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Rating Action:

Moody's assigns Baa3 ratings to the Series 2013 first tier toll revenue bonds; third tier Transportation Infrastructure Finance Innovation Act (TIFIA) loan/ subordinate tier BANs of Kentucky Public Transportation Infrastructure Authority; Outlook stable

Global Credit Research - 05 Dec 2013

Ratings apply to $295 million bonds and $452 million BANs/TIFIA loan

New York, December 05, 2013 --

Moody's Rating

Issue: Downtown Crossing Project Revenue Bonds, First Tier Series 2013A (Current Interest Bonds); Rating: Baa3; Sale Amount: $159,610,000; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Issue: Downtown Crossing Project Revenue Bonds, First Tier Series 2013B (Capital Appreciation Bonds); Rating: Baa3; Sale Amount: $67,503,393; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Issue: Downtown Crossing Project Revenue Bonds, First Tier Series 2013C (Convertible Capital Appreciation Bonds); Rating: Baa3; Sale Amount: $73,680,031; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Issue: Downtown Crossing First Tier Revenue Bonds; Rating: Baa3; Sale Amount: $334,624,031; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Issue: Downtown Crossing Project Notes and TIFIA Third Tier Obligation, 2013 Series A (Tax-Exempt); Rating: Baa3; Sale Amount: $424,130,000; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Issue: Downtown Crossing Project Notes and TIFIA Third Tier Obligation 2013 Series B (Taxable); Rating: Baa3; Sale Amount: $28,070,000; Expected Sale Date: 12-11-2013; Rating Description: Revenue: Other

Opinion

Moody's Investors Service assigns Baa3 ratings to the Series 2013 first tier toll revenue bonds; third tier Transportation Infrastructure Finance Innovation Act (TIFIA) loan and subordinate (fourth tier) bond anticipation notes (BANs) of the Kentucky Public Transportation Infrastructure Authority (KPTIA). The rating outlook is stable.

RATING RATIONALE:

A back-loaded and escalating debt structure; untested tolling environment; nearby non-tolled alternatives as well as project complexity in a densely populated area are significant credit risks. The Baa3 rating on the first tier bonds is based on forecasted debt service coverage ratios (DSCRs) well above 2 times even on a Moody's sensitivity case; substantial mitigation of construction risks through a fixed-price design-build contract and expected financial and management support by the Kentucky Transportation Cabinet (KYTC), including replenishment of prefunded operating and maintenance reserves, and a guarantee of certain construction costs, if needed. The need for the project as a capacity/congestion reliever and safety enhancer on essential interstate highways; Federal Highway Administration (FHWA) approval and support evidenced by a TIFIA loan commitment are credit strengths as is an adopted toll policy that increases toll rates annually by the greater of rate of inflation as measured by CPI or 2.5%.

While there is a larger amount of debt at the third and fourth tiers, and aggregate DSCRs are lower, the Baa3 for the subordinate tier BANs and the third tier TIFIA loan incorporates the ascension (springing lien) of TIFIA loan lien to parity with first tier bonds in the event of a narrowly defined bankruptcy-related event that includes two consecutive missed interest payments. The ability of the TIFIA loan to become parity with the senior debt in the event of insolvency or bankruptcy would narrow the loss given default differential between the senior debt and TIFIA loan. The TIFIA loan also has a dedicated debt service reserve fund (DSRF) comparable to that of first tier bonds. The TIFIA DSRF is funded up front with taxable BAN proceeds equal to the first two TIFIA loan repayments with a fund-up to MADs on a 5-year look forward basis.

The FHWA is providing a $452 million TIFIA loan to the authority for eligible project costs. The authority is issuing the BANs to advance the project construction and expects to fund the notes at maturity with proceeds of the TIFIA loan. It is the authority's stated intention under the authorizing resolution to fund the BANs at maturity on July 1, 2017 with proceeds of a single draw on the loan, though the authority could draw the loan earlier for reimbursement of any eligible project costs. Once executed, the loan is a contractual obligation of the FHWA and is not subject to reauthorization or annual appropriation by the federal government. We note that the contractual obligation of the Federal Highway FHWA under the TIFIA program, while strong, is not a legal pledge to fund the BANs at maturity and so we assign the same rating to the BANs as we do to the TIFIA loan.

