Fitch Ratings Affirms Purple Line Transit Partners Project; Negative Outlook

Maryland Transit Administration Purple Line Train

Maryland Transit Administration

BETHESDA, Md. – With a Negative Outlook, Fitch Ratings affirms the ‘BBB’ rating on the $100 million of PABs issued by the Maryland Economic Development Corporation on behalf of PLTP.

Fitch Ratings reports it has “affirmed at ‘BBB’ the rating on approximately $100 million of private activity revenue bonds (PABs) series 2022A (green bonds) and $543.5 million of series 2022B PABs (green bonds)issued by Maryland Economic Development Corporation on behalf of Purple Line Transit Partners LLC (PLTP; limited liability company) for the Purple Line light rail transit (LRT) project (the project).”

In addition, Fitch Ratings affirmed the rating on the roughly $1.8 billion subordinate Transportation Infrastructure Finance and Innovation Act (TIFIA) loan to PLTP for the project. The Rating outlook for all instruments remains Negative. Fitch says the Negative Outlook reflects the “complex construction works that have led to delays within days of breaching the design build” and lender’s longstop dates twice in the two years since financial close. However, it positively viewed the ability of the project to “reach a settlement that extended the longstop date both times.” Despite this, construction risks still remain given the nature of the projects and remaining duration of construction. 

The Negative Outlook could be returned to Stable over a year or two if the project handles future delays “in an expeditious manner that supports timely projected completion.” Negative rating action could occur should there be “persistent delays” that risk project funding. 

Fitch Ratings reports the BBB rating reflects the experience of the contractors who have handled large-scale capital projects as well as the advanced stage of construction of the project, the sufficiency of the construction security package, a strong revenue-paying grantor, and a payment mechanism and operating standards that are clearly defined. The current rating factors in the “project’s financial profile with rating case minimum debt service coverage ratio (DSCR) of 1.2x and robust cost resiliency in the form of the project’s realistic outside cost (ROC) multiple of 13.1x, consistent with an investment-grade rating.”

Key rating drivers are detailed below.

Completion Risk – High Midrange

Experienced Contractor; Sufficient Security

This reflects the $2.5 billion of construction works over four to five years and considers the “nearly complete design and substantial works completed to date by the prior and current DBJV and Owner.” The Maryland Department of Transportation (MDOT) takes on the risk of unknown defects. Design-build contractor, a DBJV of Dragados USA, Inc. and OHLA USA, INC. will construct the project. The DB requirements are passed to the DB contractor on “a back-to-back basis,” and sub-contract with technical experts are in place for rolling stock and specialized aspects of systems integration.

The total liquid security comes to 6% with liquidated damages able to cover 12 months of debt to the longstop date. Fitch says it “views the parent company DB guarantees up to a 35% liability cap, and 35% performance and 50% payment bonds as sufficient to cover both immediate needs as well as total costs in the case of contractor replacement, when taken together with the cashflow headroom of up to $100 million.”

Revenue Risk – Volume – Stronger

Payments from Strong Counterparty – Revenue Risk: Stronger

The MDOT and Maryland Transit Administration (MTA) are responsible for the debt, “making a revenue service availability (RSA) payment at service commencement, and making availability payments (AP) during operation of the project.”

The availability payments are divided between a fixed capital payment and escalating payments. Fitch says it views “the tailored payment mechanism that allows PLTP flexibility to match the most appropriate index for each cost component as moderately better than peers and it further includes flexible standards or cure periods to ensure minimal deductions are incurred.”

Infrastructure Dev. & Renewal – Midrange

Contracted Operations; Adequate Lifecycle Plan – Cost Risk: Midrange

Both the project operations and LRV maintenance are contracted through an O&M contractor, an LLC comprised of Alternate Concepts, Inc. and CAF USA, Inc. Moreover, the O&M contractor “will perform regular condition and performance monitoring inspections to assess the remaining life of the asset.” In the event of a rehabilitation cashflow deficit, Fitch reports the “O&M contractor will be required to fund a renewal reserve account.”

In the O&M contract, there is additional support that includes “parent company guarantees (75% annual liability cap, 150% rolling three-year aggregate liability cap, 200% cap on termination) and liquid security in the form of a 50% annual payment LOC. This security cushions some cost and lifecycle forecast uncertainty over the 30-year operations period.”

Debt Structure – 1 – Midrange; Debt Structure – 2 – Midrange

Conservative Structure; Flat Coverage – Debt Structure: Midrange

“The debt structure is fixed rate and fully amortizing and is further supported by a six-month debt service reserve fund funded at RSA payment date and a 1.20x equity lockup trigger. Funds trapped in the distribution lock-up account for more than 30 months will be applied to prepay TIFIA obligations, which Fitch views favorably in terms of deleveraging. The DSCR profile is relatively flat, following a few initial years of slightly higher coverage. The TIFIA loan, while technically subordinate, has the ability to spring to parity with the senior debt in a bankruptcy-related event, supporting a lack of differentiation in attribute scoring between liens.”

For the financial profile, Fitch Ratings applies a weighted average of the project’s realistic outside cost is 8%, per analysis with the Technical Advisor (TA) and is “consistent with a midrange cost project per criteria, which results in an average DSCR of 1.3x and minimum coverage of 1.2x.” Not including outliers, the rating case DSCR profile is flat at 1.2x from 2037 and on. The project, according to Fitch Ratings, demonstrates robust cost resiliency for a ‘BBB’-category project with a minimum all cost break-even of 105%.

Fitch Ratings has listed several factors that could lead to a Negative rating or downgrade. These include: “a material delay beyond scheduled RSA without adequate compensation; credit deterioration of key project counterparties including contractors and the revenue offtaker; [and/or] post successful project completion, material cost increases during operation that reduce coverage levels below 1.2x for a sustained period.” 

For factors that could lead to a Positive rating or upgrade, the Outlook could return to Stable over the next one to two years if the “project handles future delays in an expeditious manner that supports timely projected completion and preserves the collaborative working relationship between all parties” and/or “post successful project completion, a demonstrated history of performance in line with or superior to the Fitch base case.”

The settlement agreement between the owner and PLTP that was approved on March 13^th this year by the MD Board of Public Works is viewed positively by Fitch Ratings. A few key terms include “schedule relief of 234 days taking the RSA date to Dec. 30, 2027 and additional compensation of around $415 million to be made over several years.”

However, this is contingent on project milestone achievements which include the arrival and assembly of the first light rail vehicle in Maryland which is expected to happen later this year. It also includes the completion of construction work on the University of Maryland campus and reopening the Capital Crescent Trail as well as testing of systems. Fitch says the “operating phase is similarly extended to 30 years from the earlier of the revenue service deadline and RSA.”

The agreement settles outstanding disputes to date and provides closure on “delays stemming from the prior DB contractor.” In addition, it highlights the working relationship between parties and the “complex nature of the construction works that caused delays within days of breaching the DB and lenders’ longstop dates twice within a short, two-year period.”

As of reporting, the project is over 65% complete with 17,000 feet of installed rail. In addition, crews are currently working on 13 of 21 stations. In addition, spending is currently around $930 million and comes in under the $1.3 billion cumulative cap in the DB contract. 41% of the $2.26 billion budget has been spent, leaving $1.3 billion left. This excludes allowances, directives, and change orders.

“All 26 base order LRVs have been accepted into storage at CAF’s Elmira, NY facility and the two option LRVs are being assembled there. LRV deliveries to the project site are expected to commence in 2Q24 with dynamic testing to begin in 3Q24.”