KBRA Assigns BBB Preliminary Rating to Colorado High Performance Transportation Enterprise’s $501 Million I-25 North Express Lanes Revenue Bonds (TIFIA)

KBRA assigns its BBB preliminary rating to the proposed issuance of the Colorado High Performance Transportation Enterprise (HPTE) I-25 North Express Lanes Revenue Bonds. The Outlook is Stable. The financing plan consists of a loan of up to $501 million from the U.S. Department of Transportation (the lender) to HPTE. This bond constitutes federal project credit assistance under the Transportation Infrastructure Finance and Innovation Act (TIFIA) for the I-25 North Express Lanes Project (the project and bonds together referred to as the TIFIA bond).

The TIFIA bond has a subordinate lien priority in toll revenues and other cash flows generated in connection with the project, which will include only segment 2 and segment 3 of the project as of financial close, as these segments reached substantial close in 2016 and 2020, respectively. The TIFIA bond is expected to bear interest at an annual rate of 4.27% and has a maturity date of December 31, 2062. Interest and principal on the TIFIA bond will be paid semiannually. The TIFIA bond will fully amortize by the projected maturity date, which removes refinancing risk in the transaction.

TIFIA bond proceeds will fund eligible project costs for segments 5-8 of the project, which will not form part of the trust estate as of financial close. These segments will only form a part of the trust estate upon reaching substantial completion. As a result, we do not include any potential revenues generated from these segments in our rating case.

HPTE is partnering with the Colorado Department of Transportation (CDOT) to operate the project in accordance with an intra-agency agreement and the E470 Public Highway Authority (E470 PHA)―a local governmental authority formed by the counties of Adams, Arapahoe, and Douglas―to collect toll revenues and provide other toll services.

Key Credit Considerations

(+) No Construction Risk

Revenues that will service the TIFIA bond are from segment 2 and segment 3, which reached their commercial operation dates in July 2016 and June 2020, respectively.

(+) Long Asset Life

HPTE has the statutory right to set tolls on the project, which will allow the project to continue generating revenues after maturity of the TIFIA bond.

(+) Transaction Liquidity

The project benefits from several liquidity sources, including a debt service reserve account, operations and maintenance reserve account, and a renewal and replacement account, which are all funded at levels at or above market precedent.

(+/-) Traffic Resource

The project area has long been recognized as a major congestion area by relevant governmental authorities. However, it does face significant competition from the adjacent general-purpose lanes. While the region has seen significant population growth of 7% to 32% from 2010 to 2019 and moderate employment growth (2.4% compound annual growth rate) in the same period, there could be potential for changes in household formations and employment during weak economic periods over the term of the transaction.

Rating Sensitivities

A rating upgrade could occur if traffic ramp-up for segment 3 and toll revenues are significantly better than expected and consistently outperform KBRA’s projections.

KBRA may downgrade the rating if traffic volumes are significantly lower than KBRA’s projections, resulting in debt service coverage ratios (DSCR) consistently below 2x.

ESG Considerations

Environmental Factors

Given that vehicles are responsible for a meaningful portion of carbon emissions, there could be future regulation or policies that discourage single-occupancy vehicles typically used by commuters, which could impact traffic levels and tolling revenues.

Social Factors

The I-25 Express Lanes are an essential component of the interstate highway system connecting the greater Denver metropolitan region. Project revenues are reliant on traffic volumes from the surrounding neighborhoods, which can be influenced by a multitude of social factors including employment levels and household income. The project benefits from a diversified local economy with higher GDP per capita and median income than the national average.

Governance Factors

HPTE will have oversight of the project throughout the term of the debt. HPTE is owned by the State of Colorado and governed by an independent board of directors. Coordination between HPTE and other governmental agencies, including CDOT and the toll services provider, will be integral in operating and collecting revenues from the project. Policy changes or a lack of transparency between the parties could negatively impact the project.

Rating Rationale

Under KBRA’s rating case, we expect the project to have an average DSCR of 2.3x through the term of the bonds. The rating and Stable Outlook reflect the project’s contractual structure, historical performance, and robust coverages through the term. These attributes and the project’s KBRA Project Risk Score (KPRS) score of Strong support a BBB rating for a project of this nature.

Outlook

The Stable Outlook reflects the substantial liquidity in place during the operations phase and experience of the operators. KBRA expects actual traffic volume to be in line with its current traffic forecasts. A rating upgrade may occur if ramp-up on segment 3 is stronger than expected and traffic significantly exceeds expectations. A downgrade may occur if traffic volumes are consistently lower than KBRA’s projections during the operations phase.

To access ratings and relevant documents, click here.

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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