges have sufficient capacity for future growth and are subject to ongoing maintenance and capital investments, including the recent completion of a grant/cash funded $4.8 million truck route. The system has applied for a $4.5 million TxDOT grant for general improvements, and will await response before moving forward with any of the non-critical facility upgrades.

KEY INDICATORS

System type: Established, dual-asset system consisting of two bridges in Eagle Pass

FY 2009:

Total toll revenue: $8.1 million

Toll Revenue Growth, FY 2008-2009: -7.3%

Total Toll Transactions: 3.37 million

Transaction Growth, FY 2008-2009: -6.5%

CAGR Toll Transaction Growth, FY 2004-2009: -3.0%

Non-Commercial Vehicle Transactions and Pedestrian Crossings (% of revenue): 85%

Commercial Vehicle Transactions (% of revenue): 15%

DSCR by Net Revenues (post city transfer), Senior Lien (5 year average): 1.23x (1.3x)

DSCR by Bond Ordinance (pre city transfer), Senior Lien (5 year average): 4.38x (4.8x)

Days Cash on Hand (5 year average): 511 (713)

Debt Ratio: 46.7%

OUTSTANDING DEBT

$10.86 million Senior Lien Revenue Bonds - rated A3

ISSUER CONTACT

Gloria Barrientos, Finance Director - 830-773-1111 ext. 7401

The principal methodology used in rating Eagle Pass Toll Bridge System, TX was State and Local Government-Owned Toll Facilities in the United States rating methodology published in March 2006. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Analysts

John Medina
Analyst
Public Finance Group
Moody's Investors Service

Maria Matesanz
Backup Analyst
Public Finance Group
Moody's Investors Service

Chee Mee Hu
Director
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS EAGLE PASS INTERNATIONAL TOLL BRIDGE SYSTEM'S (TX) SENIOR LIEN Baa1 REVENUE BOND RATING; ASSIGNS STABLE OUTLOOK
No Related Data.
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