Elizabeth River Crossings Opco's Debt Is ... - Standard & Poor's

April 2, 2012 

Research Update: 

Elizabeth River Crossings Opco's 

Debt Is Assigned Preliminary 'BBB-' 

Rating; Outlook Stable 

Primary Credit Analyst: 

Jodi E Hecht, New York (1) 212-438-2019;jodi_hecht@standardandpoors.com 

Secondary Contact: 

Matthew Hobby, New York (1) 212-438-6441;matthew_hobby@standardandpoors.com 

Table Of Contents 

Overview 

Rating Action 

Rationale 

Outlook 

Related Criteria And Research 

Ratings List 

www.standardandpoors.com/ratingsdirect 1 

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Research Update: 

Elizabeth River Crossings Opco's Debt Is 

Assigned Preliminary 'BBB-' Rating; Outlook 

Stable 

Overview 

• U.S. public/private partnership Elizabeth River Crossings OpCo LLC (ERC) 

is issuing senior bonds and obtaining a federal loan under the 

Transportation Infrastructure Finance and Innovation Act program to 

build, rehabilitate, and operate new and existing tunnels between the 

Virginia cities of Portsmouth and Norfolk. ERC plans to earn traffic toll 

revenues under a 58-year comprehensive agreement with the Virginia Dept. 

of Transportation on the existing untolled Midtown and Downtown tunnels 

and the to-be-built Midtown Tunnel and Martin Luther King extension 

expressway projects to repay the public and federal debt. 

• We are assigning our preliminary 'BBB-' rating to ERC's debt. This is 

Standard & Poor's first public rating for a public-private partnership 

project in the U.S. 

• The stable outlook reflects our belief that the project will complete 

construction work on time, including establishing a toll collection 

system on the existing untolled facilities and that traffic and 

operations will be in line with our base case. 

Rating Action 

On April 2, 2012, Standard & Poor's Rating Services assigned its preliminary 

'BBB-' rating to Elizabeth River Crossings Opco LLC's (ERC) $675 million 

senior-lien revenue bonds due June 2041 and to the $422 million Transportation 

Infrastructure Finance and Innovation Act (TIFIA) loan due June 2046. The 

rating is subject to our review of executable documentation that includes 

terms that ERC has represented and we have included in our rating conclusion. 

The outlook is stable. 

Rationale 

The rating reflects the traffic ramp-up risk, a well-mitigated construction 

program, and a highly leveraged financial profile. A key credit challenge for 

the project is the impact on existing traffic levels after establishing tolls 

on the Midtown and Downtown tunnels. These tunnels connect the two cities, 

Portsmouth and Norfolk, and run across the Elizabeth River. At the same time, 

the project will build a new, two-lane tunnel adjacent to the existing Midtown 

Tunnel, thereby doubling the capacity of the existing Midtown Tunnel. The 

project will also build the Martin Luther King extension expressway (MLK) that 

will provide links to the Midtown and Downtown tunnels. 

Standard & Poors | RatingsDirect on the Global Credit Portal | April 2, 2012 2 

953672 | 300000444

Research Update: Elizabeth River Crossings Opco's Debt Is Assigned Preliminary 'BBB-' Rating; Outlook Stable 

ERC is developing and will operate the project. It is wholly owned by 

Elizabeth River Crossings HoldCo LLC , which is equally owned by Macquarie 

Midtown Holdings Inc., wholly owned by funds managed by Macquarie 

Infrastructure and Real Assets, and Skanska ID ERC Holdings LLC, an indirect 

subsidiary of Skanska Inc. ERC will build and operate the project under the 

terms of the Comprehensive Agreement (CA) with the Virginia Dept. of 

Transportation (VDOT), the owner of the project assets. The CA is in place for 

58 years from financial close and we believe it provides a reasonable 

framework to build and operate the facilities. Our rating assumes that VDOT 

has the authority to grant to the project the right to collect toll revenues 

and opinions are being issued by the Virginia Attorney General's office on 

behalf of VDOT, and Hunton & Williams LLP, counsel to the project, to that 

effect. 

