Fitch Upgrades SEPTA's Revenue Bonds to 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Southeastern Pennsylvania Transportation Authority (SEPTA, the authority) revenue bonds:

--$240 million revenue refunding bonds, series of 2010.

In addition, Fitch upgrades the following ratings:

--$327 million in outstanding revenue bonds to 'AA' from 'A+'.

The Rating Outlook is Stable.

The bonds are expected to price the week of Sept. 20, 2010.

RATING RATIONALE:

--The upgrade reflects sustained solid debt service coverage provided by a diverse set of pledged revenues and enhanced bondholder protection resulting from the legislative closure of the lien.

--Bonds are secured by several statewide taxes and fees dedicated for mass transit and deposited in the Public Transportation Assistance Fund (PTAF) including: 0.947% of the Commonwealth of Pennsylvania's (the Commonwealth) sales and use tax revenues, receipts from a 3% vehicle lease tax, revenues from a $2.00 daily motor vehicle rental surcharge, and monies generated by a $1.00 new tire fee imposed on the sale of all new tires in the Commonwealth.

--Although the pledged revenues are sensitive to economic cycles, coverage of maximum annual debt service (MADS) has remained solid at approximately 3.35 times (x) in fiscal 2010. Including the current issuance, projected MADS coverage remains healthy at roughly 2.75x even with no projected growth in the dedicated revenues from the fiscal 2010 level.

--SEPTA serves a vital component of the state's economy and provides an essential service to nearly four million residents in the Philadelphia metropolitan area, although its operating environment is strained and there is a funding gap in the Commonwealth's Public Transportation Trust Fund (PTTF).

KEY RATING DRIVERS:

--Performance of the pledged revenues, as demonstrated by debt service coverage levels.

--Although bonds are secured by revenues in the PTAF, maintenance of balanced financial operations and resolution of the funding gap affecting state subsidies to SEPTA are important for the long term viability of the system.

SECURITY:

The bonds are limited obligations of the authority payable from pledged revenues derived from specific dedicated Commonwealth fees and taxes. These dedicated revenue streams collected statewide and deposited into the PTAF include: 0.947% of the Commonwealth's sales and use taxes, receipts from a 3% vehicle lease tax, revenues from a $2.00 daily motor vehicle rental surcharge, and monies generated by a $1.00 new tire fee imposed on the sale of all new tires in the Commonwealth.

CREDIT SUMMARY:

The upgrade to 'AA' from 'A+' reflects sustained solid debt service coverage provided by a diverse set of pledged revenues and enhanced bondholder protection resulting from the legislative closure of the lien. While the dedicated fees and taxes supporting the bonds are sensitive to economic cycles and have experienced declines in recent years, MADS coverage is still a solid 2.75x by fiscal 2010 revenues. Legal provisions and bond covenants are strong, and were further enhanced by passage of Act 44 in 2007, which eliminated SEPTA's ability to further leverage the dedicated taxes.

The bonds are secured by four separate revenue streams which are distributed to the PTAF pursuant to Section 1310 of the Public Transportation Assistance Law (the Law). After a small portion of the PTAF revenues is set aside for the Pennsylvania Department of Transportation (PennDOT) and small rural systems, the remaining moneys are available for mass transit systems throughout the Commonwealth. Of this balance, 70.3% is allocated by statute to class 1 transit systems. As SEPTA is the only such system in the Commonwealth, it currently receives the entire 70.3% allocation, and Fitch believes that the addition of another class 1 transit system is highly unlikely. Included in the legal provisions is a strong flow of funds that requires all pledged revenues be transferred directly from the Commonwealth's treasury department to the trustee. Revenues are retained for debt service starting on March 1st of each year until the following fiscal year's debt service requirement is satisfied.

The state substantially restructured and expanded state funding for public transit systems with the passage of Act 44, which eliminated the ability to further leverage the dedicated taxes without making any changes in the pledged revenues securing the bonds. Prior to its passage, the Law provided for the distribution of the pledged revenues from the PTAF to the authority. Act 44 repealed the Law and established the PTTF. To ensure that these changes did not affect the pledged revenues securing the bonds, Act 44 provided that despite the repeal of the Law, the PTAF would continue to receive all revenues the fund was entitled to receive prior to June 30, 2007. More specifically, Act 44 stipulates that transit entities with outstanding obligations will continue to receive the dedicated revenues flowing into the PTAF. After debt service obligations secured by PTAF revenues have been paid, funds remaining in the PTAF will be transferred to the PTTF. Further, Act 44 effectively closes the lien by specifying that no transit entity may pledge PTAF funds to secure additional obligations. Act 46, passed in July 2010, allows transit entities with outstanding obligations issued prior to June 30, 2007 to issue refunding bonds secured by money from the PTAF, as SEPTA is doing with the current offering. Refundings cannot extend the final maturity of the bonds.

Not unlike other states across the nation, the Commonwealth has experienced economic and revenue pressure in recent fiscal years, which has translated into declines in the economically sensitive pledged revenue streams. After healthy growth in the total dedicated revenues between fiscal years 2006-2008, revenues fell by 3.3% in fiscal 2009, followed by a steep 8.1% (estimated) decline in fiscal 2010. The Commonwealth is currently forecasting growth in total sales taxes of 3.8% in fiscal 2011. Sales taxes account for almost half of the dedicated funds, with the vehicle lease tax as the second largest source at about 30%. Despite recent revenue pressure, debt service coverage has remained strong at 3.61x in fiscal 2009 and 3.35x in fiscal 2010. Including the 2010 bonds, MADS coverage is at least 2.75x, a solid, healthy coverage level, assuming zero growth in the pledged revenues from fiscal 2010. Projected debt service drops substantially in fiscal 2021, from $40 million per year to $33 million, before falling to $4.5 million in fiscal 2023 and nominal maturities of about $25,000 per year thereafter through final maturity in fiscal 2028. After this sale, 30% of the authority's debt will be hedged variable-rate bonds; SEPTA has no unhedged variable rate debt. Debt service forecasts assume a rate of 4.7% on the variable-rate debt, consistent with the synthetic fixed rate on the swap associated with the 2007 bonds.

SEPTA has historically operated at or near break even operations financially, and the authority has a long track record of effectively managing financial pressures. SEPTA's operations are heavily subsidized and sometimes periodically threatened by work stoppages. While this has no direct impact on the pledged revenues, the strained operating environment and current funding gap in the PTTF present challenges for the authority over the longer term. Maintenance of balanced financial operations and resolution of the funding gap affecting state subsidies to SEPTA are important for the long term viability of the system.

Established in 1964 as an agency of the Commonwealth, SEPTA operates an integrated public transit system primarily in southeastern Pennsylvania, including service within the city of Philadelphia and the heavily populated suburban counties of Bucks, Chester, Delaware, and Montgomery; regional rail service also extends to Trenton and West Trenton, New Jersey and to Newark, Delaware. The multi-modal system provide bus, subway, elevated subway, regional rail, light rail, trackless trolley, and customized community transportation services to nearly four million people across the Philadelphia metropolitan region. The authority is governed by a 15-member board with the counties and Philadelphia appointing two members each, and one member appointed by each of the following: the governor of Pennsylvania; the Commonwealth's senate majority leader; the senate minority leader; the majority leader in the Pennsylvania House of Representatives; and the house minority leader.

Additional information is available at 'www.fitchratings.com'

Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

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