DBRS Downgrades Short-Term Private Activity Revenue Bonds of Purple Line Transit Partners, LLC to BBB (high), Stable Trends

DBRS Limited (DBRS) has today downgraded the Private Activity Revenue Bonds (RSA), Series 2016A and the Private Activity Revenue Bonds (FCP), Series 2016B (collectively, the Short-Term PABs) of Purple Line Transit Partners, LLC (ProjectCo) to BBB (high) from A (low). The trends on the ratings remain unchanged at Stable. DBRS’s assessment of a deterioration in the creditworthiness of Fluor Corporation (Fluor), which nonetheless remains the most creditworthy member of the Design Build Contractor and the entity upon which the Design Build Contractor’s credit assessment during the construction phase is based, is the primary cause of the rating action. Notwithstanding, DBRS notes that the BBB (high) ratings and Stable trends on the long-term Private Activity Revenue Bonds (SLP), Series 2016C, the long-term Private Activity Revenue Bonds (AP), Series 2016D and the long-term TIFIA loan, whose creditworthiness had been bounded by the operating phase at the time of the rating assignment, remain unchanged. ProjectCo is the special-purpose entity created to design, build, finance and maintain the Maryland Purple Line Project (the Project) under a 35.8-year project agreement (PA) with the Maryland Department of Transportation (MDOT) and the Maryland Transit Administration (MTA; collectively, the Authority or the Owner). ProjectCo’s design, construction and commissioning obligations have been passed down to affiliates of Fluor, Salini Impregilo S.p.A. and Traylor Bros., Inc. (collectively, the Design Build Contractor).

At the time of the initial rating assignment, DBRS conducted internal assessments on the creditworthiness of the Design Build Contractor parties and their parents and selected Fluor, based on its relative credit strength, to be the starting point for the Project’s rating during construction. At financial close, each of the Design Build Contractor’s respective parents provided a joint and several guarantee, which covers all of the Design Build Contractor’s obligations under the Construction Contract, to an aggregate limit of 35% of the contract price, with construction work valued at $2.0 billion. Since financial close, DBRS’s internal assessment of the creditworthiness of Fluor has declined as a result of Fluor’s recent weakened financial performance, which DBRS expects will continue during the 2017 fiscal year. As a result, the credit value of Fluor’s parent guarantee has been negatively impacted.

LEGAL PROCEEDINGS
On August 3, 2016, shortly after financial close in June of that year, the U.S. District Court for the District of Columbia (the Court) rendered a decision to cancel federal approval (namely, the Purple Line Record of Decision or the ROD) for the Project until the completion of a new Environmental Impact Statement (EIS) that considers the potential for reduced ridership within the D.C. metro system. The decision was made in connection with a suit filed by the Friends of the Capital Crescent Trail and other interested individuals (the Plaintiffs) against the Federal Transit Administration (FTA), the U.S. Department of Transportation, U.S. Fish and Wildlife Service and the U.S. Department of the Interior (collectively, the Defendants) alleging, among other things, that the Defendants violated federal law by certain acts and omissions in obtaining approvals issued for the Project. The Court’s decision resulted in the postponement of an approximately $900 million FTA Section 5309 Capital Investment Grant (New Starts) earmarked to fund the Project and has caused the construction of the Project to be halted.

On November 22, 2016, the judge hearing the suit issued a memorandum opinion in response to a motion made by the Defendants and the State of Maryland asking the court to alter or amend its judgement. In the memorandum opinion, the judge reaffirmed his judgement that the Defendants “violated the Administrative Procedure Act when they wholly failed to consider the impact that Washington Metropolitan Area Transit Authority Metrorail’s recent safety and ridership issues could have on the Purple Line Project.” The judge declined to reinstate the ROD, but found that “the Federal Transit Administration must be given the initial opportunity to assess the significance of this new information and determine whether a full supplemental environmental impact statement is necessary.” The Defendants have since responded with an opinion that a further supplemental EIS is not necessary in their view. A final decision from the court is currently pending and is without a firm timeline.

