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Fitch Affirms Virginia Small Business Financing Auth's PABs at 'BBB-'

  Fitch Affirms Virginia Small Business Financing Auth's PABs at 'BBB-'

Business Wire

NEW YORK -- April 9, 2013

Fitch Ratings has affirmed the 'BBB-' rating on $663.75 million in private
activity bonds (PABs) issued by the Virginia Small Business Financing
Authority on behalf of Elizabeth River Crossings Opco, LLC (ERC, or the
concessionaire). In addition, Fitch affirms the 'BBB-' rating on the $422
million TIFIA loan to ERC.

The Rating Outlook for both the PABs and TIFIA loan is Stable.

KEY RATING DRIVERS:

Established Traffic Base With Uncertain Elasticity Of Demand Upon Toll
Implementation: Once tolling is implemented, revenue will be generated from a
well-established transportation corridor serving primarily commuter traffic
into and out of Norfolk and Portsmouth, VA, both of which exhibit
above-average wealth levels. The level of diversion following the
implementation of tolls is uncertain but is partially mitigated by the
distance to free alternatives which are operating at capacity. The Virginia
Department of Transportation (VDOT) is currently exercising its right under
the Comprehensive Agreement (CA) to postpone the commencement of the
imposition and collection of tolls on the existing Midtown Tunnel and existing
Downtown Tunnel until Jan. 31, 2014. By postponing toll collection VDOT is
responsible to lost revenues thereby increasing its contribution to the
project by $112.5 million.

Tolling Framework Provides Financial Flexibility: The CA enables ERC to raise
tolls at the greater of 3.5% or CPI annually following substantial completion
of new project assets. The initial peak passenger vehicle toll for the tunnels
will be set at $1.84, if using a transponder, which Fitch views as reasonable
compared to other tolled bridges in the area and nationwide. Fitch continues
to monitor litigation regarding implementation of tolls on the project. While
the outcome of the litigation is uncertain, it is Fitch's opinion that should
tolls ultimately not be implemented on the project the CA provides contractual
protections that would require damages payable from VDOT sufficient to pay-off
the ERC debt. As with such a state obligation, it will be subject to
appropriation by the legislature.

Fixed-Rate Debt And Significant Tail Mitigate Financing Risk: Fixed-rate PAB
and TIFIA financing vehicles fully amortize over the tenor of the respective
loans. A tail of 23-years provides cushion to refinance if needed. TIFIA is
structured to provide minimum interest payment in the event revenues are
insufficient to make the scheduled payment amount. Cash lock-up provisions and
additional bonds are tied to meeting a 1.3 times (x) coverage of senior debt
service and scheduled TIFIA debt service.

High Leverage: Leverage is on the higher side but comparable to urban center
peers at approximately $107 million per lane mile. Under Fitch's base case,
net debt to cash flow available for debt service (CFADS) is considered high at
15x during the first full year of operations of the new asset in 2017 and
evolves to 13x in 2022.

Significant Completion Risk Due To Complex Nature Of Construction: Complicated
immersed underwater construction of the new Midtown Tunnel, which is currently
on schedule, is partially mitigated by experienced design build team comprised
of Skanska AB, Kiewit Infrastructure Group, and Weeks Marine. The security
package is considered adequate with a letter of credit (LOC) equal to 6% of
the contract price and 45% liability cap supported by joint and several
guarantees from the Skanska and Kiewit corporate parents. Toll risk during the
construction period has been partially mitigated by VDOT's decision to delay
toll implementation until January 2014.

RATING SENSITIVITIES

--Unanticipated construction issues that may cause significant delay in
completion of the project beyond the long-stop date could stress the rating.

--Should future leveraging, either through additional senior borrowing or
TIFIA loans, result in lower projected debt service coverage ratios, negative
rating action may be warranted.

--Post completion, financial metrics below Fitch's rating case expectations
due to changes in economic conditions that lower overall corridor demand or
the result of operating and maintenance expenditures that are above forecast
levels could pressure the rating.

SECURITY

The PABs will be secured by a first priority lien on project net revenues and
the TIFIA loan will be secured by a second priority lien on project net
revenues. The priority of the TIFIA loan springs to parity with the senior
secured obligations and any other permitted senior secured indebtedness upon
the occurrence of a bankruptcy related event.

TRANSACTION SUMMARY

The Downtown Tunnel/Midtown Tunnel/MLK Extension Project (the project)
includes the construction of a new two-lane immersed tub tunnel adjacent to
the existing Midtown Tunnel beneath the Elizabeth River in Virginia and
modifications to the interchange at Brambleton Avenue/Hampton Boulevard in
Norfolk, the construction of an extension to the Martin Luther King Freeway
(MLK Extension), and the refurbishment of the existing Midtown Tunnel and
Downtown Tunnel facilities. ERC will design build, finance, operate, maintain,
and toll the project over the 58-year concession term. ERC is a special
purpose vehicle, owned by Skanska ID and Macquarie (50:50 ownership) and was
established specifically for the project. Total sources are funded with
committed equity and public funds of approximately 33%, debt of 55% and
revenues pre construction completion of 12%.

Design of the new tunnel is 86% complete and is expected to be finished no
later than September 2013, which is slightly ahead of schedule. Rehab of the
existing downtown tunnel is expected to start in July 2013 versus October 2013
originally anticipated with 90% of the design work currently complete. The
DBJV reports to be ahead of schedule on the approach work. All critical
properties for the MLK work have been acquired, with a small piece still
needed, and construction is expected to be underway by December 2013.

VDOT has exercised its right under the CA to postpone toll implementation
until Jan. 31, 2014. VDOT is responsible with lost revenues based on projected
revenues from financial model at closing ($112.5 million total). The
postponement of tolls partially eliminates toll risk during the construction
period. Traffic in the corridor is down approximately 0.5% year on year over
the last few years, however, the tunnel traffic has held generally firm except
in the recent months when it is down slightly likely due to the opening of the
Jordan Bridge as predicted.

As of Dec. 31, 2012, cumulative costs from financial close totaled $16.5
million compared to budget of $21.5 million resulting in a $5 million positive
variance. This positive variance is almost entirely due to expenditures
postponed to 2013 as a result of the tolling suspension.

Fitch continues to monitor current litigation regarding tolling on the
project. The plaintiffs have filed a suit against VDOT challenging the
Virginia General Assembly's authority to enact the Public-Private
Transportation Act of 1995 (PPTA), and the CA entered into between VDOT and
ERC to finance and construct the Midtown Tunnel Project. Both parties have
agreed to Summary Judgment with a hearing scheduled for May 1st and a decision
expected sometime afterwards. In the event that the outcome of the litigation
precludes ERC from tolling the project or invalidates VDOT's grant of tolling
rights to ERC, it is Fitch's opinion that the CA provides contractual
protections that would require damages payable from VDOT sufficient to pay-off
the ERC debt. As with such a state obligation, it will be subject to
appropriation by the legislature.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (July 12, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' - (Aug. 2, 2012).

Applicable Criteria and Related Research

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges, and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684146

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Contact:

Fitch Ratings
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Chad Lewis, +212-908-0886
Senior Director
or
Committee Chairperson
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Senior Director
or
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elizabeth.fogerty@fitchratings.com
 
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