Fitch Affirms Missouri Highways & Transportation Commission's Fed Reimbursement Bonds at 'AA-'

CHICAGO--()--Fitch Ratings has affirmed Missouri Highways & Transportation Commission's (MHTC) approximately $760.1 million of outstanding federal reimbursement state road bonds at 'AA-'. The Rating Outlook remains Stable.

The rating is driven by a strong subordinate pledge of a fourth lien on Missouri's state highway revenues which include various transportation receipts constitutionally dedicated for highway purposes and deposited in the state road fund and the state road bond fund. The bonds are also secured by the state's future federal highway grants.

KEY RATING DRIVERS

Presence of Backup Pledge Mitigates Federal Concern: MHTC bonds are secured by a fourth lien on state highway revenues generated from a motor vehicle sales tax, which helps to offset reauthorization risk.

Uncertainty of the Federal Program: 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).

Protection Against Leverage: Additional borrowing against federal revenues is limited by strong additional bonds test requiring federal funds to be 5x the amount of maximum annual debt service (MADS). MHTC's internal debt management policy also limits debt capacity to 20% of state and federal revenues. The 2033 maturity of the bonds is long relative to other federal reimbursement bonds and exposes bondholders to higher level of uncertainty surrounding the HTF but this is more than offset by the back-up pledge.

Lack of Legal Restrictions Relating to the Fourth Lien of State Highway Revenues: Given the closed senior lien and fully utilized Amendment 3 bonding capacity, the Missouri Department of Transportation (MoDOT) may raise funds via the fourth lien which would weaken the GARVEE's back-up pledge.

Peer Group: Similar direct-pay, double-barrelled GARVEE bonds at this rating category include Colorado DOT, Maryland Transit Authority, and Arizona State Board of Transportation. The MHTC bonds remain a notch lower than its peers due the relative strength of the back-up pledge.

RATING SENSITIVITIES

Negative: Additional leverage on the fourth lien of state road bond fund revenues that drops coverage of GARVEE debt service by state funds below 2.0x.

Positive: Positive rating action related to the pledge of federal highway revenues is unlikely at the current time given the uncertainty surrounding the federal program, however, a material improvement in Fitch's view of the state back-up pledge could warrant positive rating action.

SECURITY

The federal reimbursement state road bonds are secured by receipts of federal highway funds under Title 23 of the U.S. Code and a fourth lien on state fuel tax, motor vehicle sales tax, and licensing fee revenues.

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 three 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.

The federal reimbursement bond's secondary pledge of a fourth lien on state highway revenues provides an important offset to the reauthorization risk of the federal program. The credit rating is reflective of the credit quality of the state revenue pledge derived largely from state motor fuel tax. Excess state revenues after the payment of all senior lien and amendment 3 debt service alone provides coverage of 7.4x in 2015 for the federal reimbursement bonds.

The federal reimbursement bonds have strong coverage of 11.3x with federal revenues alone and 18.7x when including state revenues in 2015. Based on HTF outlays projected by the Congressional Budget Office (CBO) and fuel consumption levels projected by the Environmental Protection Agency (EPA), Fitch's base case assumes that federal spending will need to be decreased by 22% in 2015 in order to match the receipts coming in to the HTF. Under such scenario, coverage remains strong at 8.0x with federal revenues alone and 15.0x including state revenues. However, while coverage remains strong, operations would be pressured.

Missouri Highways & Transportation Commission is vested with authority over the state highway system, as well as all other state transportation programs including aviation, railroads, mass transit, and waterborne commerce. It is a bipartisan, six-member commission appointed by the governor with approval of the senate and, in turn, it appoints the director of MoDOT. MoDOT administers nearly 34,000 miles of highway and 10,000 bridges and oversees state and federal funds distributed to the other transportation modes of air, rail, water, and transit.

For additional insight as to how Fitch views the state highway revenues, please see Fitch's release on May 2014, 'Fitch Rates Missouri Highways & Trans Commission State Road Bonds 'AAA' & 'AA+'; Outlook Stable.'

SECURITY

The federal reimbursement state road bonds are secured by receipts of federal highway funds under Title 23 of the U.S. Code and a fourth lien on state fuel tax, motor vehicle sales tax, and licensing fee revenues.

Additional information is 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

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990411

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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 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Robert Hirtle
Analyst
+1-212-908-0132
or
Committee Chairperson
Bernardo Costa
Senior Director
+55 11 4504 2607
or
Media Relations
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 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Robert Hirtle
Analyst
+1-212-908-0132
or
Committee Chairperson
Bernardo Costa
Senior Director
+55 11 4504 2607
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com