TEXT - Fitch affirms Massachusetts GANs
Dec 3 - Fitch Ratings affirms the 'AA+' rating on approximately $510 million of outstanding Commonwealth of Massachusetts (the Commonwealth) senior lien refunding grant anticipation notes (GANs), series 2003A and 2010A. Fitch also affirms the 'AA+' rating on the Commonwealth's approximately $100 million of subordinate lien GANs, series 2010A. The Rating Outlook is Stable for both liens. KEY RATING DRIVERS: Presence of Backup Pledges and Strong Structural Protections Mitigates Federal Concern: Both series of GANs are primarily secured by all Federal highway reimbursement revenues received from the Commonwealth, and both liens maintain strong backup pledges from revenues deposited in the Commonwealth Transportation Fund (CTF), providing strong debt service coverage to a potentially declining long-term Federal revenue stream. Though the GAN backup pledges are subordinated to payment of CTF debt service, the high 4 times (x) maximum annual debt service (MADS) additional bonds test (ABT) on senior CTF bonds mitigates overleveraging. In addition, the GANs' Trust Agreement establishes funds and accounts that govern the collection of federal highway reimbursements and funds debt service up to one year in advance. Uncertainty of the Federal Program: In Fitch's view, the federal program, once formula driven and funded on a multiyear basis, has now morphed into a program where future policy is less certain, funding levels are less predictable, and more frequent action is needed from Congress to extend authorization and on general fund transfers that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. Backup Pledges Subject to Commonwealth Appropriation: Should federal funds expected to be reimbursed provide less than 1.2x debt service on senior and subordinate GANs, a scenario which Fitch views as unlikely, the Commonwealth (General Obligation debt rated 'AA+'/Stable by Fitch) must appropriate CTF revenues for GAN debt service. However, should an appropriation not be provided, federal reimbursements are frozen until debt service for the following year has been funded. Future Leveraging beyond Current Authorization: Future Massachusetts Department of Transportation (MassDOT) budget gaps, changes in federal funding levels, and/or high cost overruns on Accelerated Bridge Program (ABP) projects may require additional leveraging of CTF revenues beyond the current authorized limit and reduce financial flexibility. Fitch notes that Commonwealth Treasury management indicates no plans to request increased authorization from the legislature and that a large amount of coverage on the current authorization exists. WHAT COULD TRIGGER A RATING ACTION --An interruption in federal transportation funding may lead to a rating action. Although uninterrupted funding is central to the rating of all federal transportation reimbursement bonds, the strength of the GANs' secondary pledges reduces the probability of a rating action if such an event were to occur. --Additional leveraging of CTF revenues, beyond the current 4x ABT on CTF bonds, to fund transportation budget gaps and repair projects that weaken the back-up and/or secondary pledge could pressure the subordinate GANs rating. SECURITY: The senior GANs are secured by a senior lien on all federal highway reimbursements received by the Commonwealth. If a true-up condition were to occur, the notes are also secured by a subordinate lien on up to $0.10 per gallon on Commonwealth Chapter 64A gas tax receipts. A true-up condition occurs if the aggregate amount appropriated by law from the Federal Highway Transportation Fund (FHTF) is less than $17.1 billion for the current federal fiscal year and the debt service coverage ratio for the following state fiscal year is less than 1.2x. The subordinate GANs are secured by a subordinate lien on all federal highway reimbursements received by the Commonwealth. Additionally, these bonds have a secondary pledge of net CTF revenues, after the payment of any CTF bond obligations, consisting of Chapters 64A, 64E and 64F tax receipts, all registry motor vehicle fees, Build America Bond subsidies, and any additional pledged CTF funds. CREDIT UPDATE The most significant risk to GARVEE bonds remains the lack of a long-term federal transportation funding solution. The imbalance between federal HTF outlays and receipts has been well documented over the past several years, and this unsustainable trajectory 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. Since 2008, there have been three transfers from the general fund to the HTF totaling $34.5 billion, which allowed highway and transit programs to continue without major cuts. Revenues are currently coming into the HTF at approximately $38 billion per year. If HTF outlays are reduced to the amount of revenue coming in, this would result in a 22% cut in spending following MAP-21. While there is no consensus within the federal government on how to maintain current transportation funding levels, additional resources are needed. Complicating matters for HTF funding 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 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. In 2008, the Massachusetts legislature approved the Accelerated Bridge Program (ABP). The program authorizes the issuance of up to $1.108 billion in federal highway GANs and up to $1.876 billion in special obligation bonds of the Commonwealth to finance the construction, reconstruction and repair of or improvements to bridges and approaches. The Transportation Reform Act, passed in June 2009, created the CTF revenue source to fund transportation needs and secure the special obligation bonds under the Bridge Program Act. A total of 590 bridges are expected to undergo some combination of replacement, rehabilitation, and prevention. The Commonwealth will issue any future GANs to fund the ABP on the subordinate lien as the senior lien is now closed, maturing in 2015. Subordinate lien principal amortization begins in 2016, after the 2015 series is retired. Current expectations are to issue the remaining GAN authorization in six different offerings from fiscal years 2013 through 2018. Federal reimbursements to the Commonwealth in fiscal year 2012 amounted to $711.5 million, resulting in an aggregate debt service coverage ratio (DSCR) on senior and subordinate lien GAN 2012 principal and interest payments of 3.8x, compared to a forecasted 2.9x at the time of the 2010 issuances. Using net CTF revenues provided by the backup pledge only, coverage is a strong 5.6x. All pledged Federal and state funds provide 9.3x coverage. Fitch estimates the average DSCR through maturity of the entire authorization of GANs to be 3x with Federal funds alone and a robust 10.2x using both state and Federal revenues. The Massachusetts Department of Transportation (MassDOT) 2011-15 capital plan indicates a budget gap of approximately $3.7 billion, which would be closed primarily through bond proceeds. Fitch does note that the first four year of the ABP have resulted in a 19% reduction in the amount of structurally deficient bridges throughout the state, such that the current 437 bridges still structurally deficient are already below the total program goal of achieving 450 by 2016. The five largest projects in the program, most of which began this year, are all in various stages of development and have experienced some degree of delays and cost overruns, though it should be noted that the program as a whole is still trending under budget. Fitch will continue to monitor the capital program as it relates to expectations and the extent to which it requires additional funding via CTF bonds, GANs or some combination thereof that could weaken the GANs credit profile. MassDOT, as an independent authority and component organization of the Commonwealth, has an appointed board and is organized as a body politic but is also governed by state laws, rules and policies. The organization oversees four divisions: highway, rail and transit, aeronautics and the registry for motor vehicles. MassDOT is administered by a Secretary of Transportation, appointed by the Governor to serve as Chief Executive Officer of MassDOT. A five-member Board of Directors appointed by the Governor with expertise in transportation, finance and engineering oversee the organization, while serving as the governing body of both MassDOT and the Massachusetts Bay Transportation Authority.
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