NEW YORK--()--Fitch Ratings assigns a 'BBB+' rating to the South Jersey Transportation Authority's (the authority) approximately $79.1 million Series 2012A transportation system revenue refunding bonds. The bonds are expected to be sold via a negotiated sale during the week of Sept. 17, 2012.
In addition, Fitch affirms the 'BBB+' rating on approximately $465.6 million of the authority's outstanding transportation system revenue bonds and the 'BBB-' rating on approximately $17.6 million of the authority's subordinate transportation system revenue bonds. The Rating Outlook is Stable.
KEY RATING DRIVERS:
ASSET WITH LONG HISTORY BUT EXPOSED TO INDUSTRY RISK: The authority's anchor asset, the Atlantic City Expressway (ACE), has been fully operational since 1966 with a 45-year compound annual growth rate for traffic and revenue of 4.9% and 7.3%, respectively. However, its traffic profile is primarily leisure-oriented given the expressway's reliance on the Atlantic City gaming industry and visitors to the southern New Jersey seashore resort towns.
RELIANCE ON TOLL REVENUES TO SUPPORT ALL OBLIGATIONS: The expressway generates sufficient toll revenues to support all obligations while providing adequate financial cushion. However, the Atlantic City International Airport (ACY) continues to operate at a deficit and is a financial burden for the authority. The history of management-implemented toll increases prior to the development and delivery of large capital programs or when debt service coverage has declined is viewed favorably but SJTA's political ratemaking ability is limited.
DEBT STRUCTURE: Nearly 20% of the outstanding debt is variable rate and, while the bonds' final maturity occurs in 2039, maximum annual debt service (MADS) of $31.9 million occurs in 2030. MADS coverage with 2011 cashflow is strong at 1.50 times (x).
HIGH LEVERAGE WITH MODERATE FINANCIAL METRICS: While net debt to cash flow available for debt service (CFADS) is somewhat high at 9x, the authority has produced debt service coverage ratios (DSCRs) of at least 1.55x since 1996. The authority is obligated to pay $2.5 million annually (subject to increases) to the State of New Jersey to fund various state transportation trust fund projects, which is somewhat concerning, albeit the payment is made subordinate to debt service. Liquidity is viewed as low at 226 days of operating expenses.
LARGE AND UNFUNDED CAPITAL PLAN: Although no additional debt issuance is planned in the near term, approximately half of the capital program is currently unfunded but is also mostly discretionary. The authority has indicated that projects will not be initiated without sufficient available funding.
WHAT COULD TRIGGER A RATING ACTION
--Lower than expected traffic or toll revenue growth due to increased competition from regional gaming outlets resulting in a DSCR profile that falls below the 1.5x - 1.7x range for a sustained period.
--Significant additional deterioration of the Atlantic City gaming industry's health triggered by increased competition from surrounding area casinos/online gaming in Pennsylvania, Delaware, Maryland and New York.
--On-going capital improvement needs requiring future debt without additional revenues to support the bonds.
--Deteriorating financial performance of the airport that leads to increased subsidy from the expressway.
Senior bonds are secured by pledged revenues after provision for an operating reserve equaling 15% of pledged project operating expenses. Pledged revenues primarily include toll revenues from the expressway, as well as certain parking and bus management fees. Current investment income is also pledged, along with fund balances. Airport revenues generated to cover debt service on bonds issued to fund airport projects are also pledged. Unlike other transactions, the subordinate bonds are paid not only after senior debt service obligations but they are also subordinate to a debt service reserve fund and a rehabilitation and repair fund. In addition, the subordinate bonds have a weak sum sufficient rate covenant.
The authority will be issuing approximately $79.1 million in Series 2012A refunding bonds to refund the outstanding Series 1999 bonds. Net present value savings for the refunding is currently estimated at approximately $4.9 million through the life of the bonds or 5.5% of refunded principal. Series 2012 bonds will mature in 2029, same maturity as the portion of Series 1999 bonds being refunded.
Traffic on the expressway contains a significant concentration of leisure-oriented travelers destined for Atlantic City casinos and southern New Jersey seashore resort towns and thus can be volatile during economic downturns. The Atlantic City casinos are experiencing stronger than expected competition from various east coast casinos and online gaming. Toll transactions decreased by 2.9% in 2011, resulting in a 2.6% decrease in toll revenues. 6-months year to date financial statements are showing improvement in traffic of 2.7% and toll revenues of 4.0% compared to the same period in 2011.
Given the uncertainty associated with increased competition in the gaming industry there is the potential for lower traffic growth or even declines. However, the authority has been successful in containing cost in recent years, implementing a number of cost cutting initiatives including privatization of toll operations and staff reductions. Operating expense after depreciation has decreased by 5.4% in 2011. The authority has historically maintained debt service coverage level above 1.5x, continued expense management is critical to preserve financial flexibility given limited projected traffic growth. For more information please see Fitch press release dated January 12, 2012.
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' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Toll Roads, Bridges, and Tunnels