Fitch Rates Bay Area Toll Authority's (California) $717MM Revs 'AA-'; Outlook Stable

July 25, 2008 12:06 PM EDT

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch Ratings assigns an 'AA-' rating to approximately $717 million Bay Area Toll Authority, California (BATA, or the authority) San Francisco Bay Area Toll Bridge revenue bonds 2008 series F-1. In addition, Fitch affirms the 'AA-' rating on $1.5 billion in parity revenue bonds and also the 'AA-' underlying rating on the authority's outstanding $2.2 billion in variable rate demand bonds (VRDBs), all of which are on parity. The Rating Outlook on the bonds is Stable.

The bonds are expected to be sold through negotiation on or about Aug. 6, 2008 with proceeds being used to refund the authority's 2003 series A and B, 2006 series A-1, D-2, and E-1, and 2007 series B-1, D-1, E-1, and E-2 bonds, which were synthetically fixed auction-rate securities and VRDBs. Remaining portions of the proceeds will be used to meet the debt service reserve fund requirement, and pay costs of issuance. BATA intends to restructure the remaining $1.7 billion of Ambac-insured VRDBs over the next few months.

The 'AA-' rating reflects the economic strength and near monopoly position of the seven-bridge system which provides critical transportation links in the San Francisco Bay Area, a mature and relatively stable traffic base, demonstrated ratemaking flexibility, and low to moderate elasticity of demand. The rating also incorporates BATA's solid financial performance, substantial liquidity position, and the ability of this system of bridges to sustain the loss of an asset from catastrophic seismic activity. The rating also reflects continued construction risk for the Seismic Retrofit Program (SRP) though significant program contingency provides considerable cushion. In addition, the rating incorporates the possibility of expense growth exceeding forecast for newly acquired operations and maintenance responsibilities (including electronic toll collection and violations enforcement efforts) as well as for rehabilitation responsibilities, the potential for sizable SRP program costs associated with the Antioch and Dumbarton bridges, and tepid revenue growth. These uncertainties could lead to the need for a toll increase before the opening of the new east span of the San Francisco-Oakland Bay Bridge (SFOBB).

Despite the dramatic cost increases of the seismic program, the critical nature of this seven-bridge system and long-term economic strength and viability of the San Francisco Bay Area continue to provide a basis for very strong investment grade credit quality. BATA manages seven of the eight major crossings in the Bay Area - the eighth being the Golden Gate Bridge, which is managed by a separate entity. These bridges provide the only viable vehicular links within the Bay Area. Given the limited ability of rail and ferry systems to serve the diverse destinations within the area, these facilities are essential to regional economic activity. These fundamentals, together with the continued retention of economic rate-setting flexibility to deal with unexpected events that materially impact financial performance, make for very strong credit quality. Seismic activity remains a key risk for the foreseeable future until the projected completion of the east span of the SFOBB in 2014. The more recent design of the Antioch and Dumbarton bridge structures was initially thought to sufficiently address seismic risk. However, after a more thorough review it appears that some actions to address geotechnical and structural elements may be needed. BATA is expected to receive a detailed report on this exposure in September 2008, after which cost estimates may be available.

Coverage of debt service as calculated by Fitch, which incorporates all maintenance expenses, is expected to be in excess of 2 times (x) for fiscal years 2008-2010. However, pro forma coverage quickly drops to a medium-term level of about 1.5x. The likelihood for material SRP expenditures in the next 3 years for the Antioch and Dumbarton bridges further accelerates this possibility. Should these costs materialize, debt service coverage - absent a toll increase - would be inconsistent with the current rating. BATA is expected to issue approximately $2.7 billion in additional new money parity debt by 2015. This will bring total toll-backed issuance to $7.1 billion to cover capital costs associated with the three programs. At that point in time, BATA estimates that approximately 35% of total debt will be traditional fixed-rate, a portion of which may be issued on a subordinate basis; 52% will be synthetically fixed, and 13% will be pure variable rate debt.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Fitch Ratings

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