Fitch Affirms Chesapeake Bay Bridge & Tunnel District, VA's General Resolution Revs at 'A-'

Fitch Ratings has affirmed the 'A-' rating on the Chesapeake Bay Bridge and Tunnel District, VA's (CBBT) approximately $44.4 million in outstanding subordinate lien general resolution refunding revenue bonds (GRB), series 1998. The Rating Outlook is Stable.

Fitch does not rate the district's approximately $57.4 million in outstanding series 2010A and series 2011A variable-rate refunding GRBs, which rank on par with the rated bonds. There is currently no debt outstanding on CBBT's senior lien, but it remains open.

The rating affirmation reflects the continued solid operational and financial performance of CBBT. While significant additional debt is anticipated to fund the construction of the parallel Thimble Shoal tunnel, which could begin as early as July 2016, it is highly likely that such new debt will fund a full defeasance of outstanding debt. As such, the financial profile of the existing bonds should not be impacted by the proposed financing. The current indenture's somewhat restrictive leverage tests further limit the district's ability to support an escalating debt profile.

Fitch will analyze all relevant information ahead of the issuance of any such additional debt whenever such information is made available.

KEY RATING DRIVERS

Monopolistic System with Commercial Exposure: CBBT's bridge and tunnel facility is monopolistic in nature, serving as the only link between the metropolitan Hampton Roads region and Virginia's eastern shore. Volume has been relatively stable over recent years, growing at a 0.3% compound annual growth rate (CAGR) over the last decade. However, the facility is dependent on heavy truck volume for 23% of toll revenues, exposing it to some cyclicality. Revenue Risk Volume: Midrange.

Moderate Price Flexibility: Toll rate increases have occurred approximately every 10 years - most recently in January 2014 - and have not materially impacted the traffic profile. The round trip toll rate is high, but a lack of convenient alternatives coupled with above-average regional demographics provides the district with moderate rate-making flexibility. The framework allows the district to set tolls at levels necessary for maintenance of capital assets, and the district's proposal to increase tolls every five years by 10% seems reasonable. Revenue Risk Price: Midrange.

Variable Rate Risk Well Mitigated: The district's variable rate debt component is high, at approximately 56% of total debt but is fully hedged to term with counterparties of appropriate credit strength. CBBT's negative mark-to-market on the swaps is fully collateralized. Debt Structure: Midrange.

Future Debt Needs: The district has accelerated the design and construction of the proposed parallel Thimble Shoal crossing project to as early as July 2016. Currently, the estimated cost for the project is $840 million but the financing and funding strategy have not yet been finalized. While the district is committed to maintaining the existing asset base in good condition, the tunnels are more than 50 years old and the six year capital plan is approximately $72 million. Infrastructure Renewal/Obsolescence: Midrange.

Low Leverage and Solid Balances: Leverage in 2013 was low at 1.3x on a net debt/cash flow available for debt service (CFADS) basis, excluding reserves in the general fund. Coverage of debt service increased to more than 3.0x after the senior lien debt matured and has historically been at least 1.5x on a combined basis since 2000. The district's cash balances are healthy at approximately 750 days cash on hand.

RATING SENSITIVITIES

--In the absence of a complete defeasance of the outstanding debt in conjunction with material additional leverage, the financial profile of the existing debt would likely no longer be consistent with an 'A' category rating and, in such a scenario, Fitch would likely downgrade the current 'A-' rating.

--Rating stability will be largely dependent on the resilience of traffic levels in the face of toll increases and the district's ability to manage operating expenses.

SECURITY:

The GRBs are primarily secured by a subordinate lien on net revenues, subject to a senior lien, on which all debt raised matured on July 1, 2010.

CREDIT UPDATE:

Audited financial results for fiscal year (FY) 2013, (ended June 30) indicate that traffic and revenue decreased by 0.8% (to 3.49 million) and 0.4% (to $44.7 million), respectively relative to FY 2012, largely due to the effects of Hurricane Sandy in October 2012. The decline in car and light truck traffic in the year was offset by the rise in heavy truck traffic which accounted for just 9% of total traffic but produced approximately 23% of the district's FY 2013 toll revenues, demonstrating a moderate dependence on commercial throughput for revenue generation. The district's average toll rose slightly to $12.81 in FY 2013 from $12.75 in FY 2012.

Through the first eight months of FY 2014, traffic and revenue are up 3.4% and 4.5%, respectively. The district raised toll rates on January 1, 2014; car tolls were increased by $1 to $13 and the toll rate for heavy trucks increased by $4 to $39 for a one way trip.

Operating expenses rose 5% in FY 2013 to $14.9 million, following a 4.3% increase in FY 2012, excluding preservation expenses that are determined annually in advance to be the investment needed to maintain infrastructure in a generally good or improved condition as determined in an independent annual inspection of the facility. Chesapeake Bay Bridge and Tunnel is more than 50 years old with two lanes in each direction except within the two tunnels where only one lane in each direction is provided and there are no alternative routes in the event of accidents. The six-year capital development budget for FY 2014 through FY 2019 is estimated at $72 million (excluding the parallel tunnel cost) and is expected to be funded from cash flow and reserves available in the reserve maintenance fund.

DSCR in FY 2013 declined to 3.22x from 3.38x in the prior year. The debt service profile remains relatively level from FY 2013 through FY 2020 at about $11.4 million before declining in FY 2021 when the series 2010A GRBs mature, and increases again to approximately $16 million in FY 2024 when the series 1998 GRB principal amortization begins, remaining flat to final maturity in FY 2026. Existing leverage is negative on a net debt to CFADS basis (including the general fund).

Fitch expects current debt to be fully defeased in the event that additional debt is raised to fund the Thimble Shoal tunnel project. Additionally, in Fitch's view, the current indenture's somewhat restrictive leverage tests further limit the district's ability to support an escalating debt profile.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 16, 2013).

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=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827012

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