Fitch Affirms Maryland Transportation Auth's GARVEE Bonds at 'AA'; Outlook Stable
RATING RATIONALE
The rating is driven by a strong subordinate pledge of Maryland Department of Transportation tax revenues, a syndicate of diverse funding streams including transportation-related and certain corporate and sales taxes. The bonds are also secured by the state's future federal highway grants.
KEY RATING DRIVERS
PRESENCE OF BACK-UP PLEDGE MITIGATES FEDERAL CONCERN: MDTA bonds are secured by a first lien on Maryland's allocation of federal highway funds and the legislatively mandated subordinate lien on certain pledged Maryland Department of Transportation Trust Fund (TTF) tax revenues, which helps offset reauthorization risk. The back-up pledge of tax receipts is subject to appropriation by the state's legislature.
UNCERTAINTY OF THE FEDERAL PROGRAM: The federal program, which was once a program funded on a multiyear basis, has now morphed into a program for which future policy is less certain. This means funding levels are less predictable, and the program is more dependent on frequent action to extend authorization and on general fund transfers that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The program still maintains a formulaic based method of aid distribution.
STRONG COVENANTS AND TIMING MECHANISMS: Additional leverage is limited by a strong additional bonds test of 3.0x maximum annual debt service (MADS). A debt service reserve fund equivalent to the maximum semi-annual interest payment provides debt service support. The remaining five years until maturity of the bonds is short relative to other federal reimbursement bonds and exposes bondholders to a lower level of uncertainty surrounding the highway trust fund (HTF) which is, in any case, more than offset by the back-up pledge.
ADDITIONAL LEVERAGE NOT ANTICIPATED: The authority has reached a statutory cap on GARVEE issuance and additional bonds are not expected in the medium term.
RATING SENSITIVITIES
Negative - Increased leveraging of the TTF or a significant change in the basket of tax revenues that weakens the secondary pledge;
Negative - Failure by the state to appropriate tax revenues if needed to cover a shortfall in federal funds.
Positive:
Positive rating action is unlikely at the current time given the uncertainty surrounding the federal program and the already elevated credit quality of the subordinate pledge of state TTF tax revenues.
SUMMARY OF CREDIT
The unsustainable trajectory of HTF expenditures exceeding receipts over the past several years has not been addressed by Congress. Instead the recent legislation relying on general fund transfers to keep the program afloat has recently been extended three months, now through October 2015. The future of the program beyond October 2015 is uncertain, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a longer-term sustainable trajectory. In Fitch's view, the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.
There are some hopeful signs of progress towards a longer-term bill with the U.S. Senate's recent passage of the Developing a Reliable and Innovative Vision for the Economy (DRIVE) ACT, a six-year authorization bill which would fund federal highway and infrastructure projects for three years. Fitch will continue to monitor legislative developments with respect to authorization and funding to assess their impact on the overall strength of the federal program.
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.
The federal reimbursement bond's are secured with a legislatively mandated subordinate lien on certain pledged Maryland Department of Transportation Trust Fund (TTF) tax revenues, which provides an important offset to the reauthorization risk of the federal program. The credit rating is reflective of the credit quality of the state revenue pledge derived largely from state motor fuel tax.
The federal reimbursement bonds have strong coverage of 6.49x with federal revenues alone and 22.87x when including state revenues in 2015. Based on HTF outlays projected by the Congressional Budget Office (CBO) and fuel consumption levels projected by the Environmental Protection Agency (EPA), Fitch's rating case assumes that federal spending will need to be decreased by 22% in 2016 in order to match the receipts coming in to the HTF. Under such scenario, coverage remains strong at 5.06x with federal revenues alone and 23.07x including state revenues.
SECURITY
The GARVEE bonds are secured by a pledge of the trust estate, consisting of annual allocations of federal aid and a subordinate pledge of certain TTF tax sources.
Комментарии