NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades the rating on the following special obligation bonds of the Alabama Revolving Loan Fund Authority from 'AA+' to 'AA-':
--$18.1 million special obligation and refunding taxable bonds, series 2010.
The Rating Outlook is Stable.
The bonds are a special obligation of the authority, payable from an irrevocable pledge of a portion of the receipts of the privilege and license tax on providers of cellular radio telecommunication services.
KEY RATING DRIVERS
DECLINES IN PLEDGED REVENUES: The downgrade reflects a significant reduction in pledged revenues related to shifts in mobile device usage. Revenues have declined 35% since peaking in fiscal 2009 and, while debt service coverage remains high, performance of the pledged revenue stream is significantly weaker than anticipated and subject to further deterioration.
VERY HIGH DEBT SERVICE COVERAGE: Pledged revenues continue to provide high coverage of debt service requirements on both an annual and maximum annual debt service (MADS) basis, reflecting the limited leveraging of the revenue stream.
CLOSED LIEN: The bonds have a first claim on pledged revenues and no additional parity borrowing is permitted under the authorizing legislation.
The rating is sensitive to significant on-going declines in revenues that reduce debt service coverage to levels inconsistent with the rating.
The 'AA-' rating reflects the still satisfactory security provided by the privilege and license tax levied on cellular radio telecommunication services. The pledged tax, which has been in place since fiscal 1990, provides very high coverage of both annual debt service and MADS. Fiscal 2014 revenue of $70.1 million provides 38x coverage of both annual debt service and MADS of $1.85 million. However, changes in how mobile services are used and billed have resulted in tax revenues shifting from this cellular tax to the general sales tax, resulting in a declining revenue trend and reduced coverage for bonds.
NARROW REVENUE PLEDGE
The tax is levied at 6% of gross sales or gross receipts of the monthly charges from the furnishing of mobile telecommunication services to a customer with a place of primary use in the state. The tax is currently paid by 69 service providers, of which, the top 10 taxpayers provide 94% of revenues. Concern over the narrow revenue pledge and payer base is mitigated by the widespread use of telecommunications devices and the continued strong debt service coverage by the pledged tax.
Tax revenues showed consistent strong growth through 2009 and when revenues peaked at $108 million, reflecting growth in the use of cell phones and other devices (e.g. Blackberries), rather than a change in the rate. Revenue declined 2.6% year-over-year in fiscal 2010, reportedly due to timing of collections rather than a drop in usage or economic weakness. However, further revenue declines since fiscal 2010 have been attributed by the state to two factors: the exclusion of data services from the taxable base following customer lawsuits and a federal moratorium on internet taxation and increased use of prepaid mobile service that is not subject to the mobile communications tax. Prepaid plans are subject to general sales taxes but not to the tax pledged to the bonds.
Revenues have declined in every year since 2009 and are down in total 35% from the peak. Concern over the contraction of the revenue base is somewhat offset by the considerable cushion provided by very high debt service coverage. Fitch break-even analysis indicates sum sufficient coverage in all years even with annual declines of 21% through the life of the bonds.
NO ADDITIONAL BORROWING
Bond proceeds provided funds to 12 state regional planning and development commissions that they leveraged to provide grants and loans for economic development. No additional pledge of the pledged revenues is authorized and any subsequent pledge, other than for refunding the 2010 bonds, would be subordinated to the 2010 bonds. Tax proceeds are applied first to debt service on the bonds, with the balance transferred to the general fund and education trust funds.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria