AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the following Regional Transportation District (RTD), CO bonds:
--$197 million certificates of participation (COPs), series 2015A.
COP proceeds will finance the acquisition of equipment, vans, buses, and light rail vehicles. The COPs are scheduled to sell via negotiation during the week of Aug. 3.
In addition, Fitch affirms the following RTD outstanding bonds:
--$167.1 million sales tax revenue bonds at 'AA+';
--$1,419.2 million sales tax revenue bonds (FasTracks Project) at 'AA';
--1,064.7 million COPs at 'A'.
The Rating Outlook on the sales tax revenue bonds is Stable. The Rating Outlook on the COPs is revised to Stable from Negative.
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. The 2015A COPs are structured with a debt service reserve fund (DSF) equal to the lesser of 50% of MADS, 62.5% average annual debt service, or 5% of par. The DSRF will be funded at closing with bond proceeds.
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) 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.
KEY RATING DRIVERS
REVISED OUTLOOK: The Stable Outlook on the COPs reflects Fitch's expectation that RTD will continue to adhere to their 1.2x net revenue coverage policy for all debt obligations Demonstrated commitment to this policy, which Fitch considers an important credit feature, has served to limit RTD's exposure to revenue volatility and budgetary contingencies.
COVERAGE DISPARITY: Debt service coverage of senior and FasTracks sales tax bonds by pledged sales tax revenue remains satisfactory due to improved revenue trends and limited revenue bond issuance. However, recent and current COP offerings and increasing capital payments for the Eagle project (a public-private partnership) may result in margins close to RTD's minimum 1.2x net revenue coverage requirement for all debt obligations. As an operating expense of the system, COPs base rental payments are paid after all other system debt service.
CLOSED SENIOR LIEN/STRONG FASTRACKS ABT: The senior lien is closed except for refundings for interest cost savings. The additional bonds test (ABT) of the FasTracks bonds requires net revenues provide 2 times (x) coverage of the combined maximum annual debt service (MADS) for all senior lien, FasTracks debt, and additional bonds.
LARGE REPRIORITIZED EXPANSION PLAN: The sizable capital plan has been reduced and reprioritized to accommodate rising FasTracks costs and previous 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, DIVERSE TAX BASE: RTD's service area is large and diverse. Sales tax revenues exhibited typical cyclicality during and after the recession. Plans to seek additional sales tax authorization have been tabled for the foreseeable future.
UNEVEN SALES TAX FORECASTING: 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: Fare box recovery exceeds RTD's 20% goal, but remains low. RTD has demonstrated its willingness to increase fares, which appear to have had a mixed impact on ridership.
ADEQUATE MARGIN: Fitch's current ratings assume compliance with RTD's 1.2x net revenue coverage target. Failure to comply with this policy could lead to a downgrade of the COPs.
RTD currently provides primarily bus service and 48 miles of light rail for a very large service area that encompasses 57% of the state population.
LOWER COVERAGE WITH ADDITIONAL BORROWING
Last year's large $441 million COPs issuance (to finance construction of the North Metro Rail Line from Denver Union Station to 104th Avenue) and the current COPs offering 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 2.6x through 2019.
Net revenue coverage, however, 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. Coverage of MADS (which occurs in 2027) by net 2014 revenues is only 0.78x.
A no-growth sales tax revenue scenario reduces total net coverage to below 1.2x, RTD's policy minimum, starting in 2016, assuming no reductions in service, no cuts in pay-go capital spending, or any increases in fare box revenue. Under this scenario, coverage falls below sum-sufficient by 2017 absent expenditure or fare adjustments. However, RTD has demonstrated its commitment to complying with its 1.2x minimum policy by raising fares (imposed in 2006, 2008, 2009, 2011, and 2016) and an 8% reduction in service in 2012 in anticipation of flat sales tax growth. Fitch's 'A' rating on the COPs assumes management will continue to take actions necessary to comply with the policy.
Fitch views COPs bondholder protection as weakened in RTD's medium term plans given the low payment priority in the flow of funds and lack of legal protection against additional leverage. Additionally, the COPs' amortization rate is low at 31% in 10 years.
REPRIORITIZED CAPITAL PLAN
Cost estimates for the FasTracks project, estimated at $7.4 billion in recent years, 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.
RTD has responded to the increase in cost estimates by revamping 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.
RTD decided in May 2012 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 2040. In 2014, RTD accelerated the construction of a large portion of one rail line, the North Metro Rail line. RTD is now planning to move ahead on one of the rail line extensions, the Southeast Rail Extension, as discussed below.
The current COP offering will finance the partial replacement of its bus fleet plus the acquisition of light rail vehicles (LRV), almost entirely for its base system (not FasTracks). A portion of the LRV purchase has been accelerated from its original schedule in 2017 in order to realize a 7.9% or $10 million reduction on the purchase price of the vehicles.
During the first quarter of 2016, RTD plans to issue up to $150 million of FasTracks bonds to finance the Southeast Rail Extension ($68 million) plus other FasTracks capital projects. The planned issuance represents half of the $300 million in remaining FasTracks bonding authorization. As part of its regular bus fleet replacement program, RTD also plans to expend $201 million for rolling stock in 2016-2020 which will either be funded using pay-go or financed with additional COPs.
RTD is undergoing an aggressive effort to fund other FasTracks projects with pay-go from myriad sources including the FasTracks Internal Savings Account (FISA) which RTD will combine with its unrestricted fund balance to fund pay-go projects. While certain FISA sources are in line with maximizing efficiencies, Fitch considers others cautiously, such as reducing O&M reserves from three months to two. FISA's identified funds total $24 million, $6 million of which has been encumbered for the expansion of rapid bus transit managed lanes on U.S. 36.
Fitch views positively RTD's progress in reconciling its existing revenue resources with the 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.
RTD issued $398 million in private activity bonds in August 2010 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 totaling $1.03 billion, was secured 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.
SALES TAX TRENDS
RTD's principal revenue source, sales and use taxes, continues to grow after recovering from a 10% decline in 2009. These taxes grew by a compound annual average of 6.7% from 2010 - 2014, including a large 9.8% gain in the most recent year. Year to date collections for the first four months of 2015 are up by a large 7.5%.
RTD's model projects compound annual average growth of 5% for 2015 - 2019, which Fitch views as somewhat optimistic. However, 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 fare box recovery rate, relying instead on excess sales tax revenue to cover operating costs. The rate has been trending up and at 25% in 2014 is above RTD's stated 20% goal. Ridership trends have been volatile recently given a history of moderate fare increases, the addition of new rail lines, 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 2.4% in 2012 despite an 8% service reduction that was imposed to accommodate nearly flat projected sales tax growth. Ridership continued to grow annually through 2014 and year to date. Fare increases are programmed every three years. Effective Jan. 1, 2016, the board has approved an average 13% fare increase, estimated to generate an additional $12 million (9.3% of 2015 fare box revenues) on a gross basis.
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.
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form