SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Central Puget Sound Regional Transit Authority, Washington's (the authority) debt as indicated below:
--$1.33 billion TIFIA loan (the loan).
The loan will close on or about Jan. 16, 2015, though no draw is expected until fiscal 2019. Proceeds will fund construction of the authority's East Link Light Rail and HOV expansion projects.
The Rating Outlook is Stable.
The loan is payable from a fourth lien on the authority's sales tax and a tax on rental cars. The loan has a springing debt service reserve fund sized to 50% of fully drawn TIFIA loan MADS should debt service coverage fall beneath 1.50x.
KEY RATING DRIVERS
ADEQUATE PROJECTED DEBT COVERAGE: The 'A+' rating reflects the broad-based and diversified nature of the pledged sales tax and satisfactory projected debt service coverage (DSC) over the life of the authority's capital program. Risks related to the authority's planned future debt issuance are mitigated by significant capital and debt issuance program flexibility.
PRESENCE OF ABT MITIGANTS: The loan's very weak 1.10x maximum annual debt service (MADS) additional bonds test (ABT) is mitigated by practical and policy constraints to leveraging to the legal minimum. The authority is highly dependent on surplus sales tax revenues for ongoing operations given low farebox recovery levels, and has a policy requiring at least 1.50x net DSC.
STRONG ECONOMIC PROFILE: The authority's territory includes roughly 70% of Washington state's economic activity and 41% of its population. Fitch views the service area not only as large but also as well diversified, poised for continued growth, and possessing above average income and employment characteristics.
SATISFACTORY FINANCIAL OPERATIONS: The system benefits from high historical and Fitch-projected average net DSC of over 5.0x through fiscal 2018, and a manageable infrastructure renewal and replacement profile. However, the system's pricing framework is weak, with a Fitch-projected farebox recovery ratio averaging just 19% from fiscal years 2014-2018.
DEBT SERVICE COVERAGE: The 'A+' rating assumes the loan's debt service coverage will not fall below 1.50x. Actual or likely coverage deterioration below this level likely would result in a downgrade.
The authority plans, builds, and operates a regional mass transit system in the counties of King (general obligation bonds [GOs] rated 'AAA', Stable Outlook by Fitch), Pierce, and Snohomish, serving approximately 41% of Washington state's (GOs rated 'AA+' by Fitch) residents. The system includes rail, light rail, buses, and HOV lanes, and is estimated to have carried 31 million riders in fiscal 2014.
STRONG ECONOMIC PERFORMANCE
The service area includes some of Washington state's largest cities, including Seattle, Tacoma, and Bellevue. The authority estimates its boundaries encompass approximately 70% of the state's economic output.
The Seattle-Tacoma-Bellevue metropolitan statistical area's (MSA) employment market performed better than the nation during and after the recession. September unemployment registered 5.1%, compared to 5.4% and 5.7% for the state and nation, respectively. MSA household income levels are also stronger than average at 114% and 128% of state and national levels, respectively. Income levels are higher still for King County, which makes up 61% of the district by population.
Employment is adequately diversified despite a degree of concentration in Boeing and Microsoft, which have supplied the region with a significant amount of high-paying jobs. The region's high educational attainment rate bodes well for continued elevated income levels and potential expansion of high skilled employment opportunities.
The county's top 10 sales taxpayers are diverse, making up just 10% of the authority's total sales tax revenues, which experienced average annual organic growth of 2.3% from fiscal years 1999-2014 even with a peak-to-trough recessionary loss of 21%. Due to voter approval of a permanent sales tax rate increase, fully effective in fiscal 2010, actual sales tax revenue growth was higher.
MIXED SECURITY CHARACTERISTICS
The loan benefits from the pledge of a broad-based and well diversified sales tax on a very large economic base. Although the loan is also payable from a rental car tax, this revenue source is very small, making up less than 1% of total pledged revenues.
The loan's security strengths are offset by its fourth lien position, a weak 1.10x MADS ABT, and a springing debt service reserve fund (DSRF) requirement that is activated when DSC falls beneath 1.50x. The DSRF would have to be funded at 50% of MADS, and can be satisfied with either cash or a surety.
Fitch views the weak ABT as substantially mitigated by two considerations. First, the authority has a financial policy requiring a minimum 1.50x net DSC in any given year, and at least 2.0x net DSC on average annual debt service. Second, the authority is highly reliant on excess sales tax revenues to fund its transit system's operations due to a low farebox recovery ratio. Management believes it would not be fiscally feasible to leverage to or near its ABT, and warrants that the weak legal provision was included to allow for future variable rate debt or commercial paper issuances.
The authority has the statutory authority to lower its sales tax rate to a minimum of 0.8% from the currently levied maximum of 0.9%, but must meet a 1.50x coverage sufficiency test annually. Failure to meet the test would require the authority to raise its tax rate to achieve at least 1.50x coverage, not to exceed the legally permitted 0.9% maximum tax rate.
FLEXIBLE YET SUBSTANTIAL CAPITAL, DEBT PROGRAMS
Fiscal 2014 estimated pledged revenues of $616.5 million generate all-in debt service coverage at a strong 12.4x on an annual debt service (ADS) basis. The authority projects it will draw from the TIFIA loan annually in fiscal years 2019-2023, with debt service payments beginning in fiscal 2028, five years after projected substantial completion of the East Link project.
Fitch's projected debt service calculation considers projected debt issuances, with the authority estimating $5.7 billion of cumulative issuances annually through fiscal 2023. To the extent that pledged revenues underperform expectations, the authority could scale back or defer both its capital and debt issuance programs. The authority's capital plans consist largely of expanding its existing rail service. Because the system has a low farebox recovery ratio, a hypothetical capital plan deferral or downsizing likely would not negatively impact the system's financial operations.
Based on the authority's projected revenue growth and debt issuance projections, Fitch estimates ADS coverage would bottom out at 2.25x in fiscal 2024 and rise thereafter. The authority's projections assume average annual growth of 4.5% and are based on its third party consultant's forecast with a haircut of 50-100 basis points.
Fitch's more conservative 2% (base case) and 0% (stress scenario) growth assumptions would result in trough ADS coverage of 1.66x and 1.23x, respectively, assuming no scaling back of the authority's capital or debt programs.
Fitch believes its 2% base case growth rate is conservative based on the region's strong economy, ongoing population growth and inflation.
SATISFACTORY FINANCIAL OPERATIONS
The authority's financial operations are satisfactory overall, with strong historical and projected net debt service coverage through at least fiscal 2018, and a manageable infrastructure renewal and replacement program. These strengths are offset by the system's weak pricing framework, as exhibited by a low Fitch-projected farebox recovery ratio of 19% from fiscal years 2014-2018.
Concerns over the authority's low farebox recovery ratio are somewhat mitigated by a moderate degree of community support, evidenced by 58% voter approval of a permanent sales tax hike in 2008 to support the system's service expansion. Also, the authority's high level of taxes as a percentage of total revenues (about 60%) reduces the risk that hypothetically weakened operations could affect overall revenues, given the lower level of correlation between sales tax performance and fare box revenues. Fitch considers the system's community essentiality to be weak, however, given that just 9% of the employed population utilizes the system. This dynamic may improve over time based on significant increases in ridership over the past several years should the trend continue.
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