AUSTIN, Texas--()--Fitch Ratings takes the following rating action on Regional Transportation District (RTD), CO bonds:
--$97.4 million sales tax revenue refunding bonds, series 2013A (taxable), assigned 'AA+';
--$197.4 million sales tax revenue refunding bonds (FasTracks project), series 2013A, assigned 'AA'.
Proceeds will refund outstanding debt for interest cost savings and pay issuance costs. The bonds are scheduled to sell via negotiation during the week of March 18, 2013.
In addition, Fitch takes the following rating actions on RTD's outstanding obligations:
--$215.4 million outstanding sales tax revenue bonds affirmed at 'AA+';
--$1,451.1 million outstanding sales tax revenue bonds (FasTracks Project) affirmed at 'AA';
--$494.9 million outstanding certificates of participation (COPs) affirmed at 'A+'.
The Rating Outlook on the sales tax revenue bonds is Stable. The Rating Outlook on the COPs remains Negative.
The sales tax revenue bonds (senior bonds) are secured by a first lien on RTD's 0.6% sales and use tax. The sales tax revenue bonds (FasTracks Project) (FasTracks bonds) are secured by a first lien on the district's 0.4% FasTracks sales tax and a subordinate lien on the 0.6% base system sales tax. The COPs are subordinate to the senior bonds, FasTracks bonds, the capital portion of the Eagle project payment, and the Denver Union Station payment, and are repaid out of all available revenues of the district, subject to annual appropriation.
KEY RATING DRIVERS
LARGE BUT CYCLICAL TAX BASE: RTD's service area is large and diverse but exhibits cyclicality as evidenced by the ongoing recovery of sales tax revenues which declined significantly in 2009. Plans to seek additional sales tax authorization have been tabled for the foreseeable future.
LARGE REPRIORITIZED EXPANSION PLAN: The sizable capital plan has been reprioritized to accommodate rising FasTracks costs and revenue shortfalls. Such pressures have spurred management to pursue innovative methods to leverage its constrained resources, which Fitch believes could result in increased risk to the overall debt structure.
THINNING COVERAGE: Debt service coverage by pledged sales tax revenue remains satisfactory due to rebounding revenue trends. However, planned COP issuances may result in diminished margins relative to RTD's minimum 1.2 times (x) net revenue coverage requirement for all debt obligations. This policy, which Fitch considers an important credit feature, has served to limit RTD's exposure to revenue volatility and budgetary contingencies.
PRESSURED COPS: The Negative Outlook on the COPs reflects their exposure to projected thinning financial margins amidst RTD's aggressive expansion plan. As an operating expense of the system, COPs base rental payments are paid after all other system debt service, which has increased notably with recent offerings.
UNEVEN SALES TAX PERFORMANCE: RTD has a history of optimistic sales tax revenue projections, but responds effectively with mid-year adjustments when needed. Sales tax performance relative to system operating and capital needs will remain an important rating driver.
LOW FAREBOX RATIO: Farebox recovery exceeds RTD's 20% goal, but remains low. Additionally, RTD has demonstrated its willingness to increase fares. Fitch also acknowledges RTD's attention to maintaining sustainable financial margins which led RTD to reduce service by 8% in 2012 in anticipation of flat sales tax growth.
COPS EXPOSURE HEIGHTENED: Additional planned leverage without commensurate sales tax growth may lead to a downgrade of the COPs.
TIGHTENING FINANCIAL MARGINS: The capacity to continue to leverage resources to fund expansion projects and fleet replacement may be limited in the future if financial performance does not come to fruition. Operating pressures could lead to downward pressure on all ratings.
GROWING ANNUAL EXPENDITURES: The RTD must delicately balance debt financing for the sizeable capital program with current expenditures, which rise annually. Political pressure to deliver additional FasTracks segments will require RTD to implement operating efficiencies and cost reduction measures and find options for additional revenue generation.
RTD currently provides primarily bus service and 34.8 miles of rail for a very large service area that encompasses 57% of the state population.
REPRIORITIZED CAPITAL PLAN
Cost estimates for the FasTracks project, now estimated at $7.4 billion, have risen substantially. The initial estimate of $4.7 billion for the full system was approved by voters in November 2004, along with the 0.4% additional sales tax needed to fund it. In response, RTD has revamped its financing plan to include significantly more in federal funds, as well as private equity through a public-private partnership that was established in 2010. RTD's Board of Directors has prioritized projects within the full FasTracks program, and is proceeding with only system expansion that can be built and operated within the existing revenue base, as projected in a comprehensive financial model.
In May 2012, RTD decided against seeking voter approval for a sales tax increase on the November 2012 ballot, given its perceived lack of support amidst a still recovering economy. Subsequently, RTD moved to delay the construction of two northern rail lines and the extension of two existing rail lines, assuming no additional sales tax authority would be available to fund these FasTracks projects prior to 2035.
