SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to following Utah Transit Authority, Utah (the authority) bonds:
--$144 million subordinated sales tax revenue refunding bonds, series 2014A and 2014B.
The bonds will be privately placed the week of April 21. Proceeds will refund a portion of the authority's outstanding subordinate sales tax revenue bonds to eliminate its variable rate exposure.
In addition, Fitch affirms the following ratings:
--$756.6 million outstanding subordinate sales tax revenue bonds at 'A+';
--$1.2 billion outstanding senior sales tax revenue bonds at 'AA'.
The Rating Outlook is Stable.
The senior and subordinate bonds are secured by a first and second lien, respectively, on certain gross sales and use taxes generated within the service area. The revenues are pledged through interlocal agreements with the counties of Salt Lake and Utah through at least 2045, which is beyond the final maturity date of the bonds. Pledged revenues also include interest subsidy payments received by UTA from the U.S. pursuant to the issuance of Build America Bonds (BABs). Most bonds additionally are secured by debt service reserve funds met through a combination of sureties and cash.
KEY RATING DRIVERS
ADEQUATE SUBORDINATE COVERAGE: The subordinate bonds' 'A+' rating reflects adequate maximum annual debt service (MADS) coverage by actual fiscal 2013 sales tax revenues of 1.32x (under various assumptions described below), though annual debt service coverage is sound at 1.91x.
SOLID SENIOR COVERAGE: The senior bonds' 'AA' rating reflects solid 2.07x coverage of MADS in fiscal 2013, which stands up well to severe hypothetical revenue declines.
STRONG ECONOMY, REVENUE GROWTH: The service area's economy is quite strong, enjoying sound growth of pledged sales tax revenues and encompassing nearly 80% of the state of Utah's population. Utah benefits from low unemployment, a solidly expanding employment base, and a well-diversified economy and tax base.
BELOW AVERAGE FINANCIAL METRICS: Fitch views the transit authority's pricing framework and financial flexibility as weak. The farebox recovery ratio is low at 23%. In addition, assuming flat sales tax revenues, debt service coverage from revenue net of operating expenses averages a weak 0.72x from fiscal years 2014-2018, conservatively assuming the authority does not refund its 2014 bonds, as planned. However, as a new system, infrastructure replacement needs are manageable.
PRESENCE OF FINANCIAL MITIGANTS: The authority's weaker than average financial metrics are somewhat mitigated by a history of strong community support and the system's significant dependence on tax revenues, resulting in a lower correlation between the performance of transit operations and pledged revenues. Furthermore, the system maintains strong liquidity.
DEBT SERVICE COVERAGE: The ratings are driven in large part by debt service coverage levels. Unexpected and material changes to the authority's sales tax revenues or debt plans, with secondary effects on debt service coverage, may impact the bonds' rating levels.
The system covers approximately 1,400 square miles in six counties that collectively serve nearly 80% of the state's population (state general obligation bonds [GOs] rated 'AAA' by Fitch). The service area spans Utah's Wasatch Front, linking the city and county of Salt Lake (both GOs rated 'AAA' by Fitch), the region's cultural and economic hubs, with fast-growing suburban areas, including the counties of Box Elder, Davis, Tooele, Utah and Weber. The authority's economic and tax bases are broad, diversified, and contain positive drivers for long-term growth, including historically very high birth and family formation rates that will continue to drive population growth.
STRONG STATE ECONOMIC PERFORMANCE
Utah's very well diversified economy has posted solid employment gains since the end of the housing-led recession, with non-farm employment well out-pacing national growth rates for three consecutive years, growing a healthy cumulative 9.1% from 2010-2013. February 2014 employment extends the trend, with 2.6% year-over-year growth, versus 1.6% for the nation. Strong growth has pushed total employment higher than pre-recession levels and the February 2014 unemployment rate fell to a very low 3.9%, compared to the national 6.7% rate.
The authority identified over $3 billion of major public infrastructure and private construction projects completed in 2013 and over $4 billion of anticipated projects over the next several years that could help further propel economic growth. Future projects include a federal courthouse ($210 million, expected to be completed by 2014) a high tech manufacturing facility ($1.5 billion, 2015), and a smelter ($340 million, 2015).
POSITIVE REVENUE ENVIRONMENT POISED TO BOOST COVERAGE
The authority's sales tax collections have performed quite well over the past few years, reflective of the state's strong economic recovery. From fiscal years 2010-2013 sales tax revenues grew a cumulative 18.6%, surpassing their pre-recessionary peak reached in 2007. The impact of these gains on subordinate debt service coverage, however, was muted due to significant new debt issuances over this time. Given the authority's limited plans for new issuances moving forward, Fitch would expect future revenue gains to result more directly in improved coverage levels.