We view the willingness and ability of the FHWA to make direct loans to borrowers under the TIFIA program as strong. Funding for the TIFIA program itself was increased in the most recent two-year highway program authorization. TIFIA direct loans represent very strong commitments of the FHWA, since an executed direct loan agreement results in the immediate obligation of the requisite budget authority. While the conditions precedent to the loan disbursement from TIFIA to the authority are fairly standard and generally mirror the terms of the bond resolution that governs the bonds, these conditions introduce some risk to disbursement of the loan proceeds and include the acceptance of the project base case financial model by TIFIA (which is a condition of the loan commitment); continued development of the project; no events of default; a limit on the loan to not exceed 33% of eligible project costs and the maintenance of two investment grade ratings on the first tier lien obligations.

STRENGTHS

*Multiple facilities provide revenue diversity. The existing I-65 Kennedy Bridge has a dominant share of bridge crossings and the new DC will provide significant time savings versus non-tolled alternates

*Established history of non-tolled traffic for the DC though none for the EEC

*Satisfactory base case forecasted aggregate DSCRs on both a gross and net basis, as stressed by Moody's

*Strong security provisions for senior bonds include multiple reserves; standard rate covenants and additional bonds tests, but based on gross revenues

*KYTC has the flexibility to shift resources from its road maintenance budget for any road or bridge project, including the DC before any appropriation is requested. KYTC's funding commitments are a small share of its federally funded transportation program

*Construction risk is significantly mitigated by a fixed price, design-build contract with liquidated damages and a high quality payment and performance bond that covers 100% of the contract value for one year beyond project completion

*Construction is ahead of schedule with 60% design complete and 15% of construction complete

*Committed TIFIA funding for 33% of eligible project costs

CHALLENGES

*Significant traffic and revenue forecast uncertainty over user willingness to pay tolls given no history of tolling in service area. Adjacent free alternative to DC and nearby I-64 bridge, adds to traffic forecasting risk

*Construction staging in a densely developed area in and around downtown Louisville makes this project more complex than average

*Construction related risks remain for non design-build components and remaining right-of way acquisition and unknown/undocumented utility and environmental conditions could delay design-build components and place pressure on contractor

*New and complex project management and governance structure and project revenue and operating sharing agreements between two states is as yet untested, though responsibilities are clearly apportioned in legal agreements and project documents

*KYTC will seek an appropriation on each and every occasion when appropriations bills are prepared for introduction in the General Assembly, though lease rental payments for O&M can be made from ample resources of KYTC, which mitigates appropriation risk

*Debt service is escalating and principal repayment is back-loaded

*Adjacent free alternative to Downtown Crossing; though no reasonable alternative to EEC

*A small legal challenge remains unsettled, though the authority does not consider it material to project completion

*Toll system integrator/operator is not yet selected, but a request for proposals has been issued with selection expected in the Spring of 2014

OUTLOOK

The outlook is stable through the construction period based on our expectation that the project will remain on schedule and within budget.

What Could Change the Rating - DOWN

The rating would be pressured down if the construction budget and contingency is exceeded or if the project completion is significantly delayed. Once operational the rating could go down if traffic and revenue underperforms the forecast.

What Could Change the Rating -- UP

The rating is not expected to increase through the construction period and the subsequent three year traffic ramp up period.

The principal methodology used in this rating was Government Owned Toll Roads published in October 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 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.

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

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.

Maria Matesanz
Senior Vice President
Public 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
Public 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 assigns Baa3 ratings to the Series 2013 first tier toll revenue bonds; third tier Transportation Infrastructure Finance Innovation Act (TIFIA) loan/ subordinate tier BANs of Kentucky Public Transportation Infrastructure Authority; Outlook stable
No Related Data.

 

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