OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to the Chicago Transit Authority, Illinois (CTA, or the authority) $135.95 million of Series 2015 Section 5307 and $43.98 million of Series 2015 Section 5337 capital grants receipt refunding revenue bonds.

In addition, Fitch has affirmed the 'BBB' rating on the outstanding $430.73 million Section 5307 and $282.27 million Section 5337 capital grants receipt revenue bonds.

The Rating Outlook on all bonds is Stable.

RATING RATIONALE

Ratings for stand-alone GARVEE bonds are derived in large part by the relative strength of the federal transportation funding program. Although no longer funded on a multiyear basis, which provides a level of long-term uncertainty, the program has proven to be an essential investment for the federal government with funding disseminated in a formulaic nature across all 50 states. The ratings further reflect the broad revenue pledge of all of the Dept. of Transportation (DOT)/Transit Agency's federal receipts and leverage covenants that help to mitigate the risk of diminished federal transportation receipts. In addition, the ratings also incorporate the liquidity offered by the other resources available to DOT/Transit Agencies which provide financial cushion to the extent there is a delay in federal funding.

KEY RATING DRIVERS

Strength of the Federal Program: Midrange
Continued Dependence on General Fund Transfers: In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The essential nature of the investment in addition to the reliable formulaic distribution of funds underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF).

Structural Features: Weaker
Transit GARVEEs Limited by Additional Bonds Test (ABT) Provisions: The Transit GARVEEs in Fitch's portfolio benefit from a broad pledge of federal transportation funding; however, in contrast to highway GARVEEs, the transit GARVEEs rated by Fitch have materially lower leverage limitations of 1.5x or below and would thus have much less flexibility to protect against declines in federal program revenues.

Resources of DOT and Transit Agency Provide Liquidity
In the event of a funding shortfall or a delay in federal funding due to a lapse in authorization, the financial resources of the DOT and Transit Agency can provide financial cushion to meet GARVEE payment obligations. Fitch's assessment of the resources available is derived from several factors including the DOT/Transit Agency's amount of working capital, size of their capital program, and their sources of funding. The CTA has no debt service reserve fund but does have working cash balances and reserves it would use in the event of a lapse in federal receipts.

Peers: Fitch's standalone highway GARVEE bonds, all of which are rated 'A+', tend to have strong additional leverage limitations of at least 3.0x current receipts to pay debt service. In contrast, standalone transit GARVEE bonds have materially lower leverage limitations of 1.5x, giving them less financial flexibility to protect against declines in federal program revenues and are thus rated 'BBB'.

RATING SENSITIVITIES

Negative/Positive: View of Federal Program Alters: A material change in Fitch's view of the strength of the federal program to weak or strong from midrange.

CREDIT UPDATE

The refunding transaction for the Section 5307 and 5337 revenue bonds is anticipated to achieve over $8.75 million of debt service savings, or 4.86% of the refunded bonds.

The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years was not addressed by the interim measure Congress passed in early August. Instead the recent legislation relies on general fund transfers to keep the program afloat through July 2015; however, the longer-term structural imbalance of the HTF remains unaddressed. The future of the program beyond July 2015 is hard to predict, but Fitch believes that significant changes are needed either on the expenditure side or on the revenue side to put the program on a sustainable trajectory. In Fitch's view the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.

While the continued General Fund transfers have underscored the relative importance of transportation funding within the federal budget to this point, they do not guarantee future commitments. Complicating matters is a significant increase in corporate average fuel economy (CAFE) standards from the current 29 miles per gallon (mpg) to 54.5 mpg by 2025 that was approved on Aug. 28, 2012. Such a standard puts further pressure on HTF receipts from taxes imposed on passenger cars, leading to an estimated 13% reduction from today's levels by 2032, requiring even larger general fund subsidies to maintain the status quo.

Fitch previously performed an analysis of the federal grant program that assumes the Congressional Budget Office (CBO) projection for outlays, translating into a 1.4% compound annual growth rate (CAGR) in HTF spending. In addition, Fitch estimates a CAGR of negative 0.5% in HTF receipts through 2030 based on a fuel consumption forecast for passenger cars run by the Environmental Protection Agency (EPA) given revised CAFE standards. Under such a scenario, the annual gap between HTF spending and receipts could be on average $19.2 billion from 2015 - 2030, meaning that by 2032 nearly half of the funding for HTF outlays would need to come from the general fund.

Under the scenario above, the FHWA would have to cut outlays to the states in aggregate by 22% in 2015 in order to match the receipts coming into the HTF; cutting outlays annually thereafter through FFY 2030. Because highway GARVEEs maintain such robust additional leveraging provisions, such a haircut in 2015 would still result in maximum annual debt service coverage across the board in excess of 2x. However, the same reduction for transit GARVEEs would result in coverage levels in the mid-1x range, approaching the lower ABT covenants.

Assuming state DOTs and transit agencies fully leverage their GARVEE programs up to their ABT, debt service coverage ratios on standalone highway GARVEEs could drop to approximately 2.3x by 2032. Coverage ratios on standalone transit GARVEEs would fall to a much lower 1.03x, thereby rendering the transit GARVEEs more susceptible to significant declines in federal funding.

SECURITY

The 5307 bonds are secured under the 5307 Indenture by a pledge of the authority's share of Federal Transit Administration Section 5307 Urbanized Area Formula funds.

The 5337 bonds are secured under the 5337 Indenture by a pledge of the authority's share of Federal Transit Administration Section 5337 Fixed Guideway Modernization Formula funds.