OREANDA-NEWS. Fitch Ratings affirms the South Jersey Transportation Authority's $441.2 million of outstanding transportation system revenue bonds at 'BBB+' and the authority's $15.3 million of outstanding subordinate transportation system revenue bonds at 'BBB-'. The Rating Outlook on all of the bonds remains Stable.

The ratings reflect the authority's adequate debt service coverage ratios (DSCR), which are expected to remain above 1.6x for senior debt and 1.5x for subordinate debt over the forecast period. Also reflected is the credit support provided in the form of the rate covenant, which would require the authority to implement toll rate increases in the case of continued revenue declines, combined with SJTA's economic flexibility to raise tolls given current low rates.

As a result of last year's refunding, near-term debt service obligations for the next five years have been reduced at the cost of increased debt service obligations in the future, thus deferring potential problems in exchange for increased near-term flexibility. In light of flat to negative medium-term traffic expectations reflecting expectations as to Atlantic City's declining importance as a regional leisure destination, Fitch is of the view that the authority's ability and willingness to raise tolls on a proactive basis to manage its DSCR coverage profile will be critical for the maintenance of current ratings.

KEY RATING DRIVERS

Revenue Risk- Volume: Weaker
ASSET WITH LONG HISTORY, SUBJECT TO INDUSTRY RISK: The authority's anchor asset, the Atlantic City Expressway (ACE), has over 50 years of operating history. However, the expressway is exposed to leisure-oriented traffic that is dependent on the health of the Atlantic City gaming industry and visitors to the southern New Jersey seashore resort towns. Traffic on the expressway has been declining primarily as a result of the economic downturn and regional gaming competition but is stabilizing in the most recent year. The average toll of $1.47 for the expressway is reasonable, which offers the authority flexibility to raise tolls. The last toll increase was implemented in November 2008 which increased tolls by 50%.

Revenue Risk- Price: Midrange
MODERATE PRICING ABILITY: The authority has historically demonstrated willingness to raise rates when debt service coverage has declined or prior to the development of a large capital program. Willingness to raise rates will be critical in the next five years given any necessary maintenance work and an increasing debt service profile.

Debt Structure: Senior/Sub - Stronger/Midrange
FIXED RATE DEBT: The authority has two liens of debt, both that are fixed-rate and fully amortizing debt profiles. In 2014, the authority refunded all outstanding variable rate debt with the issuance of the 2014A&B bonds reducing some risks to interest costs. Total debt service requirements decreased from $29.9 million in 2015 to $27.6 million in 2019 but increases to $33 million in 2020 with MADs at $35.1 million in 2030.

Infrastructure Development & Renewal: Midrange
LARGE CAPITAL PROGRAM: The authority's 10-year capital program for 2016-2025 is large totaling $737.2 million, with $337.9 million for the airport and $399.3 million for the expressway. However, many projects are discretionary and depend upon available funding with no capacity constraints given current traffic forecasts. Management has indicated no additional debt issuance is anticipated and the current plan allows for a delay in spending. A significant delay and deferred maintenance could affect traffic and revenue and should be monitored, though this is partially mitigated by annual road inspections.

MODERATE LEVERAGE WITH ADEQUATE FINANCIAL FLEXIBILITY: The expressway generates sufficient toll revenues to provide adequate financial cushion whilst also supporting Atlantic City International Airport (ACY) which continues to operate at a deficit. Senior and subordinate lien DSCRs for 2014 were 1.60x and 1.53x respectively and are expected to increase slightly in 2015. Leverage is considered moderate at 7.3x net debt to cash flow available for debt service (CFADS), while liquidity of $48.1 million of unrestricted cash (as of June 2015), equivalent to 344 days cash on hand, is considered adequate.

PEERS ANALYSIS: Peers for SJTA include Mid-Bay Bridge Authority rated 'BBB+' for the senior lien and 'BBB' for the springing lien and Rhode Island Turnpike Authority rated at 'A', both of which have exposure to leisure traffic. While Mid-Bay Bridge has higher coverage ratios, leverage is considerably higher than SJTA. Rhode Island Turnpike has more favorable coverage and leverage than SJTA but has a sizable capital plan.

RATING SENSITIVITIES
--Negative: Failure of the authority to implement adequate or timely toll increases to maintain an overall DSCR profile in the 1.5x to 1.7x range;
--Negative: Traffic declines beyond those currently envisaged due to preferences or secular changes;
--Negative: Deteriorating financial performance of the airport that leads to increased subsidy from the expressway and pressure the preservation of adequate fund balances;
--Negative: Additional borrowings to fund capital improvements which will result in lower range of coverage or higher net debt leverage;
--Positive: Given SJTA's traffic and revenue outlook for forthcoming years, a positive rating action is not envisaged in the near term.

SUMMARY OF CREDIT

Traffic on the expressway decreased by 0.1% through September 2015 while toll revenues increased by 0.6%. The small decline is viewed favourably as it indicates a stabilizing traffic base given that a combination of factors (2008 recession, Hurricane Sandy, and casino closures) had resulted in year over year declines in traffic over the past six years.

Casino revenues in Atlantic City have been on a declining trend, but gaming revenues have increased slightly this year. Fitch expects 2016 and 2017 to be stable given continued improvement in the economy and no new competition in the near term. Atlantic City's Trump Taj Mahal may or may not close, but there should be no material impacts to the expressway as it only represents about 7% of total gaming revenue in Atlantic City. Outside of Atlantic City, potential competition could come from the legalization of gaming across New Jersey and one to two new casinos opening in the surrounding areas.

The 2014 debt refunding has reduced near-term debt service obligations at the cost of increased debt service obligations in 2020. Debt service coverage is slightly higher in 2015 compared to last year's forecast by CDM Smith due to a stabilizing traffic volume instead of a 2% decline and lower near term debt service. Senior DSCR in 2015 is at 1.7x and 1.62x including subordinate debt. Debt service escalates from $26.1 million to $32.5 million in 2020, pressuring the authority's coverage ratio in that year and thereafter. Failure to adjust tolls in the face of traffic and revenue underperformance, increases in operating expenses, and escalating debt service will result in a weaker DSCR profile than currently expected.

Fitch's base case assumes that traffic will stabilize over the next four years, with slight declines that average -0.8% annually. This is reasonable given that the authority had a -2.93% CAGR over the last five years. As debt escalates from $26.1 million to $32.5 million in 2020, a 25% increase in tolls would be needed in 2019 to maintain their DSCR in the 1.5x-1.7x range until 2023. Fitch assumes a decline of 6% in the year that tolls increase, and flat growth thereafter. DSCR will fall below 1.5x from 2023-2025.

Fitch's rating case assumes an average annual decline of 0.8% in the first three years, similar to the base case. A 50% toll rate increase in 2019 will allow the authority to maintain DSCR well above 1.5x over the forecast period (2015-2025). In response to a toll increase, traffic is assumed to decline by 12% in 2019. A small economic shock to traffic of -7% is assessed in 2020, which is in line with expectations of an economic cycle. Traffic remains slightly depressed (-0.5%) in the next two years, followed by a recovery from 2023-2025 (average annual growth rate of 2.3%). In this scenario, DSCR will be well insulated from the debt increase in 2020 and the authority will be able to maintain its current rating throughout.

Fitch also looked at a break-even gross toll revenue growth scenario, which reflected 1.5% growth in toll revenues and 3% expense growth in order to maintain a 1.0x aggregate DSCR. Fitch assumed drawings on cash reserves and the debt service reserve fund (DSRF) in order to supplement CFADS in meeting debt service obligations.