TEXT - Fitch cuts Colorado Regional Transportation District COPs
Nov 30 - Fitch Ratings assigns an 'AA' rating to the following Regional Transportation District (RTD), CO bonds: --$466.3 million sales tax revenue bonds (FasTracks project), series 2013A. Proceeds will finance expansion of the district's transit system and pay issuance costs. The bonds are scheduled to sell via negotiation during the week of Dec. 12, 2012. In addition, Fitch takes the following rating actions on RTD's outstanding obligations: --$215.4 million outstanding sales tax revenue bonds affirmed at 'AA+'; --$976.2 million outstanding sales tax revenue bonds (FasTracks Project) affirmed at 'AA'; --$503.2 million outstanding certificates of participation (COPs) downgraded to 'A+'; The Rating Outlook on both sales tax revenue bonds is Stable. The Rating Outlook on the COPs is revised to Negative from Stable. SECURITY The sales tax revenue bonds (senior bonds) are secured by a first lien on RTD's 0.6% sales and use tax. The sales tax revenue bonds (FasTracks Project) (FasTracks bonds) are secured by a first lien on the district's 0.4% FasTracks sales tax and a subordinate lien on the 0.6% base system sales tax. The COPs are subordinate to the senior bonds, FasTracks bonds, the capital portion of the Eagle project payment, and the Denver Union Station payment, and are repaid out of all available revenues of the district, subject to annual appropriation. KEY RATING DRIVERS COPS DOWNGRADE AND OUTLOOK REVISION: The downgrade of the COPs to 'A+' from 'AA-' reflects their growing exposure to projected thinning financial margins amidst RTD's aggressive expansion plan. As an operating expense of the base system, COPs base rental payments are paid after all other system debt service, which is increasing notably with the current offering. LARGE BUT CYCLICAL TAX BASE: RTD's service area is large and diverse but exhibits cyclicality as evidenced by the ongoing recovery of sales tax revenues which declined significantly in 2009. Plans to seek additional sales tax authorization have been tabled for the foreseeable future. LARGE REPRIORITIZED EXPANSION PLAN: The sizable capital plan has been reprioritized to accommodate rising FasTracks costs and revenue shortfalls. Such pressures have spurred management to pursue innovative methods to leverage its constrained resources, which Fitch believes could result in increased risk to the overall debt structure. THINNING COVERAGE: Including the current offering, debt service coverage by pledged sales tax revenue remains satisfactory due to rebounding revenue trends. However, Fitch notes that planned COP issuances may result in diminished margins above RTD's minimum 1.2 times (x) net revenue coverage requirement for all debt obligations. This policy, which Fitch considers an important credit feature, has served to limit RTD's exposure to revenue volatility and budgetary contingencies. UNEVEN SALES TAX PERFORMANCE: RTD has a history of optimistic sales tax revenue projections but responds effectively with mid-year adjustments when needed. Sales tax performance relative to system operating and capital needs will remain an important rating driver. LOW FAREBOX RATIO: Farebox recovery exceeds RTD's 20% goal but remains low. Additionally, RTD has demonstrated its willingness to increase fares. Fitch also acknowledges RTD's attention to maintaining sustainable service levels which led RTD to reduce services by 8% in the current year in anticipation of flat sales tax growth. WHAT COULD TRIGGER A RATING ACTION COPS EXPOSURE HEIGHTENED: Additional planned leverage without commensurate sales tax growth may lead to a downgrade of the COPs. TIGHTENING FINANCIAL MARGINS: The capacity to continue to leverage resources to fund expansion projects and fleet replacement may be limited in the future if financial performance does not come to fruition. GROWING ANNUAL EXPENDITURES: The RTD must delicately balance debt financing for the sizeable capital program with current expenditures, which rise annually. Should RTD implement operating efficiencies and cost reduction measures and find options for additional revenue generation, Fitch believes RTD will continue to issue Fastrack bonds since they are politically pressured to deliver additional FasTracks segments. CREDIT PROFILE RTD currently provides primarily bus service and 34.8 miles of rail for a very large service area that encompasses 57% of the state population. REPRIORITIZED CAPITAL PLAN Fitch notes the substantial rise in cost estimates for the FasTracks project, now estimated at $7.4 billion, up from an initial $4.7 billion for the full system as approved by voters in November 2004, along with the 0.4% additional sales tax needed to fund it. In response, RTD has revamped its financing plan to include significantly more in federal funds, as well as private equity through a public-private partnership that was established in 2010. RTD's Board of Directors has prioritized projects within the full FasTracks program and is proceeding with only system expansion that can be built and operated within the existing revenue base, as projected in a comprehensive financial model. In May 2012, RTD decided against seeking voter approval for a sales tax increase on the November 2012 ballot, given its perceived lack of support amidst a still recovering economy. Subsequently, RTD moved to delay the construction of two northern rail lines and the extension of two existing rail lines, assuming no additional sales tax authority would be available to fund these FasTracks projects prior to 2035. RTD is proceeding with another FasTracks component, the I-225 Light Rail Line, a 10.5 mile segment that will connect the future East Rail Line (leading to Denver International