Fitch Puts Massachusetts Turnpike Authority's Metro Highway System Revs on Watch Negative
NEW YORK--(Business Wire)--
Fitch places on Rating Watch Negative the long-term rating on $1.2
billion in outstanding Massachusetts Turnpike Authority (MTA or the
authority) Metropolitan Highway System (MHS) revenue bonds 1997 series
A (senior) and $89.1 million in outstanding MHS revenue bonds 1997
series C (senior). Additionally, Fitch places on Rating Watch Negative
the rating on the authority's $194.7 million in outstanding MHS
revenue bonds 1997 series B (subordinated) and $764.9 million in
outstanding MHS revenue bonds 1999 series A (subordinated). Fitch
currently rates the senior lien bonds 'BBB+' and the subordinate lien
bonds 'BBB'.
The Negative Rating Watch is based upon a confluence of challenges
(economic, financial and political) that raise questions about the
turnpike's ability to maintain financial flexibility and meet upcoming
financial commitments at the margins of protection assumed by the
current ratings.
Financial pressures are expected to increase as a result of
escalating costs, related debt service and the increasing operation
and maintenance expenses of Center Artery/Tunnel (CA/T) operations.
Despite the virtual completion of the CA/T project, financial costs
have increased following the collapse of a tunnel ceiling panel in
2006. Additional costs related to repair, investigation, and
remediation have been estimated at approximately $90 million. In
January 2008, the Attorney General for the Commonwealth of
Massachusetts (the Commonwealth) announced a settlement of several
historical claims against certain contractors, awarding $458 million
to the Commonwealth and the Authority. Of that sum, approximately $400
million will be deposited in a newly created trust fund. The trust
fund will provide some financial relief as it will hold judgment and
settlement monies which will only be used to fund non-ordinary and
non-routine repairs and maintenance of the CA/T and Ted Williams
Tunnel. The long-term financial imbalance faced by the MTA is a result
of political agreement reached in the late 1990s to provide funding
for the tolled and un-tolled portions of the CA/T, which compromises
the MTA's long-term financial flexibility. Financial flexibility is
further constrained by a jump in debt service costs of approximately
34% in 2009 with another 27% increase again in 2015. The imbalance is
also due to the inadequacy of past toll increases by the MTA in the
face of higher than expected CA/T operating costs.
The use of non-recurring revenue sources, namely swaptions, has
contributed to additional risk and a more constrained long-term
financial profile. In May 2001, the authority entered into several
fixed-payer swaptions with UBS AG (UBS) with a notional amount
totaling $800 million. In 2007, UBS exercised two of five of its
outstanding swaptions which took effect on Jan. 1, 2008. Additionally,
UBS recently exercised the remaining swaptions, with one taking effect
in July 2008 and the remaining two taking effect on Jan. 1, 2009. The
net effect of these swaptions has increased the authority's fixed rate
liabilities and has contributed to financial strain. The authority is
likely to face approximately $24 million in annual expenses related to
swaptions by 2010. Additionally the Authority has entered into several
fixed-receiver swaptions with Lehman Brothers Special Financing, Inc.
(Lehman Brothers) with a notional amount of $800 million. In a rising
interest rate environment, the exercise of these swaptions could
further contribute to financial strain. The cost of terminating the
swaptions with Lehman Brothers is currently estimated to be
approximately $30 million.
In August 2008, the Commonwealth enacted legislation to guarantee
principal and interest payments on up to $800 million of future MTA
bonds to refinance debt associated with the swaptions. The guarantee
is intended to cover the debt service of future variable rate debt
that will replace fixed-rate debt related to the outstanding interest
rate swaptions. Additionally the guarantee will cover potential swap
termination payments for pre-existing swaps entered into by the
Authority. Fitch views the guarantee as providing a temporary fix to
mitigate the financial pressure from the exercised swaptions and
enhance market access. While it shows the Commonwealth's commitment to
the asset, it also reinforces the fact that this enterprise remains
painfully mired in a political cycle that requires decisive and
immediate action by the MTA to maintain current credit quality.
