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Rating Action:

Moody's rates LBJ Infrastructure Group Series 2010 IH 635 Managed Lanes Project Sr Bonds Baa3

28 May 2010

New York, May 28, 2010 -- Moody's Investors Service has assigned a Baa3 rating to the Texas Private Activity Bond Surface Transportation Corporation's $600 million Series 2010 Senior Lien Revenue Bonds (LBJ Infrastructure Group LLC IH 635 Managed Lanes Project). The rating carries a stable outlook. Proceeds of the bonds will be loaned to LBJ Infrastructure Group (the concessionaire), which will use them together with the proceeds of an $850 million TIFIA loan from the United States Department of Transportation to help finance the construction of the IH 635 Managed Lanes Project, pursuant to the concession it was awarded by the Texas Department of Transportation. The bonds will be secured by a senior lien on the project's revenues and the concessionaire's rights under the various project documents, including the comprehensive development agreement (the CDA, or the concession agreement). The TIFIA loan will have a subordinate lien on the same security, except following a bankruptcy related event, in which case the TIFIA lien will spring to parity with that of the senior bonds.

The rating reflects the high level of potential demand for the project, which helps to drive strong forecast financial metrics. The metrics also benefit from the support of the subordinated and backended TIFIA government funding and the relatively high degree of equity contribution. Along with the generally supportive concession terms and strong lender protections, these considerations help to mitigate uncertainty regarding users' appetite for the high projected tolls and the potentially elevated level of traffic and revenue volatility facing the project, as well as leverage that is somewhat higher than that of comparable projects recently rated by Moody's . In addition, the ratings incorporate the proven project delivery and construction expertise of the project's sponsors, manageable construction risk, and strong construction risk mitigants. The stable outlook reflects Moody's expectation that project construction will proceed on schedule and within budget.

The concessionaire is a special purpose entity that has been awarded a 52-year concession by TxDOT to build, finance, and operate the project, the most significant element of which is a 13.25 mile long managed toll lanes facility located immediately adjacent to portions of the existing untolled Interstate Highways 635 and 35E, running west from I-75 northeast of downtown Dallas across I-35 E to Luna Road and south along I-35 E to Loop 12. The project will provide congestion relief for the existing roads and is expected to provide substantial time savings and improved travel time reliability relative to alternatives. The concessionaire will have virtually unfettered discretion to set tolls, subject only to the requirement that traffic continue to flow freely, and it expects to vary toll rates dynamically throughout the day depending on traffic conditions in order to maximize revenues. The project will have a fully electronic open-road tolling system allowing traffic to enter and exit the managed lanes without passing through any toll booths.

The substantial and clearly established pool of potential users provided by existing traffic on the heavily congested I-635 and I-35E supports robust forecast financial metrics. In the sponsors' base case, mandatory debt service coverage is projected to rise rapidly, from a comfortable 2.2x in 2016, the first full year of operations, to 3.0x by the third year, when traffic is expected to be fully ramped up. The ratings also consider the economical diversification and affluence, of the heavily developed, densely populated, and steadily growing service area, which supports robust projected demand for the project. Additionally, lenders will benefit from strong structural protections, including cash funded debt service and major maintenance reserves. This helps to mitigate the high degree of uncertainty surrounding the willingness of users to pay the rates upon which the sponsors' forecasts are based - which are well above those charged by ordinary toll roads -- given the direct competition represented by free limited-access, or general purpose (GP), lanes and new frontage roads running immediately parallel. Moody's notes that managed lane projects have a limited history and the demand for them is highly discretionary, despite the significant portion of existing traffic represented by commuters and other business travelers. Because tolls are expected to rise as traffic increases, and to fall as it decreases, Moody's believes that the project could exhibit a higher degree of traffic and revenue volatility than is customary for ordinary toll roads. Furthermore, there is greater execution risk involved in managing the dynamic tolling system effectively and efficiently, in a manner that maximizes revenues while considering users' desire for cost and time-to-destination certainty. The North Texas Tollway Authority, which will provide toll collection services, is responsible for enforcement and bears all collection risk provided the tolling technology works properly.

Notwithstanding the congestion relief offered by the project, which will increase existing capacity by up to 50% (including the expansion of the frontage lanes), the GP lanes are expected to remain relatively congested, at least during peak periods. However, there is some question regarding how much traffic must switch to the managed lanes in order to provide adequate relief on the GP lanes, especially during off-peak periods. While the backloaded debt service schedule affords significant flexibility in the early years of the concession, it also means that project will have to maintain steady growth in revenues over the longer term in the event that it underperforms initially.

The project's leverage is manageable in Moody's opinion, particularly at the level of the senior bonds, which contribute just 23% of total project costs of $2.6 billion. The high capital costs are significantly offset by a sizeable construction grant from TxDOT, equal to 20% of total costs, in addition to an equity contribution from the project's sponsors that exceeds senior debt. Cintra, the project's primary sponsor, is a highly experienced toll road developer and operator. The project also benefits from a strong construction risk mitigation package, including a fixed-price, date-certain design build contract with a subsidiary of a highly reputable and experienced construction firm (a sister company of the lead project sponsor) with meaningful damages and a large payment and performance letter of credit. While the work is not overly complex from a technical perspective, it does entail significant challenges related to traffic management and staging given the high levels of congestion on the existing lanes coupled with spacial constraints.

The senior bonds additionally benefit from the enhanced financial flexibility afforded by the more heavily backloaded debt service schedule for the TIFIA loan and the ability to defer a substantial portion of the TIFIA debt service even further. In Moody's opinion, it is unlikely that the TIFIA springing lien will be triggered unless the senior bonds have been accelerated, even if there were a payment default on the TIFIA loan. We note that the springing lien is a standard provision in all TIFIA loans undertaken to date.

This is the first rating action for LBJ Infrastructure Group.

The principal methodologies used in rating this issuer were "Operational Toll Roads" and "Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Dallas, TX, LBJ Infrastructure Group LLC is a special purpose entity created to hold a 52-year concession offered by the Texas Department of Transportation to design, build, finance, operate, and maintain the IH 635 Managed Lanes Project. The project is located near Dallas. LBJ Infrastructure Group is approximately 51 % indirectly owned by Cintra Infraestructuras, S.A., 42.4% indirectly owned by Meridiam Infrastructure Finance S.A.R.I., and 6.6% owned by Dallas Police and Fire Pension System. The Texas Private Activity Bond Surface Transportation Corporation is a conduit issuer created by the Texas Transportation Commission specifically to issue tax-exempt private activity bonds on behalf of LBJ Infrastructure Group and developers of other surface transportation projects.

New York
Aaron Freedman
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Chee Mee Hu
Managing Director
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates LBJ Infrastructure Group Series 2010 IH 635 Managed Lanes Project Sr Bonds Baa3
No Related Data.
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