Fitch Rates Idaho Housing and Finance Association GARVEES 'A+'

CHICAGO--()--Fitch Ratings has assigned an 'A+' rating to approximately $158 million of Idaho Housing and Finance Association (IHFA) grant and revenue anticipation refunding bonds (GARVEEs), series 2015A. The association plans to price the series 2015A bonds the week of June 15, 2015.

Fitch has also affirmed the 'A+' rating on approximately $633.2 million of outstanding parity obligations.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Federal Program Future Uncertain: The Idaho Transportation Department's (ITD) receipt of Title 23 funds from the Federal Highway Administration (FHWA) to pay debt service depends on the strength, stability, and reliability of the federal program that authorizes outlays from the highway trust fund (HTF). The federal program, which was once funded on a multiyear basis, has now morphed into a program where future policy is less certain and funding levels are less predictable. The program is more dependent on frequent action to extend authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. While future policy is uncertain, the federal program remains essential in funding the maintenance of the nation's highway system and is distributed by a formulaic method.

Robust Protection Against Leverage: While final maturity in 2032 exposes bondholders to a certain degree of reauthorization risk, the trust indenture additional bonds test (ABT) limits annual debt service to 30% of annual apportionments expected to be received, allowing ITD to retain sufficient flexibility at the 'A+' level even under a scenario in which outlays from the HTF are cut to match projected gas tax receipts.

Strong Coverage and Adequate Flexibility: Federal funds authorized provided strong DSCRs of 4.42x in 2014 and are projected to remain above 3x under Fitch's rating case. Similar to other GARVEE programs, there is no debt service reserve fund. Though ITD derives approximately a majority 56% of its revenues from federal resources, the department retains substantial liquidity on hand to cover potential delays in federal receipts. In addition, ITD maintains no other debt outstanding than that associated with its GARVEE program.

Peer Comparison: Fitch's standalone highway GARVEE bonds, all of which are rated 'A+', tend to have strong additional leverage limitations of at least 3.0x current receipts to pay debt service. In contrast, standalone transit GARVEE bonds have materially lower leverage limitations of 1.5x, giving them less financial flexibility to protect against declines in federal program revenues and are thus rated 'BBB'.

RATING SENSITIVITIES

Negative or Positive - A material change in Fitch's view of the strength of the federal program.

Security

The bonds are secured by all federal payments received by the Idaho State Highway account, including but not limited to direct GARVEE debt service reimbursements to be made under a February 2006 Memorandum of Agreement between the ITD and the FHWA.

Transaction Summary

The IHFA is expected to issue $158 million of series 2015A GARVEE bonds to refund the Series 2006 bonds and partially refund the Series 2008A bonds for a net present value savings of $13.3 million, or 7.9% of the refunded bonds.

The Highway Trust Fund (HTF) continues to be on an unstable trajectory with expenditures exceeding revenues. The most recent legislative authorization, Moving Ahead for Progress in the 21st Century Act (MAP-21), relied on $10.8 billion of transfers from the general fund and did not address the long-term structural imbalance in the HTF. An interim measure passed in late May 2015 keeps the program running through July 2015 as the larger debate on ways to fund the HTF is still continuing. Fitch will continue to monitor legislative developments as they unfold.

Future funding levels will be hard to predict, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a sustainable trajectory. Further complicating matters is the increase in corporate fuel economy standards approved in August 2012 that could adversely impact gas tax revenues which support the HTF going forward. The risk of a potential reduction in federal funding is offset by the department's DSCR which remains strong at 4.4x in 2014.

Based on MADS of $59 million without BAB subsidies, ITD could withstand a 30% drop in obligation authority from FFY 2009 totals and still be able to meet its ABT throughout the life of the bonds. There is no guarantee, however, that Idaho's federal transportation funding will grow or even remain stable during subsequent authorization periods. Idaho may be more susceptible than other states to changes in federal funding policy given its status as a donee state; it currently receives $1.66 in federal surface transportation funds for each $1.00 it contributes in motor fuel tax revenues.

If the association were to issue up to its ABT limitation and assuming that receipts into the HTF were to decline by double the rate that the Environmental Protection Agency (EPA) projects passenger car gallons to decline based on 49.6 mile per gallon corporate average fuel economy (CAFE) standards, debt service coverage ratios on the association's GARVEEs could drop to approximately 2.5x by 2032.

The state legislature authorized the initial issuance of GARVEEs in 2005. A memorandum of agreement between the FHWA and the ITD and a master financing agreement among the association, ITD and the Idaho Transportation Board (ITB) establish a payment stream equal to 90% of debt service requirements in each period. Pledged receipts are broadly defined under the indenture to include not only those federal surface transportation funds granted for the purpose of paying debt service but all other federal surface transportation fund receipts as well, meaning these other federal surface transportation funds are reimbursed to the state legislature following their annual appropriation of the 10% match.

IHFA, which is authorized by state statute to issue the bonds, is a body politic and corporate created to assure an adequate source of capital for affordable housing and has the power to finance various facilities for nonprofit corporations. ITD is responsible for building, preserving and operating the state transportation system. The ITB is vested with the authority to control, supervise and administer ITD. Under the master financing agreement each subsequent issuance of debt must be authorized by the legislature, creating flexibility to expand or contract the size of the program.

The IHFA has so far issued seven series of GARVEE bonds which have funded all of a total planned $857 million to fund highway construction throughout Idaho. The series 2014A issuance last year completed the authorization.

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

Applicable Criteria

Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds (pub. 15 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685504

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985954

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Associate Director
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison
Chicago, IL, 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Associate Director
+1-312-368-2082
Fitch Ratings, Inc.
70 West Madison
Chicago, IL, 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com