Virginia Small Business Financing Authority — Moody’s assigns first-time ratings to Capital Beltway Express LLC’s Private Activity Revenue Bonds, TIFIA loan and VTIB loan; outlook is stable

Rating Action: Moody’s assigns first-time ratings to Capital Beltway Express LLC’s Private Activity Revenue Bonds, TIFIA loan and VTIB loan; outlook is stableGlobal Credit Research – 31 Jan 2022New York, January 31, 2022 — Moody’s Investors Service, (“Moody’s”) has today assigned a first time Baa1 rating to the Capital Beltway Express LLC’s (“Project Co” or “Borrower” or “CBE”) $302.854 million Tax-Exempt Senior Lien Private Activity Revenue Bonds, (I-495 HOT Lanes Project), Series 2022 and a Baa1 rating to its $840.7 million Taxable Subordinate Lien TIFIA Revenue Notes, (I-495 HOT Lanes Project), Series 2022, both issued through a conduit issuer, the Virginia Small Business Financing Authority. We have concurrently assigned a first time Baa1 rating to the Borrower’s $1.05 billion Transportation Infrastructure Finance and Innovation Act (TIFIA) loan, consisting of an $840.7 million TIFIA loan — Refinancing Tranche and a $212.7 million TIFIA loan — NEXT Tranche, as well as a first time Baa2 rating to the Borrower’s $49 million Virginia Tax Infrastructure Bank (VTIB) loan. The rating outlook is stable.The proceeds from the $840.7 million TIFIA loan — Refinancing Tranche will be used to refinance the $840.7 million Taxable Subordinate Lien TIFIA Revenue Notes, (I-495 HOT Lanes Project), Series 2022. Project Co will use $189.2 million (par amount excludes premium) of the Senior Lien Private Activity Revenue Bonds (PABs), Series 2022 to refinance the outstanding 2008 PABs. The remaining $114.5 million (par amount excludes premium) of senior PABs, the $212.7 million TIFIA loan — NEXT Tranche and the $49 million VTIB loan will be used along with equity to finance Project NEXT, a 2.5 mile extension of the Project (the 12 mile I-495 HOT Lanes Project) from its northern terminus just north of the Dulles Toll Road to the George Washington Memorial Parkway just before the Maryland border.Assignments:..Issuer: Capital Beltway Express LLC….Senior Secured Bank TIFIA Term Loan, Assigned Baa1….Senior Unsecured VTIB Term Loan, Assigned Baa2..Issuer: Virginia Small Business Financing Authority….Senior Secured Revenue Bonds, Assigned Baa1Outlook Actions:..Issuer: Capital Beltway Express LLC….Outlook, Assigned StableRATINGS RATIONALEThe long-term Baa1 rating for the senior PABs and TIFIA loan reflects the long-term cashflow generating ability of the I-495 HOT Lanes Project that will only be enhanced with the addition of the extension, Project NEXT, at the northern end of the current 12-mile facility. The construction risk of Project NEXT is well mitigated and not constraining to the rating. As the regional managed lane network is completed, the I-495 HOT Lanes Project will benefit from higher traffic and revenue as we have seen in other regions to date. The trip reliability that the managed lanes provide is essential to the users that are willing to pay high toll rates during congested periods. This allows the owner to continue to drive revenue growth at a higher level than base traffic growth because the same number of users would be willing to pay more over time if more congestion occurs and demand increases. The dynamic tolling model ensures the free flow of traffic at certain speeds and lane capacities while also driving toll revenues higher over time for the project.The ratings incorporate a favorable view of the ultimate 50% equity owner of Transurban Chesapeake, Transurban Finance Company Pty Ltd (Transurban, Baa1 stable), that is a highly experienced long-term global toll road developer. This expertise and long-term commitment to the project, region and asset class has been fundamental to the project’s continued performance since it opened in 2012 owing to the weaker than expected initial ramp up and, more recently, the material impact from the pandemic. Transurban’s long-term commitment has also shown to include equity support if needed and the very long concession for the project with 66 years remaining, provides a very high incentive to provide cashflow support through short periods of stress.Long-term, there is material value in the long concession and the expectation that the new Project NEXT will eventually connect to the new managed lanes to be developed along the new American Legion bridge into Maryland and up along I-270. Once completed, Maryland’s new express lanes will direct even more commuter traffic onto the project because of improved reliability for those commuters. Similarly, the improved connectivity to the Dulles Toll Road and I-66 and the further build out of the regional managed lane network in DC all bode well for long-term traffic and revenue growth. We have seen additional years of growth post the completion of improved managed lane connectivity in other regions and this will happen in DC once the network is fully connected, and regional users find the increased trip reliability the lanes provide can extend further. The I-495 is at the center of this DC managed lane network and benefits from connecting traffic throughout the region. We understand that most of these aspects are not included in the base traffic and revenue study, which is conservative and why the study’s outputs are considered reasonable as the study was well developed with a significant amount of data and an ability to back validate past performance.The ratings incorporate the higher degree of uncertainty over the next couple of years as the project continues to recover from the pandemic at lagging levels compared to other tolled managed lanes. The construction of Project NEXT and other construction