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Rating Action:

Moody's affirms Toll Road Investors Partnership II, L.P.'s Ba1 rating and stable outlook

29 Apr 2020

New York, April 29, 2020 -- Moody's Investors Service, Inc. (Moody's) has affirmed Toll Road Investors Partnership II, L.P.'s (TRIP II, the project, or the toll road) Ba1 underlying rating on about $1.1 billion of outstanding long-term senior unsecured bonds. The rating outlook is stable.

RATINGS RATIONALE

The affirmation of the Ba1 rating with a stable outlook reflects TRIP II's very strong liquidity profile and project finance structural protections, including the advance collection of the following year's debt service payments, which lowers the credit negative impact of the severe drop in traffic and revenue we expect in 2020 and 2021 owing to the coronavirus. The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The toll road sector has been significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand. Moody´s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. As a result of the epidemic, already existing trends of lifestyle changes may accelerate, such as an increase in remote working and teleconferences that could negatively impact traffic volumes and reduce profits for toll roads.

Under our current base coronavirus case, we expect TRIP II's toll revenues to decline in 2020 by at least 30% compared to 2019 and we expect the lack of toll rate control to result in 2021 toll revenues being about 13% below 2019 levels. Total toll revenues will not return to 2019 levels for several years as long-term traffic and revenue growth will generally track regional economic growth plus an assumed rate of annual toll increases yet to be approved by the Virginia State Corporation Commission (VA SCC). This slow forecast recovery reflects the toll road's historical slow rebound from economic downturns and a potential change in user behavior that could reduce traffic. We expect financial metrics to weaken but remain adequate in 2020 and 2021 owing to the temporary decline in debt service in these years. However, Moody's calculated total debt service coverage ratio (DSCR) reaches a low point in 2022 when a large increase in debt service costs may result in a total DSCR below 1.0x. This forecast shortfall in funds to pay the early redemption portion of debt service due in 2022 will be covered by the large cash balance in the Early Redemption Reserve Fund which is then replenished in subsequent years per the cashflow waterfall.

The forecast maintenance of very strong project level liquidity for much longer than originally forecast helps offset the increased risk associated with lower forecast annual DSCRs we now expect for several years. These lower DSCRs reduce the toll road's resiliency to future toll revenue declines, but the strong indenture required liquidity balances ensure more than enough funds remain available to cover these shortfalls. The high amount of locked-up equity earnings provides a strong incentive for the owner to continue to operate the asset efficiently over the long-term, including funding future capital investments, while working cooperatively with all stakeholders.

A key consideration in the sustainability of the Ba1 rating is the expectation that the VA SCC will approve about half of TRIP II's pending request for a multi-year toll rate increase from 2021 to 2025, in line with recent history of about 2.9% annually. While there is some elasticity to higher toll rates for some users, several wealthy users have a very high value of time and will continue to use the toll road regardless of the higher toll rates. If the VA SCC does not approve future toll rate increases in line with current expectations, credit quality will be negatively affected over the long-run, and the rating could be downgraded. Owing to the lack of expected strong traffic growth over the long-term, the credit supportiveness of the VA SCC remains fundamental to the direction of the rating moving forward.

The rating also recognizes some standard project financing features including trustee held security and administered cash flow waterfall, typical ring-fencing provisions, a debt service reserve fund sized at maximum annual debt service (MADS), and limitations on business activities, additional indebtedness, and distribution of excess cash flow. Some stronger features include the multiple additional operating and capital improvement funds, the flexible debt service repayment schedule, the additional Early Redemption Reserve Fund Requirement sized at 50% of MADS, and a modified cash sweep whereby cashflows are collected and separated into separate debt service account in advance of their payment dates to ensure adequate funds are available to fund the larger debt service payments when due in February of each year.

Rating Outlook

The stable outlook reflects our expectation that the toll road will maintain higher project level liquidity owing to non-compliance with the two required equity lock-up tests for several years while traffic, revenue and financial metrics slowly recover but remain narrow for many years post the coronavirus.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that Could Lead to an Upgrade of the Rating

• Materially higher than forecast traffic rebound and annual growth post the coronavirus

• Higher than expected toll rate increases or early deleveraging results in higher financial metrics than currently forecast with total DSCRs over 1.5x and FFO to debt over 10%

Factors that Could Lead to a Downgrade of the Rating

• VA SCC approves a toll rate increase that is well below currently forecast expectations or in the extreme, denies a toll rate request

• Traffic recovery post the coronavirus is weaker than expected resulting in total DSCRs below 1.0x for several years requiring higher and continual use of liquidity

• Unexpected high capital reinvestment requirements

Profile

Toll Road Investors Partnership II, L.P. (TRIP II) is a special purpose company that has the right to develop, construct, own and operate the Dulles Greenway, a 14-mile long toll road extending westward through Loudoun County, VA (Aaa, stable) from Dulles International Airport to the Town of Leesburg, VA (Aaa, stable), and to charge and retain tolls pursuant to a Certificate of Authority granted by the Virginia State Corporation Commission, which currently expires on the earlier of the final payment of the bonds or ten years after the last maturity date. Atlas Arteria (ALX) holds 100% of the economic interest in TRIP II and is publicly traded on the Australian Securities Exchange.

Rating Methodology

The principal methodology used in these ratings was Privately Managed Toll Roads published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1096736. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

John Medina
VP - Senior Credit Officer
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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