Additionally, political differences are influencing the
Authority's rate setting ability and has limited the extent of toll
increases. The MTA is seeking additional annual funding to cover CA/T
expenses. At this time there has been no indication from the
Commonwealth that any further support will be provided. Historically,
toll increases by the Authority have been met with political
resistance. In 2002, the scheduled toll increases were delayed six
months and also incorporated unexpected discounts including continued
electronic toll collection discounts for passengers that were not
originally forecast. The 2008 toll adjustment continues the electronic
toll discounts while increasing cash tolls to levels that were
projected in 1999. Both Fitch and the Authority believe the most
recent toll increase will not generate sufficient revenues to cover
obligations in the near future. Without further planned toll
increases, additional capital infusion or debt refinancing, Fitch
believes that the Authority's financial profile will continue to be
strained, and will evaluate the appropriateness of negative rating
actions if such cases prevail.
Fitch's 'BBB+' rating on the senior bonds and 'BBB' rating on the
subordinated bonds reflect the MHS' very strong service area, strong
asset base of roadways that include two tunnels, and very stable
traffic base which is relatively inelastic to toll increases.
Additionally, dedicated payments from the Commonwealth of
Massachusetts for the Central Artery/Tunnel (CA/T) project cover a
portion of related operating costs and debt service payments.
MHS traffic has essentially recovered from the effects of the
closure of the I-90 connector tunnel following the collapse of a
ceiling panel in July 2006. While traffic declined by over 1% in 2006,
it increased by over 5.4% in 2007. Toll revenues decreased 1.8% in
2006, however revenues increased by 5.2% in 2007. The MTA implemented
a toll increase in January 2008 lower than originally represented and
acknowledged at the time to be insufficient given the MTA's expenses
and debt service profiles. Through June 2008, year-to-date traffic is
down approximately 2.3% in part due to national trends related to oil
prices and the economy, meanwhile revenues have grown 19.1% further
reflecting the relative inelasticity of demand. The decline in traffic
is below the average of 3% for expressway systems year-to-date. For
more information on this, see Fitch's special report 'U.S.
Transportation Assets: Facing a Temporary Decline or a Permanent
Change?' dated August 20, 2008 and available on the Fitch Ratings web
site www.fitchratings.com.
With the recent toll increase, senior debt service coverage and
combined senior and subordinated debt service coverage calculated by
Fitch, after grossing dedicated payments into revenues are expected to
be about 2.4 times (x) and 1.3x, respectively, in the short-term.
Short-term senior and combined senior and subordinated net debt
service coverage on an indenture basis, which is a more liberal
calculation based on the ratio of net revenues to gross debt service
less dedicated payments and interest earnings, are estimated to be
around 4.5x and 1.4x, respectively. Annual dedicated payments from the
commonwealth, which represent reimbursement for CA/T related costs,
are pledged by the authority to pay a portion of debt service. While
pledged to debt service, dedicated payments do not adequately cover
CA/T operating costs. Fitch anticipates that subordinate coverage is
likely to drop below 1.0x on a net basis within the next 2 years due
primarily to increasing debt service costs.
The Massachusetts Turnpike Authority, a public instrumentality of
the Commonwealth of Massachusetts, is responsible for the operation of
the Metropolitan Highway System and the Western Turnpike. The finances
of the MHS, which includes the Boston extension, the Sumner and
Callahan tunnels, the CA/T and the Central Artery North Area, are
under a separate system from the Western Turnpike, which includes the
portion of the turnpike from the New York border in the west to its
intersection with Route 128 in the east.
Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.
Fitch Ratings
Brian Taylor, +1-212-908-0620
Mike McDermott, +1-212-908-0605
Cindy Stoller, +1-212-908-0526 (Media Relations)
Copyright Business Wire 2008
