Fitch Affirms Pennsylvania Turnpike Registration Fee Revs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'AA-' rating on the Pennsylvania Turnpike Commission's (PTC, or the commission) $402.47 million outstanding registration fee revenue refunding bonds, series 2005 A-D.

The Rating Outlook is Stable.

SECURITY

The bonds are secured solely by an annual allocation of the first $28 million of Act 3 revenues (vehicle registration revenues), payable each fiscal year to the PTC.

KEY RATING DRIVERS

STRONG COVERAGE FROM AVAILABLE REVENUES: The 'AA-' rating reflects the relatively stable nature of the vehicle registration revenues securing the bonds, and the solid coverage of debt service by funds available to the bonds. Annual Act 3 revenues have covered the $28 million allocation to the commission for the bonds by over 7x since issuance. The allocation requires only an annual executive authorization and continues even without an enacted commonwealth budget.

VARIABLE RATE EXPOSURE: A significant amount of outstanding registration fee bonds are in variable-rate mode with offsetting swaps, presenting some credit risk, particularly given the fixed revenue stream.

RATING SENSITIVITIES

PERFORMANCE OF PLEDGED REVENUES: The rating is sensitive to the consistency and strength of the Act 3 registration fee revenues, which are the basis of the annual allocation used to pay debt service.

CREDIT PROFILE

Act 3 revenues, consisting of a portion of vehicle registration fees, provide a generally stable, though somewhat narrow, source of revenues for debt service. The state enacted Act 3 in 1997, which increased fees and other charges generally related to the registration of various types of vehicles by approximately 50% (the Act 3 revenues). Act 3 revenues have been relatively flat since issuance of the bonds in 2006, with a compound average annual growth rate of 0.1%.

STABLE DEBT SERVICE COVERAGE

The consistent revenue stream has generated ample coverage of the $28 million annual allocation pledged for debt service. Pennsylvania's Department of Transportation (PennDOT) collects all vehicle registration fees, including the additional fees enacted under Act 3, and deposits them into the motor license fund held by the state treasurer. Pursuant to an intercept agreement between PTC, the treasurer, and PennDOT, the state treasurer transfers the first $2,333,333 of Act 3 revenues collected every month to the bond trustee (equivalent to $28 million over each year). These transfers only require an annual executive authorization (EA) from the governor and are not subject to appropriation risk. The governor issued the required EA for the current fiscal year, allowing the transfers despite the lack of an enacted commonwealth budget.

Act 3 revenues generated at least 7.6x coverage of the $28 million allocation every year since issuance of the bonds. For fiscal year 2015, Act 3 revenues provided 7.8x coverage with 0.8% year-over-year (yoy) growth in revenues. Actual and estimated debt service on the bonds, provided by the issuer and reflective of the fixed rate swaps, ranges between $26 million and $27 million over the life of the bonds.

VARIABLE RATE BONDS ADD SOME RISK

The series 2005 bonds are comprised of four subseries: series A of 2005 (fixed-rate bonds), series B of 2005 (variable-rate bonds), series C of 2005 (variable-rate bonds) and series D of 2005 (variable-rate bonds). Related to the issuance of series B, C, and D of the series 2005 bonds, the commission executed four separate floating-to-fixed rate swap agreements to hedge its interest rate risk on the full par value of its variable rate debt.

As of July 20, 2015, the swaps carried a combined negative fair market value of $70.2 million against the commission with no collateral posting currently required. Importantly, swap termination payments are subordinated to payments of principal and interest to senior bond holders, and swap counterparties are unable to cross default or accelerate ahead of senior bondholders under a swap termination event.

Fitch views the variable rate structure for the series B, C, and D bonds as a credit concern because of the legal inability of the PTC to unilaterally alter its allocation of Act 3 revenues. SBPA renewal risk, as well as basis, tax and termination risks, along with possibly higher future liquidity and remarketing fees, introduce the potential for unanticipated dilution in the commission's $28 million of allocated Act 3 revenues. PTC swap termination payments are subordinated to payments of principal and interest to senior bond holders, and swap counterparties are unable to cross default or accelerate ahead of senior bondholders under a swap termination event.

PTC created a reserve, outside of the indenture, to address the potential for increased liquidity and remarketing costs on the commission's variable-rate debt exposure. As of June 30, 2014, this commission reserve fund held $7.1 million and the balance increased substantially to $19 million by July 2015 after the trustee transferred excess pledged revenues that had accumulated in the revenue account established under the indenture. PTC recently extended its SBPAs supporting the variable rate bonds for through Oct. 16 and intends on refinancing those bonds with five year floating rate notes that will not require external liquidity support.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS.

Applicable Criteria

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

Dodd-Frank Rating Information Disclosure Form

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989228

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1-212-908-0575
Managing Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director

Contacts

Fitch Ratings
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com
or
Primary Analyst
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter, +1-212-908-0575
Managing Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director