TEXT-Fitch affirms Ariz. Board of Transportation's GANs at 'AA'

Fri Dec 7, 2012 5:35pm EST

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Dec 7 - Fitch Ratings affirms the 'AA' rating on the Arizona State Board of
Transportation's (the board) approximately $335 million in outstanding grant
anticipation notes (GANs). The Rating Outlook remains Stable.

KEY RATING DRIVERS

--Dual Pledge: Arizona Department of Transportation's (ADOT) bonds are secured
by the first lien on Arizona's federal highway funds and the subordinate lien on
monies in the State Highway Fund (SHF) and Maricopa County Regional Area Road
Fund (RARF) (for eligible RARF projects), which helps offset reauthorization
risk.

--Historically Stable Federal Transportation Funding: Fitch notes that changes
in federal funding policy with each new authorization period could result in
reduced funding levels for highways.

--Strong Covenants and Timing Mechanisms: Additional leverage is limited by a
strong additional bonds test of 3.0 times (x) maximum annual debt service
(MADS). ADOT has an administrative covenant to deposit all federal aid into the
Grant Anticipation Note Fund if projected coverage is insufficient.

--Additional Leverage Not Anticipated: ADOT has no current plans on issuing any
further GAN debt in the next five years.

WHAT COULD TRIGGER A RATING ACTION

--Significant reduction in federal funding, a lapse in federal gas tax
collections, or a change in budgetary treatment of the federal highway trust
fund.

--A decline in the SHF and RARF fund balances and/or excessive leveraging of
highway revenue bonds and transportation excise tax revenue bonds could put
pressure on the rating.

SECURITY

The notes are secured by future federal aid under grant agreements between the
ADOT and the Federal Highway Administration (FHWA). Funds deposited in the SHF
and the RARF provide back-up security.

CREDIT SUMMARY

Expenditures of the HTF have been exceeding revenues in the past several years.
The most recent authorization, Moving Ahead for Progress in the 21st Century
(MAP-21), provides funding certainty for the next two years but it does not
address longer-term issues regarding the sustainability of the federal program
or solvency of the HTF and relies on a total of $18.8 billion general fund
transfers in 2013 and 2014. Funding levels have become less certain and
difficult to predict beyond current authorization. In addition, the increase in
corporate fuel economy standards approved in August 2012 would adversely impact
gas tax revenues which support the HTF. In Fitch's view, the unsustainable
trajectory of the HTF may lead to policy changes that could affect bondholders.

ADOT operates and administers the state highway system under the policy
directives and debt-issuing authority of the board. Debt service on the notes is
payable from federal aid revenues paid to ADOT under grant agreements with the
FHWA related to each GANs series. Since the grant agreements establish only a
sum sufficient payment stream, the board has broadened the definition of pledged
revenues to include all federal aid revenues received by ADOT and, to the extent
necessary, certain SHF and RARF resources. The SHF is funded by statewide fuel
taxes and user fees via the Highway User Revenue Fund (HURF). As of June 15,
2012 the SHF had a balance of $225 million. The RARF is funded by the Maricopa
County transportation excise tax. As of June 15, 2012 the RARF had a balance of
$420 million. Excluding federal funds, these HURF and RARF balances provided
approximately 9.9x MADS coverage.

ADOT has entered into grant agreements with the FHWA relating to the outstanding
GANs. Under the grant agreements, the FHWA has agreed to make payments to ADOT
for eligible project costs, to the extent federal funds are available, in
amounts equal to GAN debt service. ADOT bills the FHWA for the amount of debt
service in advance of the debt service payment date. All grant revenues under
any grant agreement relating to the outstanding GANs are deposited with the
State Treasurer who is required to deposit such grant revenues directly into the
Grant Anticipation Note Fund.

The Arizona Highway Department's mission is to provide a safe, efficient and
cost-effective transportation system for Arizona. The department is responsible
for more than 6,700 miles of highways and 4,000 bridges across the State of
Arizona.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Leveraging Federal Transportation Grants' (Aug. 15, 2012).

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds
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