NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the ratings on approximately $4.99 billion in dedicated tax fund (DTF) bonds of the Metropolitan Transportation Authority, NY (MTA), to 'AA' from 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are special obligations payable from state taxes deposited in the pledged amounts account including dedicated mass transportation trust fund (MTTF) receipts and metropolitan mass transportation operating assistance account (MMTOA) receipts. Tax revenues allocated to the DTF are subject to annual appropriation by the state legislature.
KEY RATING DRIVERS
LINK TO STATE CREDIT QUALITY: Tax revenues allocated to the DTF are provided by annual appropriations of the state legislature, and the state has discretion regarding revenues flowing to the fund. The state has a track record of providing a reliable revenue stream to the DTF.
STRATEGIC IMPORTANCE: The MTA transportation network is essential to the economy of New York state, with New York City Transit (NYCT) carrying an average of 8.1 million daily subway and bus riders and Metro-North Railroad (MNR) and Long Island Rail Road (LIRR) carrying another 587,000 daily commuter rail passengers.
INSULATION FROM MTA OPERATIONS: The security for the dedicated tax bonds is insulated from the highly constrained financial operations of the MTA, although excess DTF revenues after debt service obligations are met are needed to support transit and commuter operations.
SOLID DEDICATED TAX STREAM: The dedicated taxes are diverse and derived from a broad, wealthy state and regional economy, although revenues are sensitive to economic cycles.
AMPLE COVERAGE: Dedicated revenues provide ample coverage of maximum annual debt service (MADS), and there is a strong incentive to limit leveraging of the DTF given the demands on surplus revenues for operating support of transit and commuter rail.
RATING SENSITIVITIES
STATE GO CREDIT QUALITY: The rating is sensitive to the credit quality of New York State, to which it is linked.
CONTINUATION OF STATE COMMITMENT: Evidence that New York State's historical commitment to providing a generally reliable revenue stream to the dedicated tax fund is materially reduced could result in a downgrade.
CREDIT PROFILE
The upgrade of MTA's DTF bonds, to 'AA' from 'AA-', is based on Fitch's view that the state's long history of support for the MTA generally and for the DTF bonds in particular warrants a rating at a level one-notch below New York State's 'AA+' general obligation rating, on par with other appropriation debt of the state.
Underlying the 'AA' rating is the expectation that the record of state support of the fund will continue going forward and the expectation that DTF borrowing will remain at a level that allows for substantial excess resources to flow to the MTA to support transit and commuter rail operations.
Tax revenues allocated to the DTF are subject to annual appropriation by the state legislature. The state is not bound or obligated to continue imposition of taxes and fees from which trust fund revenues are currently derived and can amend, modify, repeal, or otherwise alter statutes imposing or relating to the fund or the taxes or appropriations. As a result, the credit quality on the bonds reflects expectations of the state's ongoing commitment to the program.
The bonds are special obligations payable by state taxes deposited in the pledged amounts account from MTTF and MMTOA receipts, subject to annual legislative appropriation. The state legislature established the MTTF in 1991 to address the need for continued capital investment in the state's transportation infrastructure.
MTTF revenue is derived from a portion of statewide petroleum business taxes, motor fuel taxes, and motor vehicle fees. The MMTOA was created in 1980 in anticipation of continuing ongoing operating deficits of state mass transportation systems. Four categories of taxes are deposited into the MMTOA: a regional franchise tax surcharge on business activity carried out within the transportation district; a regional sales tax imposed on sales and uses of certain tangible property and services within the MTA transportation district; a portion of franchise taxes on certain transportation and transmission companies statewide; and an additional portion of statewide petroleum business taxes.
The state has a track record of providing a generally reliable revenue stream to the DTF, although as part of a gap-closing plan in late 2009 the state legislature reduced the MMTOA appropriation. This was the first time an existing appropriation to the MTA from a dedicated tax that had already been collected by the state had been reduced. Periodic adjustments since then to dedicated resources of the MMTOA have been small relative to overall MMTOA resources and otherwise have been used to support MTA needs.
Fitch estimates that preliminary total MTTF and MMTOA pledged receipts of approximately $2.2 billion in state fiscal year 2015 (which ended on March 31, 2015) provided 5.8 times (x) coverage of fiscal 2015 debt service and 5.3x coverage of MADS (in fiscal 2017); Fitch's coverage calculations exclude the impact of federal Build America Bond subsidies, projected at about $26 million annually. Fiscal year 2015 MTTF receipts alone provided coverage of about 1.5x MADS.
An additional bonds test requires not less than 1.35x historical coverage of MADS by MTTF receipts and investment income, and not less than 2.5x coverage of MADS by combined MTTF and MMTOA receipts and investment income. As the MTA issues additional bonds to finance its large transit and commuter rail capital needs, debt service coverage is expected to fall but still be strong based on MTA's operating demands, which provide practical limits on the amount of debt issued in the future.
MTTF receipts are transferred to the debt service account monthly in the amount of 1/5 of the next interest payment and 1/10 of the next principal payment. MMTOA receipts are applied to the debt service account to the extent MTTF receipts are not sufficient to meet the debt service requirement but have never been needed for this purpose.
Excess MTTF and MMTOA receipts are used by the MTA for capital and operating needs of the transit and commuter rail systems, including debt service on the MTA's transportation revenue bonds (rated 'A' with a Stable Outlook by Fitch). The transportation revenue bonds are also secured by the MTA's operating receipts and other sources.
State statute prohibits the MTA from filing a bankruptcy petition. The same statute includes the state's pledges to maintain this prohibition in place as long as bonds are outstanding, and to leave bondholders' rights unimpaired.
For more information on the State of New York, see Fitch's press release "Fitch Affirms New York State GOs and Related Bonds at 'AA+'; Outlook Stable" dated July 15, 2015 and available at Fitch's website at 'www.fitchratings.com'.
For more information on the MTA, see Fitch's press release "Fitch Rates Metropolitan Transportation Auth (NY) Trans Rev Bonds 'A'" dated July 13, 2015 and available on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988867
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988867
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.