OREANDA-NEWS. Fitch Ratings has affirmed Massachusetts Department of Transportation's (MassDOT) approximately \$1.05 billion of Metropolitan Highway System (MHS) revenue bonds at 'A+'. The Rating Outlook remains Stable.

The rating reflects the continued stability of the asset as seen in a long history of traffic and revenue growth. The toll road's robust coverage and ample cash balances provide adequate mitigation to the potential impact of future macroeconomic stresses consistent with an 'A' category rating.

KEY RATING DRIVERS

Established Road System, Revenue Risk - Volume: Stronger
The MHS is a highly monopolistic asset providing key interstate connections for commercial and passenger traffic located in a strong service area with a stable and relatively inelastic demand profile.

Moderate Pricing Power, Revenue Risk - Price: Midrange
Toll rates are relatively low and provide significant economic ratemaking flexibility but the highly politicized toll environment in the Commonwealth of Massachusetts (Commonwealth) acts as a practical limit on ratemaking ability.

Deferred Capital Maintenance, Infrastructure Renewal & Development: Midrange
Significant lifecycle costs are anticipated in the near future after a decade of deferred capital maintenance. The centralized management of these assets within the MassDOT provides comfort that critical investments will be made when needed.

Adequate Near-term Financial Cushion, Debt Structure: Midrange
The debt service profile is backloaded and there is a history of increasing operations and maintenance expenses. Debt service coverage through the medium term is adequate but excess revenues do not fully fund needed requirements for asset renewal and replacement. Barring meaningful toll increases, financial margins would erode and credit quality could deteriorate.

Supportive Commonwealth and Limited Leverage
The Commonwealth's significant financial and debt management support to the MassDOT in the form of annual dedicated payments for the benefit of the senior and subordinate liens and the prohibition of additional senior and subordinate bonds, other than to refund obligations issued prior to July 2009, provide meaningful credit enhancement to the MHS.

Peer Analysis
Central Florida Expressway Authority (CFX, 'A/A-'/Stable Outlook) and Miami-Dade Expressway Authority (MDX, 'A-'/Stable Outlook) are MHS's closest peers, each operating large expressway systems in a metropolitan area. MHS is less leveraged and features higher coverage then both CFX and MDX, consistent with its higher rating at the top of the 'A' category.

RATING SENSITIVITIES

--Negative: Unwillingness to adjust tolls and inability to control expenses to maintain historical levels of financial flexibility;
--Negative: Meaningful deferral of lifecycle capital investment;
--Positive: Upward rating action is not likely at this time.

CREDIT UPDATE

Traffic and revenue performance remained stable in fiscal 2014 (ended June 30) with 105.1 million transactions (up 2.7% over fiscal 2013) and revenue growth of 2.8% to \$191.1 million. Traffic for the first seven months of fiscal 2015 is up 1.5% but revenues are down 1.6%. The disparity is directly attributed to the conversion of the Tobin Bridge to all electronic tolling (AET). The delay in the mailing of invoices and receipt of collections for toll-by-plate users has caused the current collection of revenues to be delayed by nearly 25% on the bridge.

The senior debt benefits from the excess contract assistance payments after the required subordinated debt service plus a \$25 million annual dedicated payment by the Commonwealth. The remaining net senior debt service is covered by net revenues of the MHS. The senior net debt service coverage ratio (DSCR) as calculated by the authority was 26.6x in fiscal 2014, largely reflecting the very low net debt service amounts due to the aforementioned contract payments. While the DSCR is projected to remain above 4.0x in the medium term, the escalating debt service profile of the senior debt indicates that future toll increases would likely be required to maintain financial metrics consistent with the 'A+' rating and to fund needed capital improvements. The legislation that merged MHS into the MassDOT precludes any additional debt under the existing indenture.

With a new administration (Governor and Secretary of Transportation) and the November 2014 repeal of the annual gas tax increase that supports the state's capital investment program, MassDOT is reviewing its capital program based on the triennial audit/inspection taking place this year. A full report will be due by Oct. 1, 2015. Capital spending on the MHS has historically been on a 'pay as you go' basis, thus excess cashflow from toll revenues would be required on an annual basis to implement the program.

The Commonwealth provides \$100 million in annual dedicated payments to the MassDOT for the benefit of the subordinated debt which adequately covers all expected subordinate debt service payments with the excess applied to the senior debt service requirement. As a result, the subordinated debt rating is linked to the general obligation rating of the Commonwealth rated 'AA+' by Fitch.

SECURITY

The bonds are secured by a senior pledge of net revenues and on all funds and accounts created under the trust agreement (other than the rebate fund) including all tolls, rates, fees, rental, other charges, and certain investment income.