Fitch Rates Massachusetts School Building Authority's Tax-Exempt CP Bank Notes 'AA'

NEW YORK--()--Fitch Ratings has assigned a rating of 'AA' to bank bonds corresponding to the following series of Massachusetts School Building Authority (the Authority) tax exempt commercial paper subordinated dedicated sales tax bond anticipation notes:

--$150 million series A;

--$150 million series B;

--$150 million series C.

The Rating Outlook is Stable.

These bank note ratings are being assigned in conjunction with the Authority's launch of a $450 million commercial paper (CP) program. Fitch has assigned a short-term rating of 'F1' to the CP notes based on irrevocable direct-pay letters of credit issued by Bank of America, N.A. (series A); Citibank, N.A. (series B); and Barclays Bank PLC (series C). Additional information is available in Fitch's March 9 press release, 'Fitch Rates Mass School Bldg Auth Tax-Exempt CP Notes Series A, B & C 'F1'', available at 'www.fitchratings.com'.

Fitch rates the Authority's outstanding senior dedicated sales tax bonds 'AA+' with a Stable Rating Outlook. Fitch rates the subordinated lien 'AA', reflecting the junior pledge to the senior bonds and the difference in the additional bonds test protections on the two liens. The Authority has outstanding $5.3 billion of senior lien bonds, $293 million of subordinated lien bonds, and $300 million of series 2014A subordinate bond anticipation notes. The series 2014A bond anticipation notes, which have a maturity date of July 16, 2015 and are expected to be redeemed by the issuance of long-term dedicated sales tax bonds or commercial paper, are rated 'F1+'.

SECURITY

The Authority's bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions. Revenue flows to pay debt service on the subordinated bonds after payments related to the senior bonds.

The CP notes and bank notes are secured by a pledge of the proceeds of the sale of any CP notes or bonds issued to pay the notes. The CP notes and bank notes are also secured by a lien on sales tax receipts that is subordinated to that of outstanding senior and subordinated bonds and the series 2014A notes. The Authority covenants that it will issue senior or subordinated bonds to refund the notes to the extent that the principal thereof and interest thereon have not otherwise been paid or provided for. The Authority has approved the issuance of $450 million of bonds to repay the CP Notes.

KEY RATING DRIVERS

--BROAD DEDICATED REVENUE SOURCE: The Authority's bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax. Although performance in the recession was weak, the sales tax has been a relatively stable revenue source over time and recent results are much improved.

--STRONG STRUCTURAL PROTECTIONS: Bondholders benefit from the statutory dedication of the tax for school capital purposes. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the tax rate, although the base can be changed.

--ADEQUATE COVERAGE: Both current debt service coverage and the additional bonds test are adequate.

--STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the second-highest personal income per capita in the nation.

--SUBORDINATED BOND RATING LOWER: The lower rating on the subordinated bonds reflects the junior pledge to the senior bonds and the difference in the additional bonds test protections on the two liens. Additional issuance requires 1.4x maximum annual debt service (MADS) coverage for the senior bonds compared to 1.3x aggregate coverage for the subordinated bonds.

RATING SENSITIVITIES

The rating is sensitive to the performance of the pledged sales tax revenue and the maintenance of solid debt service coverage levels.

CREDIT PROFILE

The Authority's strong bond ratings are based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections afforded, including the statutory dedication of the tax for school capital purposes. The Commonwealth has imposed a sales tax since 1966, and although performance in the recession was weak, coverage of MADS remains solid at 1.9x for senior bonds and 1.8x for aggregate debt service, based on fiscal 2014 revenues and without consideration of the federal interest subsidies associated with Build America Bonds and Qualified School Construction Bonds. Sales tax revenue results are much improved since the recession, with a 6.7% year-over-year increase in fiscal 2014, which ended on June 30, and 6.2% growth forecast for the current fiscal 2015 as the economy continues to recover. Through February, Commonwealth sales tax revenues are slightly below forecast.

Additional information on the Authority's dedicated sales tax debt is available in Fitch's Dec. 22, 2014 press release, 'Fitch Rates Mass. School Building Auth. $80MM 2015A Sales Tax Refunding Bonds 'F1+', also available at 'www.fitchratings.com'.

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

Applicable Criteria and Related Research:

--'Rating U.S. Public Finance Short-Term Debt' (Jan. 7, 2015);

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

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

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Tax-Supported Rating Criteria

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

U.S. State Government Tax-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981121

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Contacts

Fitch Ratings
Primary Analyst
Laura Porter
Managing Director
+1 212-908-0575
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1 212-908-0889
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Laura Porter
Managing Director
+1 212-908-0575
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1 212-908-0889
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com