2008-11-09 06:46:01 -

- Fitch Ratings has assigned an 'AA-' long-term rating to the Illinois State Toll Highway Authority's (the authority) approximately $400 million toll highway variable-rate senior priority revenue bonds, series 2008B. The bonds are scheduled for negotiated sale on or about Nov. 6, 2008 and are secured by a senior lien on the net revenues of the toll-road system. Proceeds will

be used to fund portions of the authority's $6.2 billion Congestion Relief capital program. Fitch has also affirmed the 'AA-' rating on the authority's $3.1 billion of outstanding parity debt. The Rating Outlook is Stable.

The 'AA-' rating reflects strong regional economic fundamentals and growing population base resulting in robust traffic demand, the essential nature of the transportation links serving a heavily traveled metropolitan area including direct connections to an established network of Interstate highways, the sound financial profile with historical coverage levels in excess of 2.0 times (x), generally low toll rates with economic flexibility to raise toll rates if needed, and limited competition from toll-free roads.

The rating also incorporates rising debt levels, with a relatively large 40% component in variable mode, associated with existing multi-billion Congestion Relief capital program. Further, the Authority recently announced a $1.8 billion Phase II addition to the capital program, much of which will likely be debt financed. The rating also incorporates the potential for stagnant traffic growth in the near term, given the weakening economic conditions within the Chicago MSA as well as ongoing volatility of fuel prices.

The authority operates a network of four toll highways that serve a 12-county area in northeastern Illinois, including the Chicago metropolitan area. Since the opening of its first highway in 1959, the authority has enjoyed a consistent history of annual gains in traffic and revenue reflecting the steady expansion of the regional economy. However, declines in traffic following the 2005 toll increases and the start of significant construction on much of the system, as well as the 2006 elimination of a mainline toll plaza on the Northwest Tollway, resulted in a 4.3% overall decline in transactions between 2004 and 2007.

Toll revenues increased significantly following the 2005 toll increase, however, the authority experienced a modest 2.3% decline in 2006 due to the combined effects of reduced traffic volume and a switch in companies that process toll evasions that resulted in an interruption in the billing process. For 2007, the addition of a new 12.5 mile segment on the Veterans Tollway helped toll revenues grow by just over 1%. Based on nine-months data for fiscal 2008, toll traffic is experiencing a 2.3% decline while toll revenues are nearly unchanged. Fitch believes these results are satisfactory for a mature toll-road system, given unprecedented volatility in fuel prices and weakening economic trends in the region. The authority's current forecast is based on a projection of a 3.1% average annual increase in system traffic, as measured in transactions, through fiscal year 2016. Fitch still continues to view the forecast as reasonable primarily due to the expansion-related projects within the capital program. Still, traffic growth may under-perform these projections in the near term if economic conditions remain weak.

The financial profile of the Authority remains strong. For fiscal 2007, the debt service coverage ratio (DSCR) was sound at 2.4x and liquidity position was notably healthy with 946 days cash on hand. The authority projects DSCR, assuming the new debt issuance of the series 2008B bonds to range between 2.3x to 2.5x. This forecast assumes toll transactions grow by over 20% in the next four years and does not include the expected issuance of an additional $700 million of new money parity revenue bonds in 2009. Still, management has indicated a goal to maintain debt service coverage at or above 2.0x. Fitch believes that current economic conditions could very well suppress traffic and toll revenues, resulting in financial results below those currently projected. Should this scenario develop, further toll increases may be needed to maintain current credit quality.

To date, the capital program is progressing with many capacity enhancing projects nearing completion, with no material variances from the budget which was revised upward by $1 billion in 2007. While the authority does not anticipate the need for future toll adjustments to finance the Congestion Relief Phase I capital program, a recently announced second phase may lead up to $1.8 billion of additional debt and require future rate increases. Key elements to this new plan include introduction of green-managed lanes within the existing system with variable pricing structures. Formal adoption of the new capital plan could occur prior to the end of the year, which anticipates a 60% toll increase starting in 2015 for commercial vehicles followed by an annual increase tied to the consumer price index. Fitch will continue to monitor the size and scope of the new component of the capital program as well as the adequacy of new proposed revenues. The Stable Outlook reflects the successful implementation of the capital improvement program without material erosion in financial performance.

Fitch believes that the authority's sizable variable-rate portfolio represents some risks to its overall financing costs. Over 40% of the Authority's $3.1 billion outstanding debt is in variable-rate demand mode and approximately $400 million of such bonds are currently being held by bank liquidity providers due to failed remarketings. All of the outstanding variable-rate debt is hedged through a diverse group of swap counterparties. Still, volatile market conditions for variable-rate debt instruments and ongoing credit uncertainties amongst the credit enhancers and liquidity providers may lead to higher debt interest costs for the authority. Fitch expects the authority to carefully manage and limit the potential upside to its debt interest costs within its variable-rate portfolio. No accelerated term-outs for the bank bonds are expected until at least April 2009.

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
Seth Lehman, +1-212-908-0755
Michael McDermott, +1-212-908-0605
Cindy Stoller, +1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com