OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to South Carolina Transportation Infrastructure Bank (SCTIB) refunding revenue bonds consisting of the following:

--$209.185 million revenue refunding bonds, series 2016A.

The bonds are expected to sell via competitive bid on July 7, 2016.

In addition, Fitch affirms the following ratings:

--$1.6 billion outstanding SCTIB bonds at 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by:

--System payments primarily composed of 1) a junior lien on truck and motor vehicle registration fees and 2) payments from the South Carolina Department of Transportation (SCDOT) from non-tax sources (primarily federal highway reimbursement funds) in amounts equivalent to certain tax revenues;

--Series payments received pursuant to loan agreements with non-state entities and SCDOT, the latter also payable primarily from federal highway revenues; and

--Transfers from the revenue stabilization fund (RSF) to smooth revenues from truck registration fees that are paid biennially.

KEY RATING DRIVERS

SOLID SOURCES OF PLEDGED REVENUES: The SCTIB maintains generally solid, dedicated sources of pledged revenues with statewide transportation tax revenues providing a somewhat narrow but generally stable revenue stream supported by other payments derived from federal highway reimbursement funds.

ADDITIONAL SOURCES OF PLEDGED REVENUE: Payments from participating municipalities in the state are also pledged to bond repayment for their respective debt obligations. While these revenue streams are relatively narrow and subject to economic fluctuations, available fund balances and statutory intercept provisions mitigate concerns.

GROWTH PROSPECTS FOR PLEDGED REVENUES: Fitch projects only modest growth in revenues pledged to bond repayment. Series payments from SCDOT and municipalities within the state will continue to meet contractual obligations while system payments will continue to reflect modest economic growth at or above the inflation rate.

REVENUE STREAM SENSITIVITY: Maximum annual debt service (MADS) coverage is expected to remain resilient under a moderate recession scenario or a drop in revenue equivalent to the largest prior year-over-year decrease although coverage in these scenarios is expected to fall below Fitch's calculation of coverage that approximates the additional bonds test (ABT) of 1.35x for senior lien debt.

STATE FISCAL ADVICE AND COUNSEL: The state of South Carolina (Issuer Default Rating [IDR] of 'AAA' with a Stable Outlook) has an underlying commitment and need for road infrastructure funded by the SCTIB. The state treasurer provides fiscal advice and counsel to the SCTIB and would enforce municipal intercept provisions if needed.

RATING SENSITIVITIES

The rating is sensitive to the performance of pledged revenue sources, additional leveraging for capital projects, and continued solid debt service coverage levels.

CREDIT PROFILE

The SCTIB was created in 1997 by the South Carolina general assembly to help finance major transportation projects with loans and other financial assistance. The bank is governed by a seven-member board of directors, which includes the chairman of the SCDOT and two appointees each of the state's governor, speaker of the house, and senate president pro tempore. The bank projects are managed by the SCDOT, with the state treasurer's office providing advice and counsel on financial matters and serving as trustee.

The bank's revenue bonds are primarily secured by system payments and series payments (as defined above), as well as transfers from the RSF. Transfers from the RSF are designed to mitigate variability in truck registration fee revenues although growth in other revenue sources has offset fluctuations. Earnings on funds and accounts, except for the debt service fund, are additionally pledged but contribute only a small percentage of total revenues.

CONTINUED GROWTH IN PLEDGED REVENUE SOURCES

Fiscal 2015 truck registration fees ($67.5 million) and motor vehicle registration fees ($41.2 million) represented over 77% of system payments and more than half of all pledged revenues. Other system payments are made by SCDOT pursuant to terms of intergovernmental agreements in amounts equivalent to a portion of revenues from a privilege tax on power sold in the state ($4.2 million) and the equivalent yield of one cent of the state gas tax ($27.4 million). Due to state constitutional prohibitions on the issuance of revenue bonds repayable from a tax source, SCDOT makes these equivalent payments from non-tax revenues, primarily federal highway reimbursement funds.

Each pledged system revenue source, including the payments from SCDOT, is subject to variable economic conditions, highlighted by total pledged system revenues declining in fiscal years 2009 and 2010 during the national recession. System revenues have exhibited improvement since that time, with 3.9% year-over-year growth recorded in fiscal 2015. The SCTIB's equivalent share of one cent of the state's gas tax demonstrated improved stability in fiscal 2015 with 3.4% growth from fiscal 2014 reflecting the state's growing economy.

