AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Regional Transportation District (RTD), CO bonds:
--$655.1 million certificates of participation (COPs) downgraded to 'A' from 'A+'.
Fitch affirms the following ratings on RTD's outstanding bonds:
--$189.6 million sales tax revenue bonds at 'AA+';
--$1,419.7 million sales tax revenue bonds (FasTracks Project) at 'AA';
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, Transportation Infrastructure Financing Innovation Act (TIFIA) loan, 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. Base rental payments for the COPs are on parity with operating expenses of the base system and the non-capital portion of the Eagle project payment.
KEY RATING DRIVERS
PRESSURED COPS: The downgrade of the COPs and Negative Outlook 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, which have increased notably with recent and planned offerings, are paid after all other system debt service.
THINNING COVERAGE: Debt service coverage of senior and FasTracks sales tax bonds by pledged sales tax revenue remains satisfactory due to restored 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.
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.
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.
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.
ADDITIONAL LEVERAGING: Additional leveraging beyond current debt plans, if not accompanied by materially improved net revenue coverage, may lead to a rating downgrade of the COPs.
SUSTAINABLE FASTRACKS EXPANSION: A return to a Stable Outlook hinges on clarity regarding the scope and timing of the unfunded portions of the district's expansion projects, including future debt plans without meaningful increases in leverage beyond that which is currently planned or dilution of net revenue debt service coverage below 1.2x.
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. Significant capital portion payments for the Eagle project, beginning in 2017, will further limit flexibility. Operating pressures could lead to downward pressure on all ratings.
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.
LOWER COVERAGE WITH ADDITIONAL BORROWING
The planned large issuance of COPs in May 2014 will lead to reduced flexibility in the event that revenue projections do not materialize. Based on RTD's sales tax projections, which Fitch views cautiously, gross debt service coverage of all debt by annual sales and use tax revenues is projected to average a solid 2.4x through 2019. However, net revenue coverage is tight under management's sales tax revenue growth assumptions, partly due to significant Eagle public private partnership (P3) capital portion payments that begin in 2017. Averaging $40 million through 2019, Eagle P3 capital portion payments are senior to the COPs. A no-growth scenario reduces coverage to 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 fare box revenue. Additionally, under this scenario, coverage falls below sum-sufficient by 2016 absent expenditure or fare adjustments.
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, leading to their downgrade to 'A'. Additionally, the COPs' amortization rate will decline notably with the upcoming issuance from the previously rapid level.
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 P3 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 three existing rail lines, assuming no additional sales tax authority would be available to fund these FasTracks projects prior to 2035. RTD is now moving ahead on one of the northern rail lines, Metro North as discussed below.
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 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 ACCELERATED
RTD is accelerating the construction of the majority of the Metro North line, from Denver Union Station to 124th Ave. Previously, the expansion of the North Metro line to 124th Ave. was scheduled for completion in 2034. RTD plans to fund the $630 million project with $479 million of COPs, to be issued by May 2014, and pay-go funding. RTD has signed a $343 million fixed-price design-build contract with Regional Rail Partners (RRP) and expects revenue service to begin in 2018. These COPs have taken the place of the previously planned issuance of $120 million of FasTracks bonds for a smaller expansion of North Metro through 72nd Ave. Along with $160 million of additional COPs for fleet replacement, RTD's total debt plans have increased by a large 172% or $410 million for the 2014-2018 period. The contract with RRP includes an option to further extend North Metro line to its terminus at 162nd Ave. at a total cost of $141.5 million.
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 is the first project to receive pay-go from RTD's new internal savings account.
ONGOING SALES TAX RECOVERY
RTD's principal revenue source, sales and use taxes, continues to grow after recovering from a large 10% decline in 2009. These taxes grew by a compound annual average of 5.6% in 2010-2013. Management projects 5.5% natural growth in 2014 and a total gain of 6.1% due to new legislative authority that provides RTD parity with the state on sales tax exemptions. For 2015-2019, RTD's model projects a more moderate compound annual average of 3.9% although Fitch still views such projections cautiously. RTD's management has proven responsive to weaker performance, taking actions such as delaying or eliminating capital projects, making service adjustments, and restructuring fares.
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 2012, 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 modestly by 1% in 2012 despite an 8% service reduction that was imposed to accommodate nearly flat projected sales tax growth. Ridership increased by a modest 1.5% in 2013 (adjusted for 2012's leap year) as some bus service was reduced upon the opening of the West Rail line in April 2013. Fare increases are programmed every three years although 2014's fares remained level.
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 RTD's previous pattern of over-estimated sales tax performance.
With the financing of its capital plan in flux, Fitch views the projected debt service coverage levels as having more inherent uncertainty than is typical for a transit system COP. 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'.
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