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Rating Action:

Moody's downgrades Toll Road Investors Partnership II's rating to Ba1 from Baa3; outlook remains negative

27 Jun 2011

$972 million debt affected

New York, June 27, 2011 -- Moody's Investors Service has downgraded to Ba1 from Baa3 the underlying rating on the Toll Road Investors Partnership II LP's (TRIP II, or the company) Dulles Greenway Project Revenue Bonds. The rating outlook is negative. The downgrade is based on continued traffic declines, continued financial metric deterioration, weaker competitive position due to increasingly expensive tolls, and our expectation that the company will be unable to meet future minimum and total debt service requirements through toll increases alone. These negatives are countered by strong liquidity, a growing service area and high resident income levels that should support some traffic growth and toll increases over time. TRIP II's bonds are rated Baa1 based upon the financial strength of the insurer, National Public Finance Guarantee (NPFG, rated Baa1, formerly MBIA).

The negative outlook reflects the expected continuing trend of traffic decline over the near term given an uncertain economic recovery and rising gas prices. A secondary consideration is the on-going litigation and claim for damages by the former operator, Autostrade International of Virginia (AIV), whose contract was terminated on May 5, 2010.

Traffic has continuously declined since 2005 by an annual average rate (AAR) of 4.9% and it is down an additional 2% through April 2011 compared to the same period in 2010. While traffic has declined, overall revenues have continued to increase thanks to several toll increases. However, the pace of this revenue growth has slowed significantly since 2007 and has not kept up with increases in debt service, resulting in year-over-year weakening of the minimum required debt service coverage ratio (DSCR). In contrast, from 1999 to 2005, traffic grew at an AAR of 12.4%.

Scheduled debt service coverage declined to a relatively narrow 1.17 times in 2008, and then rose to 1.36 times in 2010 due to toll rate increases in January 1, 2009 and July 1, 2010. Another toll rate increase is schedule for January 1, 2012. While mandatory debt service coverage remained stronger at 1.72 times in 2010, mandatory coverage also has declined significantly from 2.65 times in 2006. Though failure to make the early redemptions does not constitute an event of default, to the extent they are not made the debt will continue to accrete interest, making future debt service requirements that much more onerous. Moody's notes that mandatory and scheduled debt service are heavily back-loaded, increasing to approximately $81 million by 2034 from $44 million in 2011. Failure to keep up with early redemptions for four consecutive years triggers an insurance event of default, but this carries no consequences until 2036, when the bond insurer has the right to accelerate the debt.

The impact of recent traffic declines is mitigated somewhat by the significant flexibility built into TRIP II's debt structure. Debt service in 2010 totaled $34.8 million, of which amount $27.6 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. These early redemptions are, however, included in the calculation of the minimum debt service coverage ratio (DSCR), which must be met in order to allow excess cash to be transferred to the company.

As a result of its deteriorating financial performance, the project failed to meet its restricted payments test in 2008 and all excess cash flow has been subject to lock up since then. While coverage in 2009 and 2010 passed the test, excess cash is not released until the project complies with the test for at least three consecutive years. As of December 31, 2010 the company had $15.3 million in the Early Redemption Fund; $75.2 million in the Early Redemption Reserve and well as $39.7 million in a cash-funded Debt Service Reserve Fund (DSRF) and a $45 million DSRF surety with NPFG.

Though the project has received regulatory approval for a series of additional toll increases through 2020, Moody's believes that the ability to continue to grow revenues through toll increases may be diminishing due to increasing elasticity of demand. The road is currently one of the most expensive in the US, with an average rate per transaction of $3.73 in 2010 compared to the adjacent Dulles Toll Road's average rate of $0.85. In 2006, the average toll increased 29% and revenues increased 22%. Despite an average toll increase of 21% in 2009, revenues only increased by 13% due to a 6.5% decline in traffic. . In 2010 the average toll increase of 6% yielded only a 2% revenue increase. As a result, the project may be challenged to meet its growing debt service requirements if traffic growth does not resume natural growth shortly.

TRIP II's rating could face downward pressure if traffic declines continue over the next couple of years. . Since the 6% toll increase in 2010 contributed to a 4% drop in traffic, Moody's expects the scheduled toll rate increase in 2012 to result in a 3.5% traffic decline. Moody's assumptions result in a 1.06 times scheduled DSCR in 2012 (1.68 times mandatory). While the rating is unlikely to be upgraded in the near-to-medium term, the outlook could be revised to stable if growth in traffic resumes within the next 18 to 24 months and remains sustainable over the longer term.

The last underlying rating action was on September 9, 2009 when the Baa3 affirmed for TRIP II's Series 2005 and 1999 Bonds and the rating outlook was revised to negative.

The principal methodology used in rating this issuer was "Operational Toll Roads" published in December 2006.

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.

Regulatory Disclosures

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

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

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

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Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Maria Matesanz
Senior Vice President
Project Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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 downgrades Toll Road Investors Partnership II's rating to Ba1 from Baa3; outlook remains negative
No Related Data.
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