Toll Road’s Bond Rating Takes a Hit

Less than a week after Orange County toll road officials took action called “absolutely critical” for the future of the San Joaquin Hills toll road, two of the three major Wall Street ratings agencies have issued warnings about the financial stability of the project.

One bond rating agency on Wednesday downgraded the toll road’s bonds from BBB to BBB-. Another already had declared the lower rating, but last week it changed its outlook for the project from “stable” to “negative.”

While analysts said they don’t believe there is danger of defaulting, traffic on the 15-mile toll road still is falling far short of projections, prompting a reassessment of the road’s financial health.

“When you look out beyond the next 10 years, there are serious challenges for the toll road,” said William Streeter, a New York-based analyst with Fitch IBCA, which knocked the bond rating down a notch.

Last week, the Transportation Corridor Agencies took the unusual step of setting aside nearly $40 million in savings--

largely from its share of the Orange County bankruptcy settlement--to guarantee payment of the debt on the road through 2007. They had hoped that would appease bond analysts who had let the agency know late last year that they were worried about the lower-than-expected traffic.

But analysts said last week’s action, while a good step, was not enough.

Fitch IBCA on Wednesday downgraded the rating on the road’s nearly $1.7 billion in outstanding bonds, a rating the toll road agency had held since the road was originally financed in 1993. While still an investment-grade rating, the change marks the first time bonds for the Transportation Corridor Agencies have been downgraded, officials said.

Standard & Poor’s, which granted a BBB- rating when the road was refinanced, maintained that rating but warned investors last Friday that the outlook on the road had changed from stable to negative. Its analysis of the project said the growing gulf between traffic and projections may result in a further erosion of the credit rating.

Another drop would put the project in a “speculative” investment category, which would make it difficult for many public entities to invest in the road.

As of Wednesday, Moody’s, another of the three major Wall Street bond-rating agencies--had not issued any change in its Baa3 rating, which is comparable to the BBB- designation.

Toll road officials emphasized Wednesday that the downgrade, while disappointing, was not a shock. And they say they are working toward a longer-term solution.

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Orange County’s three toll roads were built with more than $3 billion in bonds issued to private investors. That debt was to be paid back through the collection of tolls and fees paid by developers who benefit from the road. Through 2007, the San Joaquin Hills toll road also has access to a $10-million-a-year federal line of credit, which has helped the road’s rating.

Analysts say it remains to be seen how the project will do beyond that date.

“There won’t be any federal line of credit, and there won’t be any more Orange County bankruptcy money,” said Streeter of Fitch IBCA. “They are on their own.”

Orange County Supervisor Todd Spitzer, who traveled with other top toll road officials to New York last month to meet with analysts, pointed out that both Fitch and Standard & Poor’s in their reports cited strong leadership at the Transportation Corridor Agencies.

“I didn’t even bat an eye, because I know they are recognizing what we have already acknowledged--that we have serious work ahead of us,” said Spitzer, who chairs the San Joaquin Hills board of directors.

John M.W. Moorlach, Orange County’s treasurer, said the shift in the ratings reports was significant.

“It means the ratings agencies are getting uncomfortable. They are looking at the numbers, and it’s made them uneasy,” said Moorlach. “Now the issue is: Was the toll road a mistake? If we are all used to drinking water out of a fountain, maybe we don’t want to pay for it out of a vending machine.”

Moorlach said he believes serious questions have yet to be answered about why projections made by the nationally known firm of Wilbur Smith and Associates were so egregiously off the mark.

Toll road officials said last week that traffic on the road was still 16% off the 1997 projections and for the first time admitted that it was unlikely to bounce back. Projections had already been dramatically scaled back from the original traffic forecasts.

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The traffic shortfall had been blamed on the severe recession in California in the mid-1990s, but officials now say there has not been a big enough rebound since the economic boom began.

Lower-than-expected traffic means less money. When the road was financed, bond buyers were promised $1.30 would be collected for every $1 owed. But current conditions on the road mean that that promise will be broken as early as 2002 unless something is done quickly.

The nearly $40 million set aside last week is enough to guarantee that promise can be kept through 2007, the soonest toll road officials can refinance the road again with tax-exempt bonds. If undertaken, such a refinancing would likely extend the life of tolls on the road, which is scheduled to be turned into a freeway when the debt is retired.

While the Fitch report suggests a 25-cent toll increase would be a good start for raising revenues, Spitzer said any unscheduled toll hike is a last resort.

“Raising tolls is the lazy way out of this problem,” said Spitzer, who has reconvened a committee focused on new sources of revenue for the road. “Everyone needs to come to the table with their thinking caps on.”

* NEGOTIATIONS IN STORE?

State Sen. Joe Dunn offers to mediate talks that could help unsnarl traffic on the Riverside Freeway. B7