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Announcement:

Moody's affirms Toll Road Investors Partnership II's underlying rating of Ba1; outlook remains negative

07 Nov 2012

Approximately $1.01 billion of debt affected

New York, November 07, 2012 -- Moody's Investors Service has affirmed the Ba1 underlying rating on the Toll Road Investors Partnership II LP's (TRIP II, or the project) Dulles Greenway Project Revenue Bonds. The rating outlook is negative.

RATINGS RATIONALE

The Ba1 rating reflects the essential service the road provides by connecting Loudoun county to Washington DC, the growing service area and high resident income levels that should support some traffic growth and toll increases over time; the Virginia State Corporation Commission's (SCC) continuous support for toll increases that are at least on par with economic growth; the project's flexible debt service schedule and strong liquidity. The Ba1 rating also reflects the project's significant underperformance compared to original traffic and financial projections; the highly leveraged structure resulting in poor financial metrics; the possible public opposition to future rate increases given the already expensive tolls, and our expectation that the project will be unable to meet future total debt service requirements through toll increases alone.

TRIP II's bonds are rated Baa2 based upon the financial strength of the insurer, National Public Finance Guarantee (NPFG, rated Baa2, formerly MBIA).

The negative outlook reflects the expectation that traffic may continue to experience additional declines given the federal government cuts and budget uncertainties that may affect the Washington DC service area. The negative outlook also reflects our expectation that financial margins will continue to tighten as debt service escalates at a higher rate than revenue growth.

The project has experienced a continuous trend of decline since 2005 with an annual average rate (AAR) of 4.5% through 2011. Though recent traffic performance has seen the lowest declines since 2005, traffic does not seem to have recovered yet. Average daily traffic declined an additional 2.5% in 2011 and growth as of September 2012 has been flat with a minor increase of 0.4%. The extent of any recovery in the Dulles Greenway's traffic in the near-term is difficult to predict given the budget uncertainties on the service area economy. While the Washington DC service area has experienced a modest recovery from the economic recession, recovery may stall as a result of the spending reductions Congress put in places in 2011, including federal job losses and reduced military spending. Loudoun County is an affluent service area and has and is expected to continue experiencing significant housing growth. Though in the longer term, this growth should translate into additional demand, the Dulles Greenway has largely underperformed original traffic projections, making it difficult to predict the extent to which housing growth will continue to support traffic growth in the near-term.

The effect of TRIP II's poor traffic performance on its financial performance is currently mitigated through annual toll increases, a flexible debt service schedule, and strong liquidity. However, the benefit of these strengths will deteriorate without recovery in traffic in the near-term.

Unlike traffic, TRIP II's total revenues have increased at an average annual rate of 6.6% since 2005, reflecting the benefit of annual toll increases since 2005. We expect the benefit of toll increases will be more limited going forward. First, up until 2012, the project had benefited from rate increases higher than economic growth as approved by the Virginia SCC, the entity that grants the project the right to operate in the state. Starting in 2013 however, the increases will be limited to grow at the greater of CPI +1%, GDP or 2.8%,until 2020, at which time, the state will revisit the toll structure. Second, the road is currently one of the most expensive in the US, with an average rate per transaction of $4.25 in 2012 or 30.3 cents per mile compared to the adjacent Dulles Toll Road's average rate of $2.00 or 14.3 cents per mile. Though the SCC has demonstrated continuous support for toll increases, which is a credit positive, the allowance for toll increases after 2020 may be limited by public opposition to significant increases on already expensive tolls.

The project is highly leveraged with negative FFO/debt, per Moody's calculations, as of 2011, but also benefits from flexibility in its debt service schedule. Debt service is growing at higher rates than revenues. Total debt service in 2011 ramped up by 27% while cash flows available for debt service grew only by 9.8% not including the one-time payment of $2 million the Partnership made to its former operator AIV following its termination of its operation and maintenance agreement. As a result, the debt service coverage ratio (DSCR) of total debt service in 2011 dropped to 1.16 times from 1.34 times in 2010. Total debt service will grow 13% in 2012 and 7% from 2013-2015, which are rates higher than historical revenue growth. As a result, financial margins will continue to tighten if revenue growth cannot keep up with the project's growing debt service requirements.

The projected tightening of financial margins is mitigated by the project's flexible debt service structure, which enables the project to postpone a portion of its debt service obligations. Debt service in 2011 totaled $44.3 million, of which amount $29.1 million was mandatory. The remainder constituted scheduled early redemptions, which TRIP II is only required to make to the extent sufficient excess cash flow is available. Mandatory DSCR in 2011 was1.77 times in contrast to the 1.16 times DSCR of scheduled debt service. To date, the project has met its total scheduled debt service requirements. Additionally, as of February 2012, the project has made early retirements of its 1999B bonds totaling $63.5 million using $34.3 million of surplus cash in its Early Redemption Reserve Fund. This deleveraging measure will have a significant impact in relieving pressure on margins by reducing debt service during 2018 to 2021 though limited to only those years. The flexible debt service structure and recent 3-year reduction in leverage continue to support the Ba1 rating.

The tightening of financial margins is also mitigated by strong liquidity. The project benefits from debt service and early redemption reserves equal to maximum annual debt service and 50% of maximum annual debt service respectively. As of February, 2012, the project holds $39.7 million in the Senior Debt Service Reserve and $42.4 million in the Early Redemption Reserve Fund. This provides a total coverage of approximately 1.5 years of the scheduled debt service and 2.5 years of the mandatory debt service obligations from 2013 to 2015. Other reserves include an operating reserve funded at 50% of next year's costs and an improvement fund currently holding $6 million.

What Could Change the Rating --UP

While the rating is currently well-positioned, the outlook coulde be revised to stable from negative if sustainable growth in traffic resumes within the next 12 to 18 months. Longer term, stronger traffic and revenue growth that improves DSCR of both mandatory and scheduled debt service could exert upward rating pressure.

What Could Change the Rating-DOWN

TRIP II's rating could face downward pressure if traffic declines continue over the near term.

TRIP II is a special purpose company that owns a concession to operate the Dulles Greenway, a 14-mile long toll road extending westward through Loudoun County, VA (rated Aaa) from Dulles Airport to the Town of Leesburg (rated Aa1). TRIP II was acquired by Macquarie Infrastructure Group in September of 2005.

The last underlying rating action was on June 27, 2011 when the rating was downgraded to Ba1 from Baa3 for TRIP II's Series 2005 and 1999 Bonds and the rating outlook was maintained as negative.

The principal methodology used in this rating was Operational Toll Roads published in December 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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.

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.

Maria Matesanz
Senior Vice President
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's affirms Toll Road Investors Partnership II's underlying rating of Ba1; outlook remains negative
No Related Data.
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