Fiscal 2013 sales tax revenues increased 3.6%, nearly matching the authority's original 3.5% growth estimate, but slightly underperforming the revised budgeted growth rate. The authority is projecting a 4.2% gain in fiscal 2014, ratcheting up annually to a sustained growth rate of 5% beginning in fiscal 2017.
In spite of the authority's 5.92% average sales tax growth over the past 20 years, Fitch views the authority's 5% long-term growth forecast as somewhat aggressive. High historical rates of growth typically fall over time as communities become increasingly built-out. Nonetheless, the combined impact of inflation, albeit at low levels, the state's high population growth, and robust economic activity could drive sales tax revenues at rates that seem atypically high compared to those in other states and transit systems.
DEBT PROFILE CHANGES VIEWED AS CREDIT NEUTRAL
The 2014 subordinate sales tax revenue bonds are being issued to refund all of the authority's variable rate debt. The bonds are structured as fixed rate with bullet maturities in fiscal years 2017 and 2018 and are callable six months prior to the bonds' respective maturities. The authority intends to refund the bonds prior to their maturity dates, but it is unclear what bond structure will be used. Although Fitch views positively the authority's reduced variable rate exposure, the new debt structure imposes interest rate risks that could negatively impact coverage levels moving forward.
The par amount of the 2014 bonds makes up less than 8% of the authority's total par of sales tax revenue bonds. Fitch estimates that a long-term fixed rate refunding of the 2014 bonds would have a negative impact on subordinate debt service coverage, but the impact likely will not be sufficiently material to result in a negative credit action, particularly if sales tax revenues continue to grow moderately without offsetting parity debt issuances.
STRONG SENIOR COVERAGE AND LEGAL PROTECTIONS, SUBS JUST ADEQUATE
Debt service coverage of senior lien bonds is strong, even on a MADS basis, but all-in coverage (combined senior and subordinate debt service) is notably weaker due to escalating debt service. Fiscal 2013 sales tax revenues of $203.8 million covered senior and all-in ADS by a strong 2.96x and 1.91x, respectively (all cited coverage levels do not consider limited federal interest subsidies, which have an immaterially small positive impact on coverage levels).
MADS coverage remains strong on the senior bonds at 2.25x (the 2014 bonds' bullet maturities are backed out of all cited MADS calculations to account for the expected refunding) but registered a just adequate 1.32x on an all-in basis. Fitch estimates that sales tax revenues would have to decline 24% from estimated fiscal 2013 levels for all-in MADS coverage to reach 1.0x. By comparison, sales tax revenues declined 10.8% cumulatively during the recession.
The additional bonds test (ABT) for senior lien bonds is a sound 2x MADS, however, the subordinate lien ABT is low at 1.1x MADS. The subordinate bonds' ABT assumes that balloon bonds are refunded with long-term fixed rate bonds.
While senior lien bonds have a pooled DSRF, the subordinate lien bonds have separate DSRF requirements for each series. Outstanding bonds' reserves are met through a combination of cash and sureties of dubious value. The 2014 bonds will not have a DSRF.
FINANCIAL METRICS WEIGHED BY RISING DEBT PROFILE
The authority's financial metrics over the past several years through fiscal 2013 have been deteriorating primarily due to rising debt service and operating expenses. Coverage of total debt service net of operations was a solid 2.26x in fiscal 2008 but fell to 1.18x in fiscal 2013, and will drop to a weak 0.80x in fiscal 2016 conservatively assuming no revenue growth.
Though lower than its 30 year historical average growth rate, the authority's long-term annual sales tax growth rate of 5% is somewhat aggressive at this point in its development. According to the authority's projections, the 5% growth rate will maintain coverage of debt service and operations at or above 1.03x through at least fiscal 2016. Authority-calculated coverage levels dip below 1.0x in fiscal years 2017 and 2018, but those figures don't reflect expectations that the 2014 bonds will be refunded prior to their maturities.
Debt service rises to a maximum of roughly $155 million in fiscal 2037 from $101.5 million in fiscal 2014. Debt service step-ups up substantially in fiscal year 2018, adjusted for the anticipated refunding of the 2014 bonds.
Concerns over potentially weak future coverage are somewhat mitigated by the service area's solid prospects for growth and sales tax revenue gains, and a history of strong community support as measured by voter approval for related sales tax revenue hikes. Also, the authority's high level of taxes as a percentage of total revenues (about 60%) reduces the risk that weak operations will affect overall revenues, given the lower level of correlation between sales tax performance and fare box revenues.
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 additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria