KBRA Affirms BBB Rating for Michigan Strategic Fund Limited Obligation Revenue Bonds (I-75 Improvement Project), Series 2018

KBRA affirms the BBB rating for the Michigan Strategic Fund Limited Obligation Revenue Bonds (I-75 Improvement Project), Series 2018 (the bonds) issued by the Michigan Strategic Fund for the Michigan I-75 Modernization Project (the project). The Outlook is Stable.

Oakland Corridor Partners LLC (OCP) is a special-purpose limited liability company formed to develop and maintain the project (1.5 miles of rural freeway, four miles of urban depressed freeway with service drives, a storage and drainage tunnel, and pump station, all located within Oakland County, Michigan) pursuant to a public-private partnership (P3) design-build-finance-maintain agreement (the project agreement) with the Michigan Department of Transportation (MDOT). OCP is indirectly owned by four private sector sponsors: John Laing Investments Limited (70%), Ajax Paving Industries, Inc. (10%), Dan’s Excavating, Inc. (10%), and Jay Dee Contractors, Inc. (10%).

Key Credit Considerations

(+) Settlement of Differing Site Conditions EventOCP entered into a settlement agreement with MDOT on December 20, 2022 in relation to the differing site conditions event that has caused significant delays to the tunnel work and construction of the pump station. The settlement agreement resolves all liability associated with the differing site conditions event as well as other monetary claims relating to unavailability events. The settlement agreement sets out the following material provisions:

Availability payments will be payable by MDOT under the original terms of the project agreement such that debt service will not be impacted prior to Milestone 3A being achieved.

(+) Construction ProgressSubstantial Completion was achieved on August 31, 2023 as scheduled, except for the work relating to the differing site conditions event as outlined above. The remaining work is on track to meet the Milestone 3A deadline, and is mostly complete (the majority of mechanical and electrical work is complete on the pump station and its roof slab is being poured; the tunnel boring machine used for the tunneling work has been disassembled and removed offsite and audits are ongoing to assess deficiencies and prepare for commissioning). The gross cost to complete as of September was $15.5 million (2.5% of total costs).

(+) First Availability PaymentOCP submitted its first availability payment invoice at the end of October with no deductions for unavailability events or noncompliance points. The total value invoiced was $4.3 million. OCP estimates that $2.3 million of these funds will be used to pay the first bond repayment scheduled for December 31, 2023. The senior interest reserve account currently holds approximately $14.7 million, which will be used to make the interest payment due on the December payment date.

Rating Sensitivities

A rating upgrade is unlikely at this time due to the availability payment structure and debt service coverage ratios (DSCR) required to achieve a higher rating. KBRA may downgrade the rating if the remaining construction does not progress according to the revised project schedule and the milestone relating to the remaining construction work is extended by a significant amount of time or if DSCRs are consistently lower than KBRA’s projections during the maintenance term.

ESG Considerations

Environmental FactorsThe project will add a crucial storage and drainage tunnel and pump station to prevent any future flooding; in the past, heavy rains have overwhelmed the freeway’s drainage system and flooded the low-lying I-696 Interchange.

Social FactorsThis portion of the I-75 is a key commercial, commuter, and tourist route handling a daily traffic volume of 103,000 to 174,000 vehicles, which is projected to increase 10% by 2035. The corridor exhibits aging infrastructure that has not received comprehensive improvements since being built in the 1960s. The project will add much needed capacity and critical infrastructure to the corridor that will help relieve traffic congestion and improve surface driving conditions and safety.

Governance Factors The milestone payments and availability payments are subject to annual appropriation by the Michigan legislature. MDOT is expected to use funds in the State Trunk Line Fund to make the milestone and availability payments. KBRA views appropriations risk to be low, given that MDOT is a highly creditworthy governmental entity and milestone payments and availability payments account for a very small percentage of MDOT’s annual highway investment expenditure (less than 1% and 4%, respectively).

Rating Rationale

The rating is based on a KBRA Project Risk Score (KPRS) of Strong and a strong financial risk profile. Under the KBRA rating case, aggregate average and minimum DSCRs are 1.15x and 1.12x, respectively, which along with a strong resiliency shown through the several sensitivity scenarios applied to the rating case, are sufficient to support a BBB rating on the bonds.

Outlook

The Stable Outlook reflects KBRA’s view that all remaining construction work is likely to be completed in accordance with the updated project schedule. KBRA expects that OCP is able to successfully operate and maintain the project with limited interruptions to availability; however, a rating upgrade is unlikely due to the availability payment structure and the DSCRs required to achieve a higher rating. KBRA may downgrade the rating if the remaining construction work does not progress according to the updated project schedule or if DSCRs are consistently lower than KBRA’s projections during the maintenance term.

To access rating and relevant documents, click here.

Methodologies