2008-08-25 23:38:04 -

- Fitch Ratings places on Rating Watch Negative $41.27 million outstanding Lake of the Ozarks Community Bridge Corporation (the corporation) bridge system refunding revenue bonds, series 1998. Fitch currently rates the bonds 'BBB-.' The series 1998 bonds mature in December 2026 and are secured by the net revenues of a toll bridge over the Lake of the Ozarks in central

Missouri.

The Negative Rating Watch reflects weaker demand in 2008 and the historical unwillingness of management to raise toll rates to a level consistent with legal covenants made to bondholders and with an investment grade rating. To the extent that management does not act aggressively in the interests of bondholders within the next six months Fitch will downgrade the bonds. There has been a sharp recent downturn in traffic, with differences in May, June, and July of -10%, -12% and -12% compared with those same months in 2007. Similar to other U.S. toll roads the bridge has experienced traffic declines due to high fuel prices and a general economic downturn. However, the discretionary nature of traffic has resulted in larger declines than at other comparable facilities. July was the sixth consecutive month in which traffic was less than the same month the previous year.

In 2005 the bridge corporation did extend the summer period during which higher tolls are charged but the revenue increase was insufficient to provide the 1.2 times (x) coverage required under the bond indenture. Instead management used a defeasance program to apply available cash in order to artificially meet the covenant. The bridge opened in 1998 with traffic levels 30% below initial forecasts, and with the exception of the extended summer season toll rates have remained unchanged since that time. Management has come to depend on traffic growth to eventually provide sufficient revenue to meet debt service needs.

The 'BBB-' rating reflects the bridge's small but historically growing base of traffic, substantial general fund balance and rate-making flexibility due to the absence of comparable alternative routes. Credit concerns include a heavy reliance on seasonal traffic flows tied to leisure activity, low levels of debt service coverage and the projected gradual erosion of internal liquidity.

Lake of the Ozarks, a man-made lake created by the damming of the Osage River, is a popular warm-weather destination for residents of the St. Louis and Kansas City metropolitan areas. The half-mile bridge provides a critical transportation link by reducing driving time around the lake by up to one hour. Annual traffic of 1.6 million vehicles, though still less than the level forecast at opening, grew at a strong 7% per year from fiscal 2001-2007. Passenger car tolls are $2.50 in each direction in the summer and $1.50 in the off-season. In 2005 the bridge corporation extended the season for summer rates to the six months from April through September.

The bond indenture requires the corporation to set toll rates such that net revenues achieve at least 1.2x debt service coverage, as measured by the ratio of net cash flow to scheduled debt service. The bridge currently achieves this required ratio only by paying down principal ahead of time using funds from the general reserve. For example, the company defeased principal amounts of $1.06 million in 2004 and $1.13 million in 2005, reducing scheduled debt service payments for 2007 and 2008 by those same amounts and allowing the corporation to technically meet its 1.2x coverage requirement. Rather than increasing tolls such that the bridge can meet its covenants on the basis of current cash flow, management plans to continue using defeasance to reduce future years' debt service while net cash flow grows with traffic. The general fund balance is currently about $5.8 million, meaning that even in a scenario with persistent negative traffic growth management could potentially continue its defeasance strategy for up a decade or more. Nonetheless Fitch does not consider the use of liquidity to prop up legal coverage for such an extended period while coverage on a current cash flow basis hovers at or below 1.0x to be consistent with an investment-grade rating. It should be noted that the average toll on the bridge is currently $2.33 per crossing. Assuming no significant changes in operating margin, a 30% toll increase would allow for estimated 1.2x coverage in all periods and produce strong surplus flows to internal liquidity accounts.

The Lake of the Ozarks Community Bridge Corporation is a not-for-profit corporation governed by a seven-member board of directors. The corporation oversaw construction and financing of the bridge and manages its ongoing operations. It was the first of its type to be created under the Missouri Transportation Corporation Act of 1990, which allowed private non-profit corporations to develop projects as an alternative to normal bridge and highway funding methods. The bridge, located in Lake Ozark, MO, is currently the only the corporation operates.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Mike McDermott, 212-908-0605
Andrew Abramczyk, 212-908-0596
or
Media Relations:
Cindy Stoller, 212-908-0526