The investment grade of $1.2 billion of private activity bonds issued for an automated people mover train at Los Angeles International Airport is threatened.
Amid delays and disputes between the airport and the private development team for the people mover, Fitch Ratings placed the BBB-minus rated senior revenue bonds on rating watch negative.
The bonds, issued in 2018 through the California Municipal Finance Authority on behalf of LAX Integrated Express Solutions, LLC, were affirmed at BBB-minus.
But there are no intermediate steps down before junk bond territory.
The negative watch “reflects elevated risks in relation to the notice of developer default issued by Los Angeles World Airports to LINXS on July 21,” Fitch Ratings analysts Anubhav Arora, Jeffrey Lack and Scott Monroe wrote.
The rating watch negative designation, unlike an outlook change, could be resolved in two weeks with a six-month maximum Arora, a Fitch director, said in an interview. A negative outlook has a two-year horizon.
Arora said Fitch’s understanding “is that both parties are working to resolve the dispute.”
Los Angeles airport officials could not be reached for comment.
LINXS notice posted to the Municipal Securities Rulemaking Board’s EMMA website disclosed a July 21 letter from the airport declaring a “developer default,” citing incomplete and abandoned work.
“LINXS also contests the default alleged in the Default Notice, and LINXS is actively working with LAWA to withdraw the defective Default Notice in a timely fashion,” the developer wrote in the disclosure notice.
“LINXS wishes to reassure you that LINXS has not — and does not intend to — abandon any part of the Project,” it wrote.
Fitch analysts said “they believe that issuance of this notice is reflective of a strained relationship between the parties, and also, introduces uncertainty over project completion as concession termination is one of the remedies available to LAWA if the developer default is not cured within 30 days.”
LAWA “will proceed to notify LINXS’ surety and the lender’s technical advisor of LINXS’ default,” Jake Adams, LAWA’s deputy executive director, wrote in the letter disclosed by LINXS.
The project is about 92% complete, according to Arora.
Completion was expected in June 2024, but there had been some delay and the contractors asked to extend the deadline, he said.
“Besides, this notice, Fitch is also monitoring the extended delays to the project’s passenger service availability date, [the date that the people mover would be placed into service], which has now moved further by 109 days to Oct. 17, 2024, from June 30, 2024, as agreed in the global settlement executed in April 2023,” Fitch wrote in the report.
Fitch notes “these delays are being worked through another relief event claim with LAWA and expects the project to have sufficient funds to cover additional unavoidable costs from July 2, 2024 to Oct. 17, 2024, either from liquidated damages payable by the design-build contractor or from compensation by LAWA if the relief event claim is supported with a settlement.”
Based on the June 2023 progress report, total cumulative earned value progress to date was 92.9%, compared to a planned value of 99.1%, according to the Fitch report.
Progress is behind the approved baseline due to several delays, including underground utility conflicts, complex interfaces with numerous stakeholders as well as the necessity for design and permit approvals from several different companies, Fitch analysts wrote.
The new dispute is over a change order related to work on the roadways, according to the disclosure document. The developer had asked for more money, though the disclosure documents do not say how much; and Arora said he doesn’t think the amount of money in dispute has been made public.
LINKS’ view is that the work in LAWA’s notice is outside the scope of the project, which is why it is seeking extra compensation, Arora said.
“It appears to LAWA that LINXS actions are being taken in an attempt to cloud its own delayed performance of the work and the inadequate resources it has brought to bear to meet the completion deadlines agreed to as part of Change Order #66,” Adams wrote. “For the foregoing reasons, LAWA warns LINXS in the strongest possible terms of the grave consequences of its proposed action to abandon material aspects of the work.”
According to LINXS’s disclosure, the developer believes the agreement requires that LAWA not only provide notice to the collateral agent of a developer default, but the notice “must contain detail sufficient enough to enable the collateral agent to assess the scope and amount of any liability of [LINXS] resulting therefrom.”
The default notice fails to meet these requirements, according to the developer’s letter.
The project bonds were downgraded from BBB to BBB-minus by Fitch in March 2020 citing credit deterioration in key project counterparties.
Fitch’s Lack and Arora were unable to shed light on which of the private partners the two-year-old ratings downgrade was alluding to, but said it was unrelated to the rating actions on airport credits after traffic plummeted in the aftermath of the first pandemic stay-at-home orders.
Fitch said in Wednesday’s report that its BBB-minus rating reflects “the complexities of implementing a large construction project, although offset by an experienced team of design-build contractors, significant construction progress already made, and an adequate construction security package.”
Fitch also cited a strong revenue-paying grantor and well-defined operating standards.
“While the project’s average debt service coverage ratio of 1.15 times under the Fitch rating case is at the lower end of the investment grade range, this is mitigated by a robust realistic outside cost to breakeven multiple of 7.8 times, which illustrates the project’s cost resiliency and supports and investment grade rating,” Fitch analysts wrote.
LINXS sold the $1.2 billion in private activity bonds for the project in 2018 through conduit issuer the California Municipal Finance Authority. The deal, which had certain maturities insured by Assured Guaranty, was 6.7 times oversubscribed.
The deal received the Far West Deal of the Year award in 2018.
The people mover project is designed to not only move passengers more efficiently throughout the airport, but also link to the Los Angeles Metropolitan Transportation Authority’s rail transit network.
The airport is notorious for generating huge traffic snarls inside the airport and on surrounding roads.
In 2015, the airport agency and LA Metro began to work through years of inter-agency squabbles to craft a solution: a 2.25-mile automated people mover that would connect to the city’s mass transit and other passenger drop-offs at six stations outside of the airport, including a station on .
That raised the issue of how to pay for the $5 billion project.
The solution came through the creation of the public-private partnership involving LAX Integrated Express Solutions, a consortium of five internationally known developers and equity financiers. The P3 is structured as a design-build-operate-maintain agreement with availability payments.
The airport projects that the people mover will serve 30 million people per year.