The project is funding construction and rehabilitation work with bond 

proceeds, a TIFIA loan, a contribution from VDOT, sponsor equity, and expected 

toll revenues on the existing tunnels during the five year construction phase. 

All funds are committed at closing, except the expected toll revenues; the 

lack of full funding at closing is a credit weakness. 

The TIFIA debt is meant to provide greater credit support to senior debt, by 

having provisions that permit deferral of payments for principal and interest. 

Under this loan structure, there are no TIFIA interest payments until 10 years 

after financial close, and from years 11 to 18 only a portion of the interest 

payments are mandatory. TIFIA principal payments begin in 2037, 25 years after 

financial close. The TIFIA loan payments come after senior debt service in the 

payment waterfall. However, in our analysis of financial performance, we 

examine cash flow coverage of both the senior secured and mandatory TIFIA loan 

payments because the distribution test is after the TIFIA loan payments in the 

waterfall and failure to make two mandatory TIFIA payments, along with a 

project bankruptcy filing can lead to default that cross-defaults to the 

senior debt. 

The project has the following risks: 

• The project is exposed to traffic volume risk that is tied to regional 

and economic trends, including ramp-up and uncertain long-term growth 

trends. 

• The construction program is a large, complex project and, given the 

degree of specialization, the replacement market for a new design build 

(DB) contractor is limited. 

• The risk that construction costs are not fully funded at financial close 

because about 17% of sources are coming from net toll revenue collected 

during the construction period. 

• Uncertainty regarding people's willingness to pay the toll. While tunnels 

and other area facilities had tolls, they were removed more than 20 years 

ago and the region does not have recent experience with tolled 

facilities. We believe this factor will affect the toll ramp-up, which we 

have considered in our base case. 


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The 'BBB-' rating reflects the following strengths: 

• Strong existing demand for the Midtown and Downtown tunnels, which are 

currently untolled and are used primarily by passenger cars commuting to 

and from work. While there are competing alternatives, these are equally 

congested during peak hours. 

• The tunnels are in the Hampton Roads region, an employment and 

residential center dominated by stable U.S. Navy and port employment and 

sound healthcare and tourism sectors. 

• Construction risk of the new Midtown Tunnel is mitigated by using 

commercially proven technology and building processes, performed by 

experienced, top-tier DB contractors. 

• The tolling technology is commercially proven and readily available. 

Federal Signal Technologies is the tolling contractor and is capable of 

installing and operating the all-electronic toll system. In addition, 

there is a deep market for replacement contractors if needed. 

We believe a key risk is the uncertainty about the initial traffic volume and 

the level of traffic reduction at the existing tunnels once tolling begins. 

ERC is establishing an all-electronic toll collection infrastructure on the 

Midtown and Downtown tunnels by September 2012, with a modest initial toll 

rate of $1.84 during peak periods and $1.59 for passenger cars during 

off-peak. In addition, we believe the ramp-up period will be longer than the 

sponsor's base case, and the sponsor's long-term growth rate, a key driver to 

future project revenues, is aggressive. Standard & Poor's base case adjusts 

for these aggressive assumptions. Under our base case, we believe average 

annual daily traffic will decline by 44% in 2012 when tolls go into effect, 

compared with a 28% decline under the sponsor base case. Our assumptions 

include a 12-month toll rate ramp-up and a six-month traffic ramp up. Our 

long-term growth rate averages 1.3% from 2016-2045, lower than the 1.5% growth 

rate under the sponsor's case. 

Traffic trends at the tunnels grew by an average rate of 1.5% from 1993 

through 2010, slower than the region's employment and population growth. 

