Fitch Places Rail Connections' Bonds On Rtg Watch Negative
12 January 2001
Fitch Places Rail Connections' Bonds On Rtg Watch Negative
NEW YORK--Jan. 12, 2001--Fitch today placed the debt rating on the parking garage revenue bonds of Rail Connections, Inc. on Rating Watch Negative. This action affects the $15,285,000 current interest bonds, series A, the $12,786,177 capital appreciation bonds, series B (as of Jan. 1, 2001), and the $4,125,000 taxable current interest bonds, series C, all of which are secured on a parity basis by a gross lien on parking revenues and are rated `BBB-' by Fitch. This action is predicated on Massachusetts Bay Transportation Authority's (MBTA) intention to restructure the debt or to take the necessary measures to maintain the investment grade credit quality of the bonds.Although the parking facility has a strong economic value and ability to pay its debt obligations over the long-term, increased uncertainties in the short-to-medium term are the subject of the current review. The extent to which MBTA commuter patronage to the new garage is below the original forecast, raises uncertainties as to any future parking ramp-up, given the maturity of that potential customer base. It also raises uncertainties as to the ability of MBTA to implement the short-term rate increases that were important to its original financial forecast. MBTA's current long-term parking rate structure also results in a considerably lower financial margin for the project than was considered at the time of financing. New uncertainties include when and how MBTA will implement a higher long-term parking rate.
Even with a gross revenue pledge, there is an increasing likelihood that parking revenues will be insufficient to meet full and timely interest payments and debt service reserve fund deposit requirements over the next few years. This increases the possibility of needing to access the debt service reserve fund during the short-term. The first interest payment from parking revenues was made in a full and timely manner on Jan. 1st of this year. Previous interest payments were made from the capitalized interest account. There is increased uncertainty as to the adequacy of project cashflows once full debt service requirements, including principal payments, start in 2004.
When Fitch originally rated the project bonds in July 1999, we commented that `it is unusual for bonds of a stand-alone parking facility to have enough financial margin and other credit protections in order to attain an investment grade rating.' Nevertheless, it was our opinion that investment grade status was warranted for a number of reasons. The Route 128 train station (to be served by the new garage) has a mature base of both MBTA and Amtrak customers. The $3 short-term and $15 long-term parking rates to be charged to parking patrons were much higher than the surface lot that preceded the garage, but were comparable with similar facilities in the region. The bonds are secured by a gross revenue pledge of parking revenues, and any deficiency in garage operating expenses is the explicit obligation of MBTA.
Other important credit considerations included the execution of a memorandum of understanding between the MBTA and neighboring communities (clearing outstanding legal disputes concerning the project), the expectation of timely completion of construction, and the sufficiency of capitalized interest to extend beyond the expected commencement of operations. A final expectation was implementation of parking restrictions on Greenlodge Street, which is adjacent to the garage, and which was used by station patrons for parking while the garage was being constructed. While our financial stress test incorporated the feasibility consultant's base case MBTA patronage, it also incorporated our doubts as to the timing and scope of planned service enhancements by Amtrak, particularly with its new Acela service. For instance, during the first ten years of operation, we calculated that 1.00 times (x) coverage of debt service and required reserve deposits was achievable with base case MBTA customer parking revenue, and with no more than 40% of projected Amtrak customer parking revenues. This analysis suggested ample latitude for potential slippage in Amtrak patronage of the garage at the `BBB-' rating level. (See Fitch report dated July 23, 1999 for more details).
Changes in both internal and external credit considerations now result in the current rating review. An unexpected internal credit consideration was MBTA's response to delays in Amtrak's new Acela service. The authority never implemented the expected $15 per day long-term rate, opting instead for a $10 per day rate. Unlike some projects, MBTA was under no legal requirement to adopt an initial rate schedule. Instead, the financial forecast presented to Fitch incorporated a proposed $15 rate. While the Fitch stress test incorporated Amtrak service delays, thereby handicapping the long-term (and higher margin) parking customer growth, we did not anticipate the need to incorporate a 33% lower long-term parking rate.
An unexpected external credit consideration is the continued existence of free parking on Greenlodge Street, due to the refusal of the Town of Canton to make street parking illegal. At the time of the financing, it was anticipated that Greenlodge Street would be closed to parking once the new garage opened. The parking rate elasticity for potential MBTA customers is altered by the presence of 220 free parking spaces, which is the approximate parking capacity along Greenlodge Street. Total parking patronage is even below the 803 daily users of the previous (and inadequate) surface lot.
MBTA has notified Fitch of its intention to refinance the bonds by June 30, 2001. If unable to refinance the bonds in that time frame the MBTA has stated that it will take all necessary steps to support the bonds including revising parking rates and/or providing an equity contribution in the form of operating and maintenance contributions. The MBTA has stated it will pursue additional alternatives, if necessary to maintain the creditworthiness of the bonds.
Rail Connections, Inc. is a nonprofit corporation organized under Massachusetts law, for the limited purpose of financing the parking garage at the Rt.128 train station. The MBTA owns the garage, which has a maximum capacity of 2,670 spaces.