CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for the following standalone grant anticipation revenue vehicle (GARVEE) bonds:
--Alaska Railroad Corp. at 'BBB';
--Chicago Transit Authority at 'BBB';
--Georgia State Road & Tollway Authority at 'A+';
--Idaho Housing and Finance Association at 'A+';
--Kentucky Asset Liability Commission at 'A+';
--Maine Municipal Bond Bank at 'A+';
--Oklahoma Department of Transportation at 'A+';
--Rhode Island Economic Development Corp. at 'A+';
--State of California at 'A+';
--State of Michigan at 'A+';
--State of North Carolina at 'A+';
--State of Ohio at 'A+'.
The Outlook on all bonds above is Stable.
RATING RATIONALE
Ratings for standalone GARVEE bonds are derived in large part by the relative strength of the federal transportation funding program. Although no longer funded on a multiyear basis, which provides a level of long-term uncertainty, the program has proven to be an essential investment for the federal government with funding disseminated in a formulaic nature across all 50 states. The ratings further reflect the broad revenue pledge of all of the Dept. of Transportation (DOT)/Transit Agency's federal receipts and leverage covenants that help to mitigate the risk of diminished federal transportation receipts. In addition, the ratings also incorporate the liquidity offered by the other resources available to DOT/Transit Agencies which provide financial cushion to the extent there is a delay in federal funding.
KEY RATING DRIVERS
Strength of the Federal Program: Midrange
Continued Dependence on General Fund Transfers: In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, and funding levels are less predictable. Also 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. The essential nature of the investment in addition to the reliable formulaic distribution of funds underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF).
Structural Features: Stronger (Highway GARVEEs)
Highway GARVEEs Maintain Significant Flexibility: The standalone GARVEE bonds in Fitch's portfolio benefit from a first lien on all legally available federal transportation funding. In the case of reimbursement GARVEE bonds this is accomplished by a pledge of all legally available federal transportation funds set aside on a monthly basis. Alternatively, in the case of direct-pay GARVEEs the broad pledge is accomplished through a covenant to de-obligate and redirect federal funds. In addition, state highway GARVEE bonds benefit from leverage limitations of at least 3x which provides the ability to retain sufficient flexibility at the 'A+' level even with a decline in federal revenues.
Structural Features: Weaker (Transit GARVEEs)
Transit GARVEEs Limited by Leverage Tests Provisions: The Transit GARVEEs in Fitch's portfolio benefit from a broad pledge of federal transportation funding. However, in contrast to highway GARVEEs, the transit GARVEEs rated by Fitch have materially lower leverage limitations of 1.5x or below and would thus have much less flexibility to protect against declines in federal program revenues.
Resources of DOT and Transit Agency Provide Liquidity:
In the event of a funding shortfall or a delay in federal funding due to a lapse in authorization the financial resources of the DOT and Transit Agency can provide financial cushion to meet GARVEE payment obligations. Fitch's assessment of the resources available is derived from several factors including the DOT/Transit Agency's amount of working capital, size of their capital program, and their sources of funding. Assessments of this for credits in the portfolio range from stronger, midrange, to weaker; however, it is not the main driver of standalone GARVEE ratings.
Peers: 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/Positive - A material change in Fitch's view of the strength of the Federal program to weak or strong from midrange.
CREDIT UPDATE
The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years has not been addressed by Congress. Instead the recent legislation relying on general fund transfers to keep the program afloat has recently been extended 3 months, now through October 2015. The future of the program beyond October 2015 is uncertain, 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 longer-term sustainable trajectory. In Fitch's view the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.
There are some hopeful signs of progress towards a longer-term bill with the U.S. Senate's recent passage of the Developing a Reliable and Innovative Vision for the Economy (DRIVE) ACT, a six-year authorization bill which would fund federal highway and infrastructure projects for three years. Fitch will continue to monitor legislative developments with respect to authorization and funding to assess their impact on the overall strength of the federal program.
While the continued General Fund transfers have underscored the relative importance of transportation funding within the Federal Budget to this point, they do not guarantee future commitments. Complicating matters is a significant increase in corporate average fuel economy (CAFE) standards from the current 29 miles per gallon (MPG) to 54.5 mpg by 2025 that was approved on Aug. 28, 2012. Such a standard puts further pressure on HTF receipts from taxes imposed on passenger cars, leading to an estimated 13% reduction from today's levels by 2032, requiring even larger general fund subsidies to maintain the status quo.
Fitch has previously performed an analysis of the federal grant program that assumes the CBO projection for outlays, translating into a 1.4% compound annual growth rate (CAGR) in HTF spending. In addition, Fitch estimates a negative CAGR of 0.5% in HTF receipts through 2030 based on a fuel consumption forecast for passenger cars run by the Environmental Protection Agency (EPA) given revised CAFE standards. Under such a scenario, the annual gap between HTF spending and receipts could be on average $19.2 billion from 2015 - 2030, meaning that by 2032 nearly half of the funding for HTF outlays would need to come from the general fund.
Under the scenario above, the FHWA would have to cut outlays to the states in aggregate by 22% in 2015 in order to match the receipts coming into the HTF; cutting outlays annually thereafter through fiscal 2030. Because highway GARVEEs maintain such robust additional leveraging provisions, such a haircut in 2015 would still result in maximum annual debt service (MADS) coverage across the board in excess of 2x. However, the same reduction for transit GARVEEs would result in coverage levels in the mid-1x range, approaching the lower additional bonds test (ABT) covenants.
Assuming state DOTs and transit agencies fully leverage their GARVEE programs up to their ABT, debt service coverage ratios on standalone highway GARVEEs could drop to approximately 2.3x by 2032. Coverage ratios on standalone transit GARVEEs would fall to a much lower 1.03x, thereby rendering the transit GARVEEs more susceptible to significant declines in federal funding.
For more information regarding GARVEEs and the HTF, please see Fitch's special report 'Federal Highway Trust Fund: Running on Fumes' dated May 5, 2014.
Additional information available on 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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989338
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989338
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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