Traffic growth was relatively stable during the period of heavy military 

spending. Tunnel users are primarily commuting passenger cars (about 60% 

during peak hours) in the Hampton Roads region, providing sound demand for the 

tunnels with limited alternatives. The U.S. Navy and port operations account 

for most employment in Hampton Roads, and the city also has sound healthcare 

and tourism sectors. During the recent recession, traffic dropped by just 

under 1%, mirroring regional and national trends when regional unemployment 

doubled to 7% and population growth was flat to declining. We expect that 

traffic trends will continue to reflect regional and national economic trends 

and also be heavily influenced by changes in the region's military bases and 

centers. While several bases may close over the next few years, we have 

assessed the essentiality of the bases and consider them to be moderately to 

highly essential. 

ERC has mitigated construction risk by passing it to the DB contractors 

through a fixed-priced, date-certain, DB contract with SKW Constructors, a 

joint venture of Skanska USA Civil Southeast (45%), Kiewit Infrastructure Co. 


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(40%), and Weeks Marine (15%), with obligations guaranteed by Skanska AB and 

Kiewit Infrastructure Group Inc. The DB contract has liquidated damages 

provisions to provide appropriate incentive to perform and adequate liquidity 

under the parent guarantee to fund needs through the long stop date, or 18 

months after the project reaches scheduled substantial completion. While the 

guarantors' credit profiles are above that of the project, the parent 

guarantees cover 45% of the DB contract, not the full value of the 

construction works. However, we concluded that ERC can replace SKW and meet 

the requirements under the CA. Therefore, under our counterparty criteria, the 

project rating is not linked to the assessment of the DB contractor. 

Construction is not fully funded at financial close and will rely on a portion 

of net toll revenues for $362 million, or 17%, of total funding generated 

during the six years of construction. The sponsor is providing a $50.6 million 

letter of credit to backstop a shortfall in toll revenues. Starting with our 

base case, if traffic declined by another 24%, the full letter of credit would 

be drawn and construction and reserve funds would still be fully funded. 

Under our base case, the minimum debt service coverage ratio (DSCR) of senior 

obligations and mandatory TIFIA loan payments is 1.32x, with an average of 

1.78x, and will average 1.65x during the senior debt's term. If the project 

delays toll implementation for six months, then the minimum DSCR drops to 

1.15x. We believe the project can withstand several downside stress scenarios. 

Under our downside stresses, including changes in inflation, operating and 

capital expenses, toll escalation, and competing facilities, cash flow is able 

to cover project obligations, and fund the construction and reserve funds. 

Liquidity 

The project's level of funding is adequate, and funds the reserves slightly 

higher than similar projects. Lenders can access a debt service reserve fund 

that will get funding at financial close at an amount equal to the next six 

months of senior debt service and mandatory TIFIA loan payments. In addition, 

the project has a major maintenance reserve that initially is required to hold 

the first 10 years of projected capital requirements. In year 11, the 

requirements change to a four-year rolling need, in line with other similar 

projects. 

Outlook 

We base the stable outlook on our assessment of current construction 

arrangements and counterparty dependency assessments. A higher rating is not 

likely during construction, even if counterparty ratings increase, based on 

the construction, ramp-up, and operating risks. After construction, an 

improvement in the rating would require comfort that performance would well 

exceed our current expectations over the debt and loan's tenor. Factors that 

could lower the rating are major construction problems that seem remote 

presently, the debt service or major maintenance funds are not fully funded at 

substantial completion, or the initial traffic is significantly lower than our 


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base case. 

Related Criteria And Research 

• Project Finance Construction and Operations Counterparty Methodology, 

Dec. 20, 2011 

• Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007 

Ratings List 

New rating 

Elizabeth River Crossing Opco LLC 

$422 million debt BBB-(prelim)/Stable 

Virginia Small Business Financing Authority (obligor) 

$675 mil senior lien revenue bonds BBB-(prelim)/Stable 

Complete ratings information is available to subscribers of RatingsDirect on 

the Global Credit Portal at www.globalcreditportal.com. All ratings affected 

by this rating action can be found on Standard & Poor's public Web site at 

www.standardandpoors.com. Use the Ratings search box located in the left 

column. 


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Elizabeth River Crossings Opco's Debt Is ... - Standard & Poor's

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