The forecast for the fiscal year ending June 30, 2016 of 1.1% system revenue growth incorporates a conservative expectation of continued economic growth, which Fitch believes is reasonable as the state's economy continues to show positive economic momentum. The forecast for fiscal 2017 of 2.2% system revenue growth continues this forecast strengthened by the biennial collection of truck registration fees.

Although the SCTIB's claim on the fee revenues is junior to the payment of state general obligation (GO) highway bonds, Fitch believes constitutional limitations on issuance of GO debt and the strong coverage of the GO bonds from other revenues minimize the impact of the subordination.

Series payments are those received by the SCTIB pursuant to loan agreements with SCDOT and participating governments, largely Horry County (GO bonds rated 'AA+') for the currently outstanding bonds. Horry County loan repayments are made from a portion of a county hospitality fee, which essentially matches debt service on its obligations, and state intercept provisions are available in the event of nonpayment. As with its system payments, SCDOT pays its series payment obligations primarily from federal highway reimbursement funds received by SCDOT. Such payments from SCDOT represented more than half of all pledged series payments in fiscal 2015.

SCDOT has committed to limit leverage such that historical federal highway fund reimbursement funds provide no less than 3x coverage of its obligations to the SCTIB. The lowest annual federal highway reimbursements in the last five fiscal years provided 5.3x coverage of the department's maximum payment obligation to SCTIB, with fiscal 2015 funds providing 6x coverage. SCDOT has covenanted to limit federal highway fund leverage and committed to make its payments to SCTIB from other non-tax sources in the event federal highway reimbursements are not sufficient.

PLEDGED REVENUE STREAM SENSITIVITY

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on a 10-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 1% scenario decline in Fitch's calculation of pledged revenues. The largest actual decline in historical revenues is a 1% year-over-year decline in fiscal 2015 although that corresponds with the falloff of Lexington County's series payments as the loan was repaid. Given careful positioning of obligations, the structure is well positioned to absorb a decline in a modest recession scenario.

LEGAL PROVISIONS AND DEBT SERVICE COVERAGE

Fitch believes SCTIB's ABT coverage definitions tend to overstate debt service coverage as they net off series payments. The ABT for senior bonds requires that historical and projected net pledged revenues (defined as pledged revenues less series payments and earnings on the project fund) cover annual net senior debt service (defined as senior debt service minus series payments and earnings on the senior debt service funds) by at least 1.35x. The ABT for the junior bonds requires that historical and projected net pledged revenues cover net senior and junior debt service (defined as junior debt service minus earnings on the junior debt service funds) by at least 1.20x.

All outstanding bonds are senior lien bonds; there is no junior lien debt outstanding and none is planned. A senior lien new money offering is expected in fiscal 2017 for projects that fall under the current pledged revenue structure. The SCTIB has about $355 million outstanding in two series of bonds that are variable-rate direct placement loans with Wells Fargo and are synthetically fixed through swap agreements with Bank of America and Wells Fargo.

The bank targets average annual senior lien revenue bond debt service coverage of 1.45x, but this is calculated in accordance with the definitions under the indenture, with the series payment deductions and considering growth in pledged revenues. Fitch calculates annual coverage of gross debt service to be about 1.37x based on the state's current revenue projections, not inclusive of other SCDOT revenues that are available for the series payments or interceptable Horry County revenues.

UPDATES TO SCTIB REVENUE STRUCTURE

The state and the bank have expanded and adjusted pledged revenues over time. The most recently amended master funding agreement provided for the inclusion of an additional $50 million annual statutory transfer from the SCDOT to the SCTIB for projects approved under the state's Act 98, which was effective on July 1, 2013. Following the governor's signature on Act 275, SCTIB was provided with additional non-state tax revenues to finance certain types of projects effective July 1, 2016, including mainline interstate highways and bridge replacements, SCTIB now intends to combine these two revenue streams in a separate revenue bond resolution under which Act 98 projects and Act 275 projects will be financed going forward. These additional revenue sources are not pledged to the current or outstanding bonds of SCTIB.