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TEXT-Fitch cuts 11 GARVEE rtgs on revised view of U.S. program
Sept. 12 - Fitch Ratings has downgraded the ratings for the following stand-alone grant anticipation revenue vehicle (GARVEE) bonds, as follows: --Alaska Railroad Corp. to 'BBB' from 'A'; --Chicago Transit Authority to 'BBB' from 'A'; --Georgia State Road & Tollway Authority to 'A+' from 'AA-'; --Kentucky Asset Liability Commission to 'A+' from 'AA-'; --Maine Municipal Bond Bank to 'A+' from 'AA-'; --New Jersey Transit Corp. to 'BBB' from 'A'; --Oklahoma Department of Transportation to 'A+' from 'AA-'; --Rhode Island Economic Development Corp. to 'A+' from 'AA-'; --State of California to 'A+' from 'AA-'; --State of North Carolina to 'A+' from 'AA-'; --State of Ohio to 'A+' from 'AA-.' In addition, Fitch has upgraded the State of Michigan's GARVEE bonds to 'A+' from 'A' and affirmed the 'A+' rating on the Idaho Housing and Finance Association's outstanding GARVEE bonds. The Outlook on all bonds above has been revised to Stable from Negative. Fitch's assessment of the strength of the Federal program has been revised to midrange from strong, a direct result of the increased uncertainty around Federal Policy. As this attribute is a key driver for GARVEE bond ratings, it is the agency's view that the increased uncertainty is not consistent with ratings in the 'AA' category. Fitch has downgraded the bonds with strong structural protections to 'A+,' a rating that balances the increased uncertainty around Federal policy with debt service coverage ratios that provide ample protection to a declining revenue stream. The structural protections included in three of the transit GARVEE bond programs that Fitch rates are viewed as weaker given their more limited downside protection to declining revenues and as a result the ratings have been downgraded to 'BBB.' KEY RATING DRIVERS --Growing Dependence on General Fund Transfers: In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the Federal gas-tax or a significant reduction in spending. The strength, stability, and reliability of the programmatic framework underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF), and, though Moving Ahead for Progress in the 21st Century (MAP-21) provides funding certainty for the next two years, it does not address longer-term issues regarding the sustainability of the Federal program or solvency of the HTF. Strength of the Federal Program - Midrange. --Highway GARVEEs Maintain Significant Flexibility: In the event of a decline in federal resources following the expiration of MAP-21, state capital improvement programs overall could be materially affected as a larger portion of funding needs would fall to the responsibility of the states and would require increased state gas taxes or mean deferral of large capital projects. Fitch's analysis of such a scenario indicates that outstanding state highway GARVEE bonds would experience some reduction in debt service coverage ratios, but since these bonds tend to have leverage limitations of at least 3.0x current receipts eligible to pay debt service they retain sufficient flexibility at the 'A+' level. Structural Features - Strong. --Transit GARVEEs Limited by ABT Provisions: In contrast to highway GARVEEs, the three transit GARVEEs rated by Fitch have materially lower leverage limitations of 1.5x or below and would thus have much less flexibility to protect against declines in federal program revenues. Structural Features - Weak. WHAT COULD TRIGGER A RATNG ACTION --A change in Fitch's view of the strength of the Federal program to weak from midrange; --Declines in federal revenues or additional state leveraging that leads to debt service coverage ratios below current projections. CREDIT SUMMARY The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years is not expected to change during the term of MAP-21. Instead the bill relies on $18.8 billion in additional general fund transfers to the HTF in 2013 and 2014 to remain solvent. The Congressional Budget Office (CBO) projects a combined shortfall of $9.7 billion in the Highway and Transit subaccounts of the HTF by 2015 if current spending levels are maintained. The future of the program beyond 2014 is hard to predict, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a sustainable trajectory. In Fitch's view the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders. While the continued General Fund transfers have underscored the relative importance of transportation funding within the Federal Budget to this point, they do not guarantee future commitments. Complicating matters is a significant increase in corporate average fuel economy (CAFE) standards from the current 29 miles per gallon (MPG) to 54.5 mpg by 2025 that was approved on Aug. 28, 2012. Such a standard would put further pressure on HTF receipts from taxes imposed on passenger cars, leading to an estimated 13% reduction from today's levels by 2032, requiring even larger general fund subsidies to maintain the status quo. Fitch performed an analysis of the program that assumes the CBO projection for outlays of a 1.4% compound annual growth rate in HTF spending, and an estimated CAGR of -.5% in HTF receipts through 2030 based on a fuel consumption forecast for passenger cars run by the Environmental Protection Agency (EPA) given revised CAFE standards. Under such a scenario, the annual gap between HTF spending and receipts could be on average $19.2 billion from 2015-2030, meaning that by 2032 nearly half of the funding for HTF outlays would need to come from the General Fund. Because the EPA forecast was run on the basis of the lower 49.6 mpg standard, Fitch projected HTF receipts to issuers at double the rate of passenger car gallon declines forecasted by the EPA. Assuming state DOTs and transit agencies fully leverage their GARVEE programs, debt service coverage ratios on highway GARVEEs could drop to approximately 2.3x by 2032 while coverage ratios on transit GARVEEs would fall to a much lower 1.03x, thereby rendering the transit GARVEEs that much more susceptible to significant declines in federal funding.
Primary Analysts: Charles Askew Analyst +1-212-908-0644 Fitch, Inc. One State Street Plaza New York, NY, 10004 Raymond Wu Analyst +1-212-908-0845 Daniel Adelman Analyst +1-312-368-2082 Ashley Ulrich Analyst +1-312-368-3176 Secondary Analyst Scott Zuchorski Director +1-212-908-0659 Committee Chairperson Michael McDermott Senior Director +1-212-908-0605 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: email@example.com.
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