NEW YORK--()--On the effective date of Oct. 4, 2012, Fitch Ratings will: (i) upgrade the long-term ratings assigned to the Metropolitan Transportation Authority transportation revenue variable rate bonds, series 2005E consisting of subseries 2005E-1 and 2005E-2, as follows: the long-term rating on subseries 2005E-1 will be upgraded to 'AA-' Stable Outlook from 'A+', Stable Outlook; the long-term rating on subseries 2005E-2 will be upgraded to 'AA' and placed on Rating Watch Negative, from 'A+', Stable Outlook; (ii) downgrade the short-term ratings to 'F1' from 'F1+' on subseries 2005E-1 and 2005E-2; and (iii) assign long- and short term ratings of 'AA/F1', Stable Outlook to subseries 2005E-3.
The rating actions are being taken in connection with the: (i) mandatory tender of the series 2005E bonds on Oct. 4, 2012; (ii) re-designation of the $250,000,000 series 2005E bonds into three from two separate subseries as $100,000,000 subseries 2005E-1, $75,000,000 subseries 2005E-2, and $75,000,000 subseries 2005E-3; and (iii) replacement of the irrevocable direct-pay letter of credit (LOC) currently provided by BNP Paribas (rated 'A+/F1+', Stable Outlook by Fitch) supporting subseries 2005E-1 and subseries 2005E-2 with two separate substitute LOCs. Subseries 2005E-1 will be supported by a substitute LOC to be provided by Bank of America, National Association (BofA, rated 'A/F1', Stable Outlook) and subseries 2005E-2 will be supported by a substitute LOC to be provided by JPMorgan Chase Bank, N.A. (JPM, rated 'A+/F1', long-term rating on Rating Watch Negative). On the same date, the newly designated subseries 2005E-3 will be supported by an LOC provided by PNC Bank, National Association (PNC, rated 'A+/F1', Stable Outlook).
On the effective date, the long-term ratings assigned to the three subseries will be determined using Fitch's dual-party pay criteria and will be based jointly on the support of the related LOC and the underlying long-term rating assigned to the bonds (currently rated 'A', Stable Outlook). For more information on the underlying long-term rating, see Fitch's press release dated Sept. 28, 2012, available at www.fitchratings.com.
Fitch's dual-party pay criteria consider the likelihood of the failure of both a rated obligor and a bank LOC provider. The methodology results in a rating that is up to two notches higher than the stronger of the two credits if the following conditions are met: (1) both entities have a rating of 'A' or higher; (2) the transaction is structured such that payments from both the municipal issuer and the bank are in the flow of funds and both entities would have to fail to perform before the bonds defaulted; and (3) the credit of the bank and the rated obligor have no more than a medium degree of correlation. Fitch has determined a low degree of correlation between each of the banks and the MTA resulting in the ratings shown above. If either the underlying bond rating or the respective bank were downgraded to 'A-' or lower, the joint probability could no longer be applied, and the long-term rating for the bonds would then be adjusted to the higher of the respective bank rating and the underlying bond rating. The short-term rating is based solely on the short-term rating assigned by Fitch to each bank.
Pursuant to the LOCs, each of the banks is obligated to make payments of principal of and interest on the bonds upon maturity and redemption, as well as purchase price for tendered bonds. The rating for the subseries 2005E-1 and subseries 2005E-3 bonds will expire upon the earliest of: (i) Oct. 2, 2015, the initial stated expiration date of the BofA and PNC LOCs, unless such date is extended, (ii) conversion to a mode other than the daily or weekly rate mode, (iii) any prior termination of the related LOC, or (iv) defeasance of the bonds. The rating for the subseries 2005E-2 will expire upon the earliest of: (i) Dec. 31, 2014, the initial stated expiration date of the JPM LOC, unless such date is extended, (ii) conversion to a mode other than the daily or weekly rate mode, (iii) any prior termination of the LOC, or (iv) defeasance of the bonds. Each LOC provides full coverage of principal plus an amount equal to 53 days of interest at a maximum rate of 12% based on a year of 365 days, and purchase price for tendered bonds, while in the weekly and daily rate modes.
Subseries 2005E-1 and 2005E-2 bonds will be remarketed at a weekly rate mode and the subseries 2005E-3 bonds will bear interest in the daily rate mode. Each subseries of bonds may be converted to a daily, weekly, commercial paper, term, fixed, or auction rate. While bonds bear interest in the weekly rate and daily rate modes, interest payments are on the first business day of each month, commencing Nov. 1, 2012. The remarketing agents are Merrill Lynch, Pierce, Fenner & Smith Incorporated for the subseries 2005E-1, J.P. Morgan Securities LLC for subseries 2005E-2, and PNC Capital Markets LLC for subseries 2005E-3.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'U.S. Municipal Structured Finance Criteria', Feb. 8, 2012;
'Rating Guidelines for Letter of Credit-Supported Bonds', June 20, 2012
'Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S. Public Finance Bonds', March 9, 2012.
Applicable Criteria and Related Research:
Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S. Public Finance Bonds
Rating Guidelines for Letter of Credit-Supported Bonds
U.S. Municipal Structured Finance Criteria