in the area is also likely to have some impact on traffic and revenue, which indicates that the project’s new steady-state operating profile may not be known for at least eight years. The project is well structured by having lower mandatory debt service requirements in these early years, allowing time for traffic and revenue to fully return and to grow over time. This uncertainty is also balanced by the owners’ high incentive to support the project through periods of short distress, as has been the case in the past, owing to the long concession.The ratings also reflect the strong financial metrics forecast over the debt tenor and the significant strength of the long concession tail that provides room for refinancings and extensions of debt if needed as well as room for new debt for future capital improvements, if needed and after satisfying the relatively low additional bonds coverage tests. In Moody’s sensitivities and realistic downside scenarios, the total debt service coverage ratios (DSCRs) remain sound, and the project continues to cashflow well. This resiliency is fundamental to the ratings and is further increased by the lower TIFIA debt service payments through 2033 before a progressive mandatory cash sweep starts to trap excess cashflow to pay down the TIFIA loan. Given the high cash sweep, we expect the project to refinance the TIFIA loan before the sweep starts in year 2034. In analyzing such a scenario, the long-term DSCRs remain in line with the DSCRs generated prior to the potential refinancing, indicating there is adequate room under the long concession to fully amortize the debt in the future and still maintain a long concession tail.Finally, the ratings incorporate the strong project financing features, reserve requirements, equity lock up and early redemption of debt should low performance persist, limitations on business activities and on adding new debt, especially while the TIFIA and VTIB loans remain outstanding. The flexible TIFIA and VTIB loan repayment schedules and low-cost financing help lower the fixed costs for the project given TIFIA will be about two-thirds of all the total debt outstanding once it is drawn and accretes. This large subordinate cushion ensures the senior lien private activity bonds maintain very strong DSCRs. The debt is also fully amortizing, though it ramps up over time, and the debt service schedule is structured to allow time for the asset to grow its traffic and revenue base as it continues to recover from the pandemic. The TIFIA cash sweep is favorable to lenders in that it reduces total leverage faster than expected, but we do not expect the sweep to occur and for equity to refinance the TIFIA debt before then. This could be on either a subordinate basis or pari passu with the senior debt as the PABs would be callable at the same time the TIFIA loan begins to sweep.The PABs and TIFIA loan are of equal credit quality due to the ‘springing-lien’ provision in the TIFIA loan that states that if a Bankruptcy Related Event (BRE) occurs, a risk that is heightened during construction and the initial ramp-up periods as it also includes missing two consecutive payments of mandatory debt service on the TIFIA loan. Should a BRE occur, the TIFIA loan becomes a Senior Obligation on parity with the senior PABs, thus resulting in equal expected loss rates.The Baa2 rating on the VTIB Loan reflects its true subordinate nature as it remains subordinate to both the senior PABs and the TIFIA Loan if a BRE occurs. While the VTIB and TIFIA Loan are paid in a parity cash flow basis, if a BRE occurs, the VTIB Loan remains subordinate and could have a higher expected loss rate owing to the large amount of senior PABs and TIFIA Loan obligations ranked ahead of the VTIB Loan, which would reduce the recovery prospects on the VTIB loan relative to the senior PABs and the TIFIA Loan.OUTLOOKThe stable outlook reflects our expectation that construction will proceed on time and on budget and the Project’s traffic and revenue will continue to recover to be relatively in line with Moody’s forecast range for base level performance.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFACTORS THAT COULD LEAD TO AN UPGRADE** Construction of Project NEXT is completed relatively on time and the revenue ramp-up profile exceeds expectations** Traffic and revenue performance exceeds Moody’s current forecast expectations with financial metrics above forecastFACTORS THAT COULD LEAD TO A DOWNGRADE** Project NEXT encounters meaningful delays or issues during construction that materially affect the Project, reducing traffic and revenue** Actual traffic and revenue performance is materially below Moody’s forecast expectations with limited ability to recover and financial metric weaken materially below our current expectations** Higher leverage results in weaker long-term financial metricsPROFILEProject Co is a wholly owned subsidiary of Transurban Chesapeake that is owned by Transurban (50%, Baa1 stable), AustralianSuper (25%), UniSuper (10%), and the Canada Pension Plan Investment Board (15%), (collectively, “the Sponsors”). Project Co entered into an 80-year Amended and Restated Comprehensive Agreement (“ARCA”) with the Virginia Department of Transportation (“VDOT”) in 2007 to design, build, operate and maintain the Project and this ARCA was updated in September 2021 to include Project NEXT.METHODOLOGYThe principal methodology used in these ratings was Privately Managed Toll Roads Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244932. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. John Medina VP – Senior Credit Officer Project Finance Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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