OREANDA-NEWS. June 16, 2015. Fitch Ratings has assigned an 'A' rating to South Carolina Transportation Infrastructure Bank (SCTIB) revenue bonds consisting of the following:

--\\$155.145 million revenue refunding bonds series 2015.

The bonds are expected to sell via competitive bid on June 18, 2015.

In addition, Fitch affirms the following ratings:

--\\$1.8 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 system payments, with statewide transportation tax revenues providing a somewhat narrow but generally stable revenue stream and other payments derived from federal highway reimbursement funds. Total system receipts in fiscal 2014 varied modestly from forecast, with actual revenues up by 3.5% from the prior year.

EXPOSURE TO FEDERAL TRANSPORTATION POLICIES: Federal highway reimbursement funds, which are significant to both series and system payments, are subject to changing federal transportation policies but sizable coverage of SCDOT's payments to the SCTIB from federal funds and the SCDOT's pledge to limit its leveraging of these revenues eases concern.

ADDITIONAL SOURCES OF PLEDGED REVENUE: Payments from participating municipalities and counties 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.

SCTIB HIGHLY LEVERAGED: The SCTIB is highly leveraged, and the indenture provisions contain a weak additional bonds test and the ability to incur additional series payment obligations, with the underlying repayment stream required to provide only 1.35x debt service coverage on senior bonds and 1.2x coverage on combined senior and junior lien bonds. There is no junior lien debt currently outstanding nor any planned.

STATE FISCAL ADVICE AND COUNSEL: The state of South Carolina (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch) 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.

Fiscal 2014 truck registration fees (\\$65.5 million) and motor vehicle registration fees (\\$39.5 million) represented over 77% of system payments and almost 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 (\\$3.7 million) and the equivalent yield of one cent of the state gas tax (\\$26.5 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 3.5% year over year growth recorded in fiscal 2014, led by solid growth in truck registration fees and the SCTIB's share of wholesale electric power revenue. The SCTIB's equivalent share of one cent of the state's gas tax demonstrated improved stability in fiscal 2014 with 1.8% growth from fiscal 2013 reflecting the state's strengthening economy. Overall, system revenue growth in fiscal 2014 was just 0.8% above the SCTIB's growth forecast for that year.

The forecast for the fiscal year ending June 30, 2015 of a 0.1% system revenue decline incorporates a conservative expectation of a 1.6% decline in truck registration fees due to the biennial collection cycle for this fee. Other system revenue sources are expected to continue to show modest but steady growth, which Fitch believes is reasonable as the state's economy continues to show positive economic momentum.
Although the SCTIB's claim on the fee revenues is junior to the payment of state 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 non-state entities, primarily Horry County (GO bonds rated 'AA+'). 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 just about half of all pledged series payments in fiscal 2014.

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 2014 funds providing almost 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.

The state and the bank have expanded and adjusted pledged revenues over time. Additional changes in the second amended master funding agreement included the provision of a first priority claim and lien on federal reimbursement funds received by SCDOT to SCTIB; SCDOT's commitment to make payments due to SCTIB within five business days of SCDOT's receipt of federal funds; and the provision of written notice to SCTIB within 10 business days should the SCDOT be unable to make its monthly payment to SCTIB in full. A third 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. The Act 98 payment will be pledged as an additional series payment once the corresponding bonds are issued, currently planned for some time in fiscal 2017.

The relatively stable quality of SCTIB's pledged revenue streams is counterbalanced by a high degree of leverage. Fitch believes that the SCTIB's additional bonds test (ABT) coverage definitions are weak, since they tend to overstate debt service coverage by netting 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 of approximately \\$300 million is planned for CY 2016 for projects that do not fall under Act 98. The SCTIB anticipates its first new money borrowing that will leverage the Act 98 revenue stream will occur in CY 2017 and total approximately \\$217 million. These two borrowings are occurring later than the SCTIB had earlier anticipated due to slow project rollout. The SCTIB has about \\$356.6 million outstanding in two series of bonds that are variable-rate direct placement loans with Bank of America and Wells Fargo and are synthetically fixed through swap agreements with those institutions. A standard debt service reserve fund is fully cash-funded at \\$154 million as of June 30, 2014.

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. Fitch calculates minimum annual coverage of gross debt service to be about 1.3x 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.