TEXT - Fitch rates Connecticut's special tax obligation bonds

Fri Nov 30, 2012 11:44am EST

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Nov 30 - Fitch Ratings assigns an 'AA' rating to the following State of
Connecticut special tax obligation (STO) bonds:

--$500 million STO bonds transportation infrastructure purposes 2012 series A;
--$125 million STO refunding bonds transportation infrastructure purposes 2012 
series B.

The par amount of both series of bonds may change. The bonds are expected to 
sell via negotiation on or about December 10 and 11, 2012. In addition, Fitch 
affirms the following ratings: 

--$2.6 billion in outstanding STO senior lien bonds at 'AA';
--$498 million in outstanding STO second lien bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross lien on pledged revenues and other receipts 
deposited to the state's special transportation fund prior to any other uses.

KEY RATING DRIVERS

SOUND COVERAGE: The bonds benefit from sound coverage of debt service for senior
and second lien STO bonds by pledged revenues, with a 2x annual coverage 
requirement and a 2x maximum annual debt service (MADS) test for additional 
bonds.

ESTABLISHED, STABLE PROGRAM: The STO bond program is a well-established part of 
a comprehensive and legislatively authorized long-term transportation 
infrastructure program.

CONSERVATIVE FORECASTING: Revenue forecasting and budgeting is conservative, 
although rising debt service and higher transportation needs present ongoing 
challenges. The state has the flexibility to slow capital spending if necessary.

TRANSPORTATION FUND AFFECTED BY STATE'S GENERAL FUND CONDITION: Interdependence 
with general fund operations has led to revenue and cost shifts in the past, 
particularly during periods of state general fund fiscal pressure.

WEALTHY STATE ECONOMY: The state's economy is fundamentally strong and wealthy, 
despite recent recessionary weakness and a slow return to economic growth.

CREDIT PROFILE

Connecticut's STO bonds are issued under a senior and second lien, and are 
secured by pledged revenues deposited to the state transportation fund (STF). 
Pledged revenues include taxes and fees on motor vehicle fuel, casual vehicle 
sales, licenses, as well as transfers from the state's general fund of taxes 
collected on oil companies' gross earnings and other statutory transfers. The 
'AA' rating for bonds on both senior and second liens reflects an additional 
bonds test on each requiring 2x coverage of principal and interest. Moreover, 
the state covenants under the second lien that any senior issuance must meet all
second lien requirements, both senior and second lien bonds are subject to an 
annual 2x debt service coverage test, and the bonds are backed by an aggregate 
debt service reserve funded at maximum annual debt service.

At present, $2.6 billion in senior lien bonds and $498 million in second lien 
bonds are outstanding. Senior lien bonds have been issued periodically under a 
1984 indenture to fund statewide transportation capital, with second lien bonds 
issued since 1990 primarily to refund outstanding senior and second lien bonds.

The STO bond program is very well established, with conservative forecasting and
budgeting, 20-year final maturity and flexibility to slow capital projects as 
necessary. Offsetting these strengths are forecast debt service growth that 
generally rises faster than pledged revenues, interdependence with the state 
general fund that has led to revenue or cost shifts during past periods of 
general fund fiscal stress, and large planned spending for transportation 
capital. 

Pledged revenues are available first for senior lien debt service and reserves, 
followed by second lien debt service and reserves. Thereafter, pledged revenues 
are available for transportation-related general obligation bond debt service 
and operating expenses of the departments of transportation and motor vehicles. 
The state actively manages the STF to maintain ample resources for projected 
debt service, capital program needs and operating expenses through a five-year 
forecast period. 

To bolster the STF fund balance after a draw in FY 2009, the state took 
corrective action in its FY 2010 - 2011 biennium budget, enacting direct general
fund transfers to the STF, among other changes. With economic stabilization 
augmenting tax receipts, FY 2011 ended with a balance of $107 million (9.2% of 
net revenues) while coverage of combined senior and second lien debt service 
remained solid at 2.7x. 

The state took additional action in its FY 2012 - 2013 adopted budget to augment
revenues pledged to transportation, including raising the statewide sales tax 
rate (the casual motor vehicles sales portion of which is deposited to STF) and 
increasing the statutory transfer of oil companies tax from the general fund. On
an unaudited basis, FY 2012 operations produced a $38.4 million operating 
surplus, bringing the STF balance to 11.8% of net revenues. Coverage of combined
senior and second lien debt service improved to 2.9x. 

As updated by the state's November 2012 revised revenue forecast, FY 2013 
operations are forecast to produce a $3.9 million operating surplus and an STF 
balance of $149.7 million (12% of net revenues), while coverage of outstanding 
senior and second lien bonds would remain solid at 2.8x. Over the forecast 
period through FY 2016, revenues and associated coverage would grow due to 
improving economic performance and higher planned oil companies tax transfers.
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