Fitch views positively RTD's progress in reconciling its existing revenue resources with the new, much higher, full capital costs. Fitch considers RTD's 2010 public-private partnership (P3) as a means to mitigate the risks of cost over-runs and minimize operating pressures. RTD is using the P3 approach to design, finance, build, operate, and maintain some of the planned new transit lines. RTD approved Denver Transit Partners (DTP) as the concessionaire in summer 2010. In August 2010, RTD issued $398 million in private activity bonds on behalf of DTP (rated 'BBB-' by Fitch). Along with additional equity, the partnership's funding comprises 12% of the total FasTracks project. A key element of the P3 plan, a federal new starts grant totalling $1.03 billion, has been approved for the $2 billion project. RTD also secured a $280 million TIFIA loan from the federal department of transportation which is on parity with outstanding FasTracks bonds.
METRO NORTH CORRIDOR
RTD is accelerating the construction of a portion of the Metro North line, from the National Western Stock Show (NWSS) to 72nd Ave, previously scheduled for completion in 2034. RTD plans to fund the $189 million project with $120 million FasTracks bonds, to be issued by the end of 2013, and pay-go funding. Capacity for the FasTracks bonds is to be created through reduced debt service costs enabled by the current refundings and near term COP refunding.
RTD is undergoing an aggressive effort to fund other FasTracks projects with pay-go from myriad sources. While certain sources are in line with maximizing efficiencies, Fitch considers others cautiously, such as reducing O&M reserves from three months to two. The expansion of rapid bus transit managed lanes on U.S. 36 will be the first project to receive pay-go from RTD's new internal savings account.
FITCH TO MONITOR SEQUESTER IMPACT
The impact of the recent sequester on RTD has not yet been fully determined. RTD's operating grants, RTD's second largest revenue source, are funded by the federal Highway Trust Fund, and are not subject to sequester. However, RTD's sizeable $1 billion full funding grant agreement (FFGA) allocation is a potential target of sequester reductions and will be monitored by Fitch. Sequester cuts to RTD's BABs subsidy is considered modest.
ONGOING SALES TAX RECOVERY
RTD's principal revenue source, sales and use taxes, continues to rebound after posting a large 10% decline in 2009. These taxes grew by 7% and 4.4% in 2010 and 2011, respectively, and unaudited 2012 collections increased by a large 8.1% indicating continued economic recovery. Future sales tax growth is projected at a conservative 1.6% in 2013, followed by an average 5.6% through 2016 before trending down annually, which Fitch views as somewhat optimistic given the historical 4.5% average annual gain even without factoring in the last recession. However, RTD's management has proven responsive to weaker performance, taking actions such as delaying or eliminating capital projects, making service adjustments, and restructuring fares.
SOLID BUT THINNING COVERAGE
The current refundings do not extend the maturity but do contain some restructuring designed to accommodate a planned $120 million FasTracks bond issuance by the end of 2013. Capacity is also created by the replacement of the cash-funded DSRF with a reserve fund surety for the series 2013A bonds. All of the closed lien sales tax bonds mature in 11 years. FasTracks bonds are back-loaded, leading the 10 year amortization rate for all bonds and COPs to remain slow at 28%. Based on RTD's sales tax projections, which Fitch considers optimistic, gross debt service coverage of all debt by annual sales and use tax revenues is projected to average a solid 2.8x through 2018. Under Fitch's stress scenario of flat sales tax in 2013 and beyond, net revenue coverage falls below 1.2x, RTD's policy minimum, starting in 2015, assuming no reductions in service, no cuts in pay-go capital spending, or any increases in farebox revenue.
PRESSURE FROM FUTURE COPS
Further reduced financial flexibility is apparent under RTD's plan to issue $305 million in COPs in 2013-2016 for bus fleet replacement. Net revenue coverage is tight under management's sales tax revenue growth assumptions, and a no-growth scenario reduces coverage to below sum-sufficient by 2016 absent expenditure or fare adjustments. This projected lack of flexibility and reduced bond-holder protection led Fitch to downgrade the COPs to 'A+' from 'AA-' recently.
Given their low payment priority in the flow of funds and additional leverage plans, Fitch views COPs bondholder protection as weakened in RTD's medium term plans. The Negative Outlook reflects COPs' potential for diminished capacity to withstand sustained sales and operating revenue shortfalls if additional debt plans are implemented.
RIDERSHIP TRENDS IMPACTED BY RECESSION AND FARE HIKES
RTD has a low farebox recovery rate, relying instead on excess sales tax revenue to cover operating costs. The rate has been trending up, and at 26% in 2011, is now above RTD's stated 20% goal. Nonetheless, this level is below national averages. Ridership trends have been volatile recently given a history of moderate fare increases, even with the addition of the Southeast Corridor rail line and fluctuating gas prices. System-wide fare increases were imposed in 2009 and 2011 to offset declining sales tax revenues. Partly due to the fare hikes, ridership declined by 6.6% in 2009 and remained flat through 2011. Notably, revenue boardings increased by 2.4% in 2012 despite an 8% service reduction that was imposed to accommodate nearly flat projected sales tax growth. Fare increases are programmed every three years.
RTD's other positive credit features include the economic base's sound underpinnings, effective utilization of debt instruments, and a willingness to increase fares. These actions partially offset the system's low farebox recovery ratio and pattern of over-estimated sales tax performance.
With the capital plan in flux, Fitch views the projected debt service coverage levels as having more inherent uncertainty than is typical for a transit system special tax bond. Fitch's ratings also consider the uncertainty inherent with the implementation of a substantial transit network expansion.
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.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises', dated July 15, 2011.
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria