Fitch Rates $59.8MM PA Turnpike Commi Motor License Fund-Enhanced Bonds 'AA'; Outlook Negative

NEW YORK--()--Fitch Ratings assigns an 'AA' rating to the Pennsylvania Turnpike Commission's (PTC, or the commission) motor license fund-enhanced turnpike subordinate special revenue bonds, series A of 2014 (convertible capital appreciation bonds).

The bonds are expected to sell via negotiation during the week of Apr. 21.

Additionally, Fitch affirms the 'AA' rating on approximately $904.9 million in outstanding motor license fund-enhanced turnpike subordinate special revenue bonds.

The Rating Outlook is Negative.

SECURITY

The subordinate revenue bonds are secured by a junior pledge on the trust estate, which consists primarily of residual toll revenues. Ultimate security for the bonds and the rating, rest with the ability to access certain monies in the commonwealth of Pennsylvania's (PA, or the commonwealth) motor license fund (MLF) to fund debt service if necessary.

KEY RATING DRIVERS

AVAILABILITY OF COMMONWEALTH MOTOR LICENSE FUND: While the bonds are intended to be repaid from toll revenues, the 'AA' rating rests upon statutory and legal commitments on the part of the Commonwealth to draw upon certain reserved funds in the its MLF to make up any deficiency in debt service deposits. The fund receives a variety of fuel and other vehicle-related revenues and historically exhibits large daily balances. Appropriation on the part of the Commonwealth is not necessary to access the MLF to cover a debt service deposit deficiency.

STATE GO CAPS RATING: The ability of the commonwealth to borrow from the MLF to support the general fund, and the lack of a direct MLF revenue pledge, limits the rating on the bonds to the state's GO rating of 'AA'/Negative Outlook.

NO NEW DEBT ANTICIPATED: Under new legislation enacted in 2013, the MLF will not be available for future new money issuances by the PTC after this issuance. The fund remains fully available for all bonds issued by July 1, 2014.

RATING SENSITIVITIES

COMMONWEALTH RATING: The rating is sensitive to changes in the commonwealth's GO rating.

STATUS OF THE MLF: Leveraging plans for the MLF as well as any further changes in Commonwealth transportation funding policy that affect the revenue performance of, or available balances in, the fund could affect the rating. Additionally, the rating is limited by the lack of a direct revenue pledge from the MLF.

CREDIT PROFILE

The rating on the bonds is based on provisions in Act 44 of 2007 (the act) of the commonwealth that direct the state treasurer to draw upon certain funds in the commonwealth's MLF in the event that debt service deposits expected to be made by the commission are insufficient. The claim on MLF revenues is stated directly in Act 44 and no further appropriation on the part of the commonwealth is necessary. Act 44 further states the commonwealth's commitment not to impair its commitment to bondholders. The bonds being offered represent the final planned issuance of MLF-enhanced turnpike subordinate special revenue bonds under Act 44, which was designed to provide additional annual support for statewide transportation projects.

MLF AVAILABLE FOR DEBT SERVICE

Fitch believes the structure of the transaction, including legal agreements enacted pursuant to the initial issuance of MLF-enhanced bonds, would avert a missed debt service payment. Neither the MLF nor its revenues are directly pledged to bondholders. Instead, the claim on MLF revenues is stated directly in Act 44 which authorizes the bonds. The subordinate trust indenture governing the bonds lays out trustee notification requirements to the Pennsylvania Department of Transportation (PennDOT) in the event of insufficient commission revenues. A memorandum of agreement (MOA) between PennDOT, the commonwealth's office of the budget, and the state treasurer spells out the timing of notifications necessary should a draw on the MLF become necessary. A draw on the MLF does not require legislative appropriation.

In addition, a special revenue bonds debt service sub-account, funded at closing with bond proceeds to reach 50% of maximum annual debt service (MADS), is available to be drawn upon if PennDOT or the Treasurer failed to transfer monies from the MLF. If MLF monies are received subsequent to a withdrawal from this account, such monies would go to restore it; however, the commission has no obligation to maintain the balance or replenish any funds withdrawn, lessening the fund's significance among rating factors.