Airport) and the existing Southeast Rail Line. Initial work on the $678 million project was begun as a joint project with the Colorado Department of Transportation with cash on hand from RTD. The current offering will finance the remaining costs, including a design-build contract awarded to Kiewit Infrastructure Company for a fixed price of $350 million. As the contractor for RTD's Denver Union Station project, which is progressing satisfactorily, Kiewit's current on-site presence and experience with RTD leads Fitch to expect manageable construction risks on the I-225 corridor. Fitch notes the projected completion date, in late 2015, coincides with the opening of the East Rail Line to DIA, enabling near system-wide mobility for riders in the non-northern portion of the district. PUBLIC PRIVATE PARTNERSHIP Fitch views positively RTD's progress in reconciling the existing revenue resources with the new, much higher, full capital costs. Fitch considers RTD's 2010 public-private partnership (P3) as a means to mitigate the risks of cost over-runs and minimize operating pressures. RTD is using the P3 approach to design, finance, build, operate, and maintain some of the planned new transit lines. RTD approved Denver Transit Partners (DTP) as the concessionaire in summer 2010. In August 2010, RTD issued $398 million in private activity bonds on behalf of DTP (rated 'BBB-' by Fitch). Along with additional equity, the partnership's funding comprises 12% of the total FasTracks project. A key element of the P3 plan, a federal new starts grant totaling $1.03 billion, has been approved for the $2 billion project. The approved bid for the P3 project totalled $300 million less than RTD's budget, leading RTD to leverage this capacity through a $280 million TIFIA loan from the federal department of transportation which is on parity with outstanding FasTracks bonds. ONGOING SALES TAX RECOVERY RTD's principal revenue source, sales and use taxes, continues to rebound after posting a large 10% decline in 2009. These taxes grew by 7% and 4.4% in 2010 and 2011, respectively, and year end 2012 projections point to a large 8% increase indicating continued economic recovery. Future sales tax growth is projected to average 5% through 2015 before trending down annually, which Fitch views as somewhat optimistic given the historical 4.5% average annual gain even without factoring in the last recession. However, RTD's management has proven responsive to weaker performance, taking actions such as delaying or eliminating capital projects, making service adjustments, and restructuring fares. SOLID BUT THINNING COVERAGE The current offering is structured with a 25-year maturity and one year of capitalized interest. Principal is back loaded, leading the 10 year amortization rate for all bonds and COPs to remain slow at 26%. Including the current offering, gross debt service coverage of all debt by annual sales and use tax revenues is projected to average a solid 3.1x through 2017. Fitch notes that the impact of the large current offering on overall debt service coverage from net revenue is modest under RTD's revenue growth assumptions. Under Fitch's stress scenario of flat sales tax in 2013 and beyond, net revenue coverage falls below 1.2x, RTD's policy minimum, starting in 2015. No additional FasTracks bonds are planned although Fitch notes that certain variables could lead to greater flexibility in RTD's future debt capacity. Further reduced financial flexibility is apparent under RTD's plan to issue $329 million in COPs in 2013-2016 for bus fleet replacement. Net revenue coverage is tight under management's sales tax revenue growth assumptions, and a no-growth scenario reduces coverage to below sum-sufficient by 2015 absent expenditure or fare adjustments. Fitch views this diminishment of bond-holder protection to be inconsistent with an 'AA' category rating for the COPs. Given their low payment priority in the flow of funds and additional leverage plans, Fitch views COPs bondholder protection as weakened in RTD's medium-term plans. The Negative Outlook reflects the COPs' potential for diminished capacity to withstand sustained sales and operating revenue shortfalls if additional debt plans are implemented. RIDERSHIP TRENDS IMPACTED BY RECESSION AND FARE HIKES RTD has a low farebox recovery rate, relying instead on excess sales tax revenue to cover operating costs. The rate has been trending up, and at 26% in 2011, is now above RTD's stated 20% goal. Nonetheless, this level is below national averages. Ridership trends have been volatile recently given a history of moderate fare increases, even with the addition of the Southeast Corridor rail line and fluctuating gas prices. System-wide fare increases were imposed in 2009 and 2011 to offset declining sales tax revenues. Partly due to the fare hikes, ridership declined by 6.6% in 2009 and remained flat through 2011. The 2012 budget includes an 8% service reduction needed to accommodate nearly flat projected sales tax growth. As a result, 2012 ridership is projected to decline by 3%. Fare increases are programmed every three years. RTD's other positive credit features include the economic base's sound underpinnings, effective utilization of debt instruments, and a willingness to increase fares. These actions partially offset the system's low farebox recovery ratio and pattern of over-estimated sales tax performance. With the capital plan in flux, Fitch views the projected debt service coverage levels as having more inherent uncertainty than is typical for a transit system special tax bond. Fitch's ratings also consider the uncertainty inherent with the implementation of a substantial transit network expansion.
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