S&P Global ratings has upgraded its long-term ratings for toll bonds issued to finance construction of the 91 Express Lanes and other freeway improvements in Riverside County. The upgrade is a significant one, boosting the previous rating of ‘BBB’ to “A-.” The ratings agency also issued a stable outlook for the debt based on traffic levels and the financial success of the project.
Financed and built by the Riverside County Transportation Commission, the Riverside County portion of the 91 Express Lanes opened in 2017. The eight-mile extension is part of a larger facility jointly operated by RCTC and the Orange County Transportation Authority.
The benefit of the ratings upgrade could help RCTC and taxpayers by lowering overall borrowing costs in the future. If RCTC has the opportunity to refinance its current debt, the lower borrowing costs could free up funding for additional projects in the 91 corridor.
In its decision to upgrade RCTC’s debt, S&P Ratings commented on the management of the facility, “We consider the commission's management and governance very strong, reflecting our view of RCTC's strategic positioning; risk management and financial management; and organizational effectiveness.”
This news comes after Fitch ratings upgraded its rating to BBB in March because customer use of the Lanes has significantly outpaced projections. Fitch noted the customers took 14.5 million total trips in 2018 – the first full year of service – more than 50 percent higher than projected. Toll revenues in 2018 were $47.9 million, which also were substantially greater than forecasted. RCTC also reported that an average of 300 new customers are opening accounts for the 91 Express Lanes each week, reflecting a demand for the managed lanes.
“RCTC maintains a steadfast commitment to being a responsible steward of Riverside County taxpayer dollars, said Chairman Chuck Washington. “The upgrade in ratings reflects a vote of confidence in RCTC’s financial stewardship and responsibility,” he said.
About Bond Financing
A toll revenue bond is a type of municipal security used to build a public project such as a bridge or an express lanes project. Revenues from tolls paid by users are used to pay the principal and interest payments on the bond. The bond allows the public agency to get the funds upfront to construct the infrastructure sooner (as opposed to waiting until all the funds have accumulated to start construction).
A bond is a written promise to repay borrowed money on a definite schedule, usually at a fixed rate over the life of the bond. Bonds have long been an important mechanism for financing highway improvements. In 1893, Massachusetts became the first state to use bonds on a highway, although the territory of Idaho had issued "wagon road" bonds as early as 1890. There are generally three types of bonds. General obligation bonds that are backed by general funding sources of the local government. Revenue bonds (like RCTC bond above) that are backed by a specific revenue source. And Hybrid bonds which are a combination of the first two.
When a local government issues a bond, the interest income is generally exempt from federal income tax. Because investors in bonds save money (by not paying taxes), they are willing to pay slightly lower interest rates for municipal bonds, which makes financing local infrastructure less costly.
All bonds have a credit rating, which is a benchmark for determining investor risk. All investments are a tradeoff between risk and reward. A credit rating provides a simplified measure of how risky a bond is likely to be. The credit rating also determines how much the issuer will have to pay for capital and affects the interest rate levels at which the bond trades. In general, the lower the rating, the higher the interest rate the local agency must offer.
Three independent companies publish credit ratings upon request for highway and other municipal debtors; Fitch, Moodys, & S&P. The ratings, which are determined by objective rating criteria such as the issuer's current debt, economic base, finances, and management, evaluate the issuer's solvency and liquidity. The rating categories or grades span the highest quality investment (Aaa or AAA) down to bonds currently in default (D). (See figure 2.)
A rating of BBB is the highest rating below the A range and is considered: medium grade, neither highly protected nor poorly secured. Currently adequate protection but long-term suggests susceptibility to interruption or impairment.