The MOA also creates the PTC special revenue bond account within the MLF. The state treasurer agrees to use best efforts to maintain the fund at a level equal to MADS on the bonds. This account is not pledged to bondholders, but the stated intent is to use balances in the account to cover deficiencies in commission payments for the bonds only in the event no other funds are available in the MLF. Under the MOA, the treasurer agrees to not access the account for interfund borrowing. The MOA requires replenishment from first monies into the MLF from certain sources if the account is drawn upon.

The commission's subordinate indenture specifies a rate covenant setting toll rates to achieve 1.15x coverage of subordinate obligations and 1.0x combined subordinate and MLF-enhanced debt service coverage. PTC's policy goals, which it continues to meet or exceed, are 1.3x for subordinate obligations and 1.2x for MLF-enhanced debt. Act 44 limits MLF-enhanced debt to $5 billion, with no more than $600 million to be issued annually. Act 89, enacted in November 2013, prohibits PTC from issuing new money bonds supported with MLF enhancement to support its obligations to PennDOT as of July 1, 2014. MLF availability for prior issuances, including the series A of 2014, is not affected by Act 89.

TRANSPORTATION REVENUES FLOW TO MLF

The commonwealth's MLF receives proceeds of motor fuels taxes, vehicle registration fees, license taxes, operator license fees, as well as other excise taxes and federal transportation revenues. Pennsylvania's constitution requires such proceeds to be used exclusively for construction, reconstruction, maintenance and repair of and safety on public highways and bridges and for debt service on obligations incurred for these purposes.

Revenue performance has been fairly steady and should improve following enactment of Act 89. Pursuant to Act 44, approximately 72% of fiscal 2013 MLF revenues were available to cover deficiencies in debt service deposits for the bonds if necessary. MLF tax and fee revenues available for debt service on the bonds increased an estimated 1.3% in fiscal 2013 year-over-year, ahead of 0.5% growth the prior year. Act 89 will significantly increase revenues flowing into the MLF and available for debt service deposits through at least fiscal 2018 when the legislation is fully implemented.

The MLF's average and minimum daily balances are significant, with fiscal 2013 levels averaging $1.1 billion and a minimum of $709 million. These balances include only MLF revenues available for debt service on the bonds. While balances are down notably from prior years, reportedly due to increased paygo capital spending by the commonwealth, coverage remains robust. The minimum daily fund balance in fiscal 2013 provided approximately 8x coverage of pro form MADS on the bonds. The additional bonds test limits MADS on all special revenue bonds, including the proposed issuance, to no more than one-third of the ending balance in the MLF for the prior year.

GO LIMITATION

In Fitch's view, MLF balances are not fully segregated from general fund operations given the general fund's ability to borrow from the MLF. This linkage caps the rating on the bonds at the commonwealth's GO rating. The commonwealth is permitted to borrow from the MLF to support general fund cash flow needs. The reverse is also true, and the commonwealth also retains the authority to issue tax anticipation notes as an alternative to interfund borrowing. Constitutional provisions require interfund borrowing from the MLF to be repaid by the earlier of eight months or July 31st. The commonwealth last borrowed from the MLF in fiscal 2010 and the borrowing was repaid within the fiscal year. The strength of the Act 44 provisions described above, including the lack of appropriation risk, support a rating on par with the GO.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Pennsylvania Turnpike Commission: Transportation Funding Legislation Positive for PTC and the Commonwealth' (Dec. 9, 2013);

--'Fitch Rates Pennsylvania Turnpike 2014A Rev Bonds 'A+'; Affirms Outstanding Bonds' (Mar. 18, 2014).

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826770

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1 212-908-0575
Managing Director
or
Committee Chairperson
Karen Krop, +1 212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1 212-908-0575
Managing Director
or
Committee Chairperson
Karen Krop, +1 212-908-0661
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com