NEW YORK--()--Fitch Ratings affirms the 'BBB+' rating on the South Jersey Transportation Authority's (the authority) $447.3 million of transportation system revenue bonds and 'BBB-'rating on the $17.7 million of subordinate transportation system revenue bonds outstanding. The Rating Outlook is Stable.
KEY RATING DRIVERS:
ASSET WITH LONG HISTORY, SUBJECT TO INDUSTRY RISK: The authority's anchor asset, the Atlantic City Expressway (ACE), has over 45 years of operating history. However, the traffic profile on the expressway is primarily leisure-oriented and heavily dependent on the health of the Atlantic City gaming industry, which has been severely pressured in recent years. Traffic on the expressway has been steadily decreasing primarily as a result of the economic downturn and regional gaming competition.
MODERATE PRICING ABILITY WITH DEMONSTRATED WILLINGNESS TO RAISE RATES: The authority has moderate pricing ability. The average toll of $1.44 for the expressway is reasonable and management has historically demonstrated willingness to raise rates when debt service coverage has declined or prior to the development of a large capital program involving debt.
PRIMARILY FIXED-RATE DEBT STRUCTURE: The authority primarily has fixed-rate debt; however, approximately 20% of the outstanding debt is variable rate which is swapped synthetically. The authority has a relatively flat amortization schedule with debt service payments of $30 million to $32 million annually through 2035 and final maturity in 2039.
MODERATE LEVERAGED WITH ADEQUATE FINANCIAL FLEXIBILITY: The expressway generates sufficient toll revenues to provide adequate financial cushion while supporting the Atlantic City International Airport (ACY), which continues to operate at a deficit. Senior debt service coverage in 2011 was 1.80x and all-in coverage was 1.71x, with FY 2012 projected to be around 1.75x and 1.66x, respectively. The authority has moderate leverage at 7.1x net debt to cash flow available for debt service (CFADS) and has 324 days cash on hand.
LARGE AND UNFUNDED CAPITAL PROGRAM BUT NO ADDITIONAL DEBT NEEDED: The authority's 10-year capital program is large and discretionary, totaling $745 million, with a significant portion dependent upon available funding. Management has indicated that no additional debt issuance is anticipated without additional source of revenues.
WHAT CAN TRIGGER A RATING ACTION:
--Negative action may be warranted should the authority experience meaningful declines in traffic and toll revenues in 2013 and 2014 resulting in a debt service coverage ratio (DSCR) profile that falls below the 1.5x-1.7x range and management does not respond accordingly.
--Deteriorating financial performance of the airport that leads to increased subsidy from the expressway and erodes liquidity.
--On-going capital improvement needs requiring future debt without additional revenues to support the bonds.
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 rehabilitation and repair fund deposits.
Traffic on the expressway has been on a declining trend in recent years primarily due to the economic downturn and stronger gaming competition from neighboring states. From 2006 to 2011, traffic decreased at a compound annual growth rate (CAGR) of 4.4% and is now approximately 20% lower than peak levels in 2008. Traffic in 2012 began to show improvement with growth of 2.2% from January through September but was later offset by Hurricane Sandy which led to traffic declines of 14.9% and 10.0% in October and November, respectively. Fitch believes that the effects of the hurricane will continue to impact traffic during the winter season but will have a declining impact in the spring and summer months. Fitch is not anticipating a significant decrease in traffic and revenues in 2013, but will closely monitor monthly reports for potential declines.
The Atlantic City casinos have experienced strong competition from various east coast casinos and may have increased competition in the event new legislation passes and new casinos open in surrounding states. Given the uncertainty associated with increased competition in the gaming industry there is the potential for lower traffic growth or even further declines, which in Fitch's view could signify a weaker economic position for the authority. Fitch will monitor traffic levels and management's response to further weakness. Controlling expenses and subsidies for the airport and a further toll increase will be critical to maintain credit quality in the face of flat to declining traffic.
Despite the recent decrease in traffic volume, the authority has maintained a solid financial profile through the implementation of rate increases and cost management. In the past, the authority has relied on growth and three toll increases to maintain healthy debt service coverage at or above 1.5x. Healthy senior debt service coverage of 1.80x and combined senior and subordinate coverage of 1.71x for 2011 is expected to mirror Fitch's preliminary estimates for 2012 of 1.75x and 1.66x, respectively.
Fitch's base case assumes a reduction in toll revenues of 3.5% in 2013 to reflect the impact of the hurricane followed by a recovery in 2014. The base case also assumes slight traffic declines in 2015 and 2016 to reflect stronger gaming competition from Pennsylvania and New York. Under such assumptions, coverage in 2013 is projected to be 1.51x and 1.43x for senior and all-in, respectively, and remain at that approximate level for 2014. Coverage over the medium term would also decline moderately. Fitch's rating case assumes a slightly more conservative loss in traffic and revenue of 6% for 2013 due to lingering impacts from the hurricane. Under this scenario, senior debt service coverage and all-in debt service coverage would fall to 1.44x and 1.37x, respectively, for 2013, and 1.41x and 1.34x for 2014. To the extent management did not respond accordingly to improve debt service coverage ratio and overall financial flexibility, downward rating pressure may be warranted. Fitch expects that a toll increase of 15% in 2017 in the base case and 2015 in the rating case would likely result in debt service coverage levels consistent with the historical financial profile.
The expressway traverses three southern New Jersey counties, Atlantic, Camden, and Gloucester. Much of South Jersey's economy is driven by Atlantic City's casino industry, which ranks as a major tourist destination in the Northeast, especially during summer months. The economic downturn has affected the area severely as unemployment for Atlantic City was 17.3% in October 2012 and is projected to be 22.8% in November by the Bureau of Labor Statistics (BLS). While the current level of unemployment is high, the broader regional economy provides some, albeit limited, stability. The unemployment rate for the MSA of Atlantic City and Hammonton was 12.9% in October 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, July 12, 2012;
--Rating Criteria for Toll Roads, Bridges, and Tunnels, Aug. 2, 2012 .
Applicable Criteria and Related Research:
Rating Criteria for Toll Roads, Bridges, and Tunnels
Rating Criteria for Infrastructure and Project Finance