Fitch Affirms Maryland Transportation Auth's GARVEE Bonds at 'AA'; Outlook Stable

CHICAGO--()--Fitch Ratings affirms the 'AA' rating on the Maryland Transportation Authority's (MDTA) $415.775 million outstanding grant and revenue anticipation (GARVEE) bonds. The Rating Outlook remains Stable.

RATING RATIONALE:

The rating is driven by a strong subordinate pledge of Maryland Department of Transportation state highway revenues, a syndicate of diverse funding streams including transportation-related and certain general fund taxes. The bonds are also secured by the state's future federal highway grants.

KEY RATING DRIVERS:

PRESENCE OF BACK-UP PLEDGE MITIGATES FEDERAL CONCERN: MDTA bonds are secured by a first lien on Maryland's allocation of federal highway funds and the legislatively mandated subordinate lien on certain pledged Maryland Department of Transportation Trust Fund (TTF) tax revenues, which helps offset reauthorization risk. The back-up pledge of tax receipts is subject to appropriation by the state's legislature.

UNCERTAINTY OF THE FEDERAL PROGRAM: The federal program, which was once a program funded on a multiyear basis, has now morphed into a program for which future policy is less certain. This means funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on general fund transfers that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The program still maintains a formulaic based method of aid distribution.

STRONG COVENANTS AND TIMING MECHANISMS: Additional leverage is limited by a strong additional bonds test of 3.0x maximum annual debt service (MADS). A debt service reserve fund equivalent to the maximum semi-annual interest payment provides debt service support. The remaining five years until maturity of the bonds is short relative to other federal reimbursement bonds and exposes bondholders to a lower level of uncertainty surrounding the highway trust fund (HTF) which is, in any case, more than offset by the back-up pledge.

ADDITIONAL LEVERAGE NOT ANTICIPATED: The authority has reached a statutory cap on GARVEE issuance and additional bonds are not expected in the medium term.

RATING SENSITIVITIES:

Negative - A significant change in the basket of state highway revenues that weakens the secondary pledge;

Negative - Failure by the state to appropriate state highway revenues if needed to cover a shortfall in federal funds.

CREDIT UPDATE:

The pledge of subordinate TTF funds provides an important offset to this reauthorization risk and supports the current rating level. The TTF tax sources include a portion of motor fuel taxes, titling excise tax on vehicles, sales and use tax on vehicle rentals and corporate income tax. The GARVEE bonds have a pledge of these revenues that is subordinate to the department's consolidated transportation bonds (rated 'AA+' by Fitch). Total TTF revenues equaled $1.59 billion in fiscal 2014 (state fiscal year ending June 30). Fiscal 2014 debt service coverage remained strong at 6.17x with federal revenues alone and 18.65x including state revenues.

The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years was not addressed by the interim measure congress passed in early August. Instead the recent legislation relies on $10.8 billion of general fund transfers to keep the program afloat through May 2015. While the continued general fund transfers have underscored the relative importance of transportation funding within the federal budget, they do not guarantee future commitments. The future of the program beyond May 2015 is 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. In addition, complicating matters is the 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. In Fitch's view, the unsustainable trajectory of the HTF may lead to policy changes that could affect bondholders.

SECURITY:

The GARVEE bonds are secured by a pledge of the trust estate, consisting of annual allocations of federal aid and a subordinate pledge of certain TTF tax sources.

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

--'Tax Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax- Supported Rating Criteria' (Aug. 14, 2012);

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

Applicable Criteria and Related Research:

Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds

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

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=889034

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+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
Samuel Marsico
Analyst
+1-212-612-7810
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty
+1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+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
Samuel Marsico
Analyst
+1-212-612-7810
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty
+1 212-908-0526
New York
elizabeth.fogerty@fitchratings.com