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Toll Road Bonds Rated Junk Again

Financing for the San Joaquin Hills highway is downgraded by a second agency as revenue keeps falling. An increase in tolls is called unlikely.

May 17, 2003|Dan Weikel | Times Staff Writer

Bonds that financed the San Joaquin Hills toll road in Orange County were downgraded to junk status Friday by a second Wall Street ratings agency as revenue continued to fall short of projections by a widening margin.

Citing more risk for investors, Standard & Poor's lowered the rating below investment grade on $1.82 billion in bonds issued for the 15-mile highway, which runs from Newport Beach to just north of San Juan Capistrano.

"We've had a negative outlook on the road for about three years," said Mary Ellen Wriedt, a credit analyst for Standard & Poor's Rating Services in San Francisco. "Traffic and revenue have continued to decline relative to projections. That led us to the downgrade."

In February 2002, New York-based Fitch IBCA lowered its mark to junk status for more than $1 billion in San Joaquin toll road bonds because of shortfalls in traffic and revenue. Moody's Investors Service, a third agency, has yet to reevaluate the turnpike.

Despite the negative ratings, Wriedt and toll road officials said the San Joaquin Hills continues to meet all financial obligations and has an untapped federal line of credit for $120 million on which it can rely. Tollway operators also said the situation was not likely to trigger an increase in tolls, which were raised last year.

Downgrades of government bonds to junk status can hurt individual investors and institutions, such as mutual funds, by lowering the value of bonds, financial experts said.

The San Joaquin Hills is part of a 51-mile network of tollways operated by the Transportation Corridor Agencies, a joint powers authority based in Irvine. Its roads include the Foothill, the Eastern, and a short stretch of California 133. The TCA sold about $1.82 billion in bonds to build the San Joaquin, which opened in 1996.

Figures dating to 1998 show the tollway has never met annual projections for traffic and revenue.

In January 2001, for example, the San Joaquin Hills took in $4.1 million in revenue or about 82% of $5.04 million in projected tolls. In February this year, the gap had widened. Actual revenue was $4.6 million or about 75% of a projected $6.14 million.

Analysts for Standard & Poor's noted that the tollway was receiving about 84% of projected revenue in 1999. By March 2003, they said, the gap between actual and projected revenue had widened to 73%. To meet its bond obligations, Standard & Poor's analysts said the TCA needs to recover 78% of its projected revenue on a long-term basis.

Walter D. Kreutzen, the TCA's chief executive officer, said the toll road could technically default on its bonds in 2005 or 2006, meaning it could not pay investors the promised $1.30 in revenue for every dollar spent. Kreutzen estimated that the San Joaquin Hills could be in actual default on its bonds by 2012, assuming the TCA does nothing to shore up the road's finances.

"I wish the downgrade wouldn't have happened, but it did," Kreutzen said. "I had hoped they would have given us enough time to get through our evaluation to find a solution."

The TCA board is considering combining the Foothill-Eastern and San Joaquin Hills and refinancing the operation. An exploratory merger was approved in April, but a final decision hinges on a pending traffic and revenue study for both roads.

There is concern that decisions by the Irvine Co. to dramatically scale back residential and commercial development in east Orange County might hurt the Foothill-Eastern, whose revenue has exceeded projections.

That could affect efforts to move ahead with the proposed Foothill South tollway through South County. Should TCA credit ratings continue to sag, the agency could have trouble issuing bonds on favorable terms for the controversial highway.

"We are working toward strengthening the plan for the entire system so when its time to issue debt for the Foothill South, there is a strong financial history," said Lisa Telles, a TCA spokeswoman.

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