As a result of the legal proceedings, ProjectCo filed a Relief Event claim in September 2016 with MTA stating that if the court’s order made on August 3, 2016, to prepare a supplemental EIS is not promptly rescinded or the ROD is not otherwise promptly reinstated, it will have a significant adverse impact on ProjectCo’s performance under the PA, and in turn, the performance by the Design Build Contractor under the Construction Contract. The Relief Event claim further outlines that the ROD and the EIS finalized on August 28, 2013, constitute Governmental Approvals that are designated as Owner-Provided Approvals under the PA. Since the Authority is responsible under the PA for the Owner-Provided Approvals, ProjectCo is of the opinion that the order constitutes an Owner failure to perform or observe its material covenants or obligations under the PA and/or to comply with the law under the definition of Owner-Caused Delay within the PA. An Owner-Caused Delay in turn constitutes a Relief Event under the definition of Relief Event in the PA. Furthermore, the order from a court of competent jurisdiction prohibiting a portion of the construction work constitutes a Relief Event, as well as any necessary adjustment to the work.

In response to a Relief Event, ProjectCo is entitled to an extension of applicable deadlines in respect of the Revenue Service Availability target date, the Long Stop Date and the Final Completion target date commensurate with the period whereby the duration of the Relief Event results in a delay to the critical path, subject to some limitations and the satisfaction of certain requirements, including ProjectCo’s demonstration that it has undertaken appropriate measures to mitigate delays. ProjectCo will also be entitled to compensation for additional construction and interest costs related to the delay.

Both parties, the Authority and ProjectCo, have the right to provide the other party with notice of a conditional election to terminate the PA for an Extended Delay, which includes any Relief Event or Owner-Caused Delay. This right arises in the case of a Relief Event that has materially prevented or delayed ProjectCo from performing a substantial portion of its obligations under the PA for a period of 180 days or more within a period of 365 consecutive days. This right also arises in the case of an Owner-Caused Delay that has materially prevented or delayed ProjectCo from performing a substantial portion of its obligations under the PA for a period of 220 days or more within a period of 365 consecutive days. Furthermore, if any Extended Delay results in 365 or more days of critical path delay, either party may deliver to the other party a notice of its unconditional election to terminate the PA. Notwithstanding the above, the Authority shall not have the right to deliver a notice to conditionally or unconditionally terminate for an Owner-Caused Delay.

In the original work staging plan for the Project, construction activities were scheduled to begin in October 2016. Since the cancellation of the ROD, the Design Build Contractor’s activities have been limited to design development. Should a termination occur in relation to a Relief Event and/or Owner-Caused Delay, bondholders will be entitled to receive the Project Debt Termination Amount, which includes repayment of all outstanding principal and all breakage costs, including make-whole payments, subject to certain adjustments specified in the PA. The Authority is required to make payments for the termination of the project debt within 60 days after ProjectCo has provided the Authority with a written statement outlining the amounts due in respect of terminating such debt. At this time, ProjectCo has not expressed an intention nor a desire to terminate the PA.

DBRS understands that depending on the outcome of the litigation, the Termination Due to Court Ruling provisions of the PA could apply in the future. In this circumstance, bondholders will be entitled to receive the Project Debt Termination Amount, as described above.

DBRS will continue to monitor the development of the court proceedings. Negative rating action may be taken if the schedule and compensation relief ultimately provided by the Authority is deemed to be insufficient, or possibly insufficient, to reach Revenue Service Availability by the then applicable Long Stop Date, or is insufficient to cover additional debt servicing costs causing, or expected to cause, a payment default in respect of ProjectCo’s senior debt obligations. At this time, DBRS considers positive rating action to be unlikely.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Public-Private Partnerships, which can be found on www.dbrs.com under Methodologies.