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Fitch Rates Chesapeake (VA) 2012 Sr Toll Road Rev Bonds 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns a 'BBB' rating to $155 million in Chesapeake (VA) Chesapeake Transportation System Senior Toll Road Revenue Bonds, Series 2012A and 2012B. The Rating Outlook is Stable.

KEY RATING DRIVERS:

Stable, Growing Service Area: The Chesapeake service area benefits from a growing population, with a demonstrated traffic base on Chesapeake Expressway and a core commuter component for the proposed expansion of US Route 17/Dominion Boulevard. Chesapeake Expressway demand is exposed to discretionary summer traffic to the Outer Banks. A growing dependency on an unproven Dominion Boulevard traffic base is a risk.

Programmed Toll Increases: The Chesapeake Transportation System has programmed toll increases on both facilities over the next several decades, with above inflationary, annual increases planned for the commuter-dominated Dominion Boulevard and 5-year increases on the more seasonal Chesapeake Expressway. There is heavy reliance in the early years on the Expressway as Dominion is built.

Some Construction Risk: There is construction risk associated with the expansion of Dominion Boulevard. While adequate structural protections are included in the contract and the selected contractors are experienced, some risk remains through the construction phase of the project.

Fixed Rate Debt with Escalating Debt Service: Senior debt and the subordinated Virginia Transportation Infrastructure Bank (VTIB) loan benefit from fixed rate structures, though the debt service profile is accreting through maturity. The VTIB loan benefits from a flexible structure, with a minimum payment schedule and the ability to cash-sweep to pay off debt sooner.

Relatively High Overall Leverage: While overall leverage is high at 15 times (x), leverage on the senior lien is moderate at 7.5x (using cash flow available for debt services [CFADS] from the fully ramped up year of 2020). The deeply subordinated VTIB loan provides considerable credit enhancement to the senior debt, and does not spring to the senior lien. In addition, there is no cross default or acceleration associated with the VTIB loan. Senior coverage is stable above 2.0x in the Sponsor Case, and shows resilience in stress scenarios modeling increasing costs or drops in expected traffic volumes.

WHAT COULD TRIGGER A RATING ACTION

Significant delays in construction, escalation in costs, or sizable use of completion bonds may result in rating action.

Should more significant traffic diversion than expected be observed on the tolled Dominion Boulevard or should management show reluctance to increase tolls in the event of traffic performance well below forecast, rating action may be necessary.

If upon completion CTS meets or exceeds traffic and revenue forecasts, positive rating action may result.

SECURITY

The bonds are special, limited obligations of the City of Chesapeake payable from net toll revenues and reserves held for such purpose under the Indenture. The bonds are not secured by a mortgage or deed of trust on, or other security interest in, the system.

TRANSACTION SUMMARY

The Chesapeake Transportation System, or CTS, is comprised of the existing Chesapeake Expressway and the expansion of Dominion Boulevard. The City of Chesapeake owns and operates these assets and is responsible for their ongoing maintenance and improvement. The Chesapeake Expressway is an existing 10.2-mile, 4-lane facility; the tollway was opened in 2001, and is heavily used by tourists traveling to the Outer Banks. The Dominion Boulevard Project will replace an existing 2-lane drawbridge, which opens on average 15 times a day with a 95-foot fixed-span bridge that would not need to be opened, and convert Dominion Boulevard into a 4-lane tolled highway (also currently 2 lanes). Commuter-dominated Dominion Boulevard will be operated exclusively using an open road tolling system. The City of Chesapeake and the Virginia Department of Transportation (VDOT) will be responsible for the Chesapeake Expressway and the Dominion Boulevard project, and the City expects to manage operations of the CTS through the City's Department of Public Works.

The City is issuing $155 million in senior toll road revenue bonds to finance a portion of the cost of construction of the Dominion Boulevard project (roughly 30%), as well as to refund the outstanding principal amount of the Chesapeake Expressway Toll Road Revenue Bonds Series 1999; to fund reserves and construction period interest payments; and to pay costs of issuance on the 2012 bonds. The bonds are fixed rate with a final maturity of 2047, and include a mix of current interest bonds (CIBs) and convertible capital appreciation bonds (CABs). Debt service is escalating through maturity, and leverage on the senior lien is moderate at 7.5x net debt to CFADS based on the fully ramped up year of 2020.

In addition to the senior revenue bonds, CTS will benefit from a $152 million VTIB loan, covering roughly 41% of the project. The VTIB loan has a 35 year repayment period with no payment during construction and the first 2 years of operation, and has a minimum repayment component that is paid out of remaining revenues after senior debt service. Any remaining revenues after required deposits for operation and maintenance (O&M) and renewal and replacement (R&R) can be applied to the VTIB loan via a cash sweep after certain conditions are met beginning in Year 3 of operations. The VTIB loan does not spring to the senior lien, and there is no cross default or acceleration associated with the VTIB loan

Certain other grants and moneys from federal and state sources are also being applied to the project, covering roughly 29% of costs.

Bidding for the project construction contract was completed in September 2012, with the winning bid coming in lower than budget and reducing capital requirements from $416 million to $345 million. The winning bidder, Dominion Boulevard Constructors Joint Venture, includes McLean Contracting Company; Bryant Contracting, Inc.; R.R. Dawson Bridge Company, LLC; and E.V. Williams, Inc. All four of the partners have constructed numerous projects for the Virginia Department of Transportation and all except R.R. Dawson have constructed projects for the City of Chesapeake. The final contract is expected to be awarded in November 2012, with the construction Notice to Proceed to be issued in January 2013 for scheduled completion in 2017.

The contract includes several structural protections, including:

--Unit price contract;

--Fixed completion date;

--Performance & Defect bonds for 100% of contract price, Payment --Bond for 100% of contract price;

--Monthly progress payments with 5% retainage;

--Liquidated damages ($3,100/day) for delays beyond the fixed completion date (sized to cover revenue shortfalls); and

--Incentive payment ($26,279/day with a $5 million cap and no disincentive limit) to encourage early completion.

In addition, the contractor has assured CTS of their ability to obtain a surety policy for the entire amount of the Project, subject to standard underwriting procedures. Per the contract, proposed surety provider(s) are required to be rated B+ by A.M. Best, and be authorized to do business in Virginia in accordance with the laws of Virginia and the rules and regulations of the State Corporation Commission.

To the extent the final contract does not reflect these terms, the assessment of construction risk may change.

In addition to reviewing the sponsor's case for traffic and cash flows, Fitch developed a Base Case and Rating Case to analyze the potential impacts on cashflows of reduced traffic levels, higher operating expenses, and varying traffic diversion assumptions of 20-35% on the tolled Dominion Boulevard. Under various sensitivity cases with annual traffic growth limited to 0.0%-0.5% over the forecast period and expense growth profiles raised by 200 basis points annually , debt service coverage ratios remain at or above 1.4x without any additional toll increases. Fitch views these levels of coverage as strong for the rating level, and views favorably the CTS's flexibility to increase rates if needed in the latter years as debt service escalates to maturity. However, given the unproven nature of tolled traffic on Dominion Boulevard, the rating is likely to be constrained until demand can been proven upon opening of the new facility.

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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Fitch Ratings
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Emma W. Griffith, +1-212-908-9124
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Source: Fitch Ratings