Case Study: Spotlight on a municipal credit

Municipal bonds are securities issued by states, cities, counties, and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways, and sewer systems. Our “Spotlight on a municipal credit” is designed to provide insight into these investment opportunities by offering a closer look at a particular issuer of municipal bonds.

Issuer: Grand Parkway Transportation Corporation

S&P:  AA+¹

Fitch:  AA¹

Grand Parkway Transportation Corporation is a transportation corporation based in Austin, Texas. The corporation is authorized to act on behalf of the Texas Transportation Commission for the public purpose of developing, financing, operating and maintaining certain segments of the Grand Parkway Project.  When completed, the Grand Parkway Project (State Highway 99), will be a 184-mile outer loop around the greater Houston metro area. The project is intended to improve mobility, reduce congestion, and accommodate demographic and economic growth in the greater Houston area.

Transactions and toll revenues grew nearly 8% and 18%, respectively, in fiscal year 2019 (with August 31, 2019 as its fiscal year-end).¹ Through the end of February 2020 (or the first half of fiscal year [FY] 2020), transactions were up 8% and revenues up 10% year over year (YOY).² However, transactions and revenues declined sharply during Q3 due to COVID-19, with both transactions and toll revenues declining 30% YOY. As result, through the end of the third quarter, transactions are down 6% while revenues are down 5% YOY.

Why we like the credit: Despite recent declines in transactions and revenues, as well as the uncertainty surrounding COVID-19, we believe the corporation’s bonds (specifically the senior debt) should continue to perform. Assuming a 30% decline in toll revenues in FY20 (a very conservative assumption), we expect debt service coverage to remain in excess of 20 times. To put a 30% decline into perspective, the corporation would have to receive zero toll revenues during Q4 FY 2020 for this to occur, which we believe is unlikely.

While debt service for senior debt jumps from $7 million in FY  2020 to $44 million in FY 2021, even if toll revenues declined an additional 50% in FY 2021, we estimate that debt service coverage would remain in excess of one time. In addition, the corporation has ample liquidity, with just over 2,000 days of cash on hand as of the end of FY 2019.