OREANDA-NEWS. Fitch Ratings has assigned an 'F1' rating to the Metropolitan Transportation Authority (MTA), New York's $700 million transportation revenue bond anticipation notes (BANs) consisting of $628 million series 2015B-1 (tax-exempt) and $12 million to each of the following series, 2015B-2a, 2015B-2b, 2015B-2c, 2015B-2d, 2015B-2e and 2015B-2f.

The 'F1' rating on the short-term transportation revenue BANs reflects the underlying 'A' rating for the MTA's transportation revenue bonds and the MTA's historical stable demonstrated market access. The BANs are secured solely by the proceeds of other transportation bonds, unused proceeds of the BANs (to the extent they are available) and, with respect to interest payable on the series 2015A BANs, amounts available for payment of subordinated indebtedness. The series 2015A BANs are not secured by any other funds, accounts or amounts that are pledged to the payment of the transportation revenue bonds or parity obligations issued under the MTA's Resolution.

In Fitch's opinion, in the event that the MTA is unable to refinance the BANs with a traditional fixed-rate transportation revenue bond solution, the MTA could issue variable-rate debt with or without bank support. Additionally, the MTA retains some, albeit limited, options to refinance the debt outside of a transportation revenue bond issuance including rolling the BANs, issuance on another lien (including the Dedicated Tax Fund lien rated 'AA-' or Triborough Bridge and Tunnel Authority lien ('AA-/A+') or using inter-agency loans.

KEY RATING DRIVERS

The 'A' rating reflects the gross lien on a diverse stream of pledged revenues, the essentiality of the MTA's transit network to the economy of the New York region, and the demonstrated ability of the MTA to produce near-term solutions for its operating and capital needs. The rating also reflects the need to generate sufficient cash to adequately cover operations of the system despite high debt service coverage ratios (DSCRs).

Strategic Importance: The MTA transportation network is essential to the economy of the New York region, with New York City Transit carrying an average of 8.14 million daily subway and bus riders and Metro-North Railroad and Long Island Rail Road (LIRR) carrying another 588,000 daily commuter rail passengers. While an independent authority, the MTA has received significant support from the state of New York in the form of additional tax sources aimed at closing projected operating budget gaps and addressing capital needs.

Highly Constrained Financial Operations: Despite high DSCRs from gross pledged revenues, the MTA's financial position is constrained given its extremely large operating profile and high fixed costs, including significant retiree pension benefits. In addition, some of the MTA's operating subsidies are vulnerable to economic conditions. While the MTA is required to provide a balanced current year budget, some tools available to meet a balanced budget, such as service reductions and fare increases, are politically unpopular.

Solid Security Pledge: The bonds are secured by a gross lien on a diverse stream of pledged operating revenues consisting of transit and commuter fares and excess bridge tolls and non-operating revenues consisting of various regional taxes.

Extremely Large Capital Needs: The MTA's 2015-2019 $26.1 billion capital program (Transit and Commuter Programs) ($29 billion including MTA Bridges and Tunnels) was approved on Oct. 28th by the MTA board and is still subject to the Capital Program Review Board's (CPRB) approval. The MTA expects to submit the capital program to the CPRB in 2016. Under a recent agreement between the MTA, the State of New York and New York City, the State and the City committed funds to close the projected capital program funding gap. New York State has committed to provide $8.3 billion, and New York City has committed to provide $2.5 billion in addition to $11.8 billion in MTA funds and $6.4 billion in federal funds.

Growing Annual Debt Burden: The MTA's capacity to continue to leverage resources to fund expansion projects while meeting renewal and replacement needs may be limited in the future if projected financial performance or additional operating subsidies do not come to fruition.

Peer Comparison: Given the size and breadth of the MTA's network of transportation assets, there is no direct comparison for the entity.

RATING SENSITIVITIES

Negative:
--Inability to achieve future projected operating efficiencies and implement other key elements of the cost reduction initiatives and/or maintain an ongoing state of good repair and other elements of the capital program;
--Significant cost overruns or delays in the capital program's mega-projects that lead to additional borrowing or deferral of core capital projects;
--Receipts in dedicated tax subsidies that are measurably below forecast levels could pressure the MTA's financial flexibility.

Positive:
--Given small near-term operating surpluses but medium-term projected deficits positive rating movement is unlikely in the near term.

SUMMARY OF CREDIT

The proceeds from the BANs will finance existing approved transit and commuter projects. The MTA expects to issue long-term debt to take out the BANs. The MTA's strategy to issue short-term BANs is to better match the useful like of the assets/projects financed by the BANS, once identified and funded, with long-term debt maturities.

The MTA's 2016-2019 November Financial Plan (Final Proposed Budget) as compared to the July Financial Plan forecasts lower cash balances for fiscal year (FY) 2016 ($123 million vs $165 million) and FY 2017 ($36 million vs $102 million) but positive forecasted balance in 2018 ($55 million vs $175 million negative balance. FY 2019, similar to prior outer-year projections, anticipates a negative cash position of approximately $182 million, up from a negative cash position of $224 million from the July plan.

The changes in 2016-2019 reflect positive results from higher toll revenues, higher real estate transaction tax receipts, lower energy expenses and lower debt service costs. The positive results were partially offset by lower petroleum business tax forecasts, lower MTA Aid and lower farebox revenue forecasts. The re-estimates and other changes are $447 million favorable through 2019.

The November plan includes three main assumptions from the July plan including the ability to achieve biennial fare and toll increases of 4% in March of 2017 and 2019 (equivalent to 2% annual increases, approximating the rate of inflation), annually recurring cost reduction targets and additional pay-as-you-go (Pay-Go) contributions for the 2015-2019 capital program. To the extent that any of these elements fail to reach current expectations, projected year end cash balances may be materially different than currently estimated. While the MTA has a demonstrated history of closing outer-year deficits, it is Fitch's opinion that the options available for new revenue generation are fewer in the current environment; however, the MTA continues to explore and implement new operating efficiencies and cost reduction measures to close outer-year gaps.

On Oct. 29, 2015, the MTA Board approved a revised $29 billion 2015-2019 capital program. The modified capital program, which includes a number of programed efficiencies and delivery methods, was reduced from the original $32 billion program proposed a year ago. The program includes $21.6 billion in core investments in the MTA's subways, buses and railroads; $4.5 billion for the East Side Access, Penn Access and Second Avenue Subway projects; and $2.9 billion for MTA Bridges and Tunnels (not subject to CPRB approval).

Under the recently negotiated agreement between the MTA, New York State and New York City, the projected funding gap of approximately $11.8 billion was closed through commitments from New York State and New York City. New York State has committed to provide $8.3 billion, and New York City has committed to provide $2.5 billion in addition to $11.8 billion in MTA funds and $6.4 billion in federal funds.

In Fitch's opinion, the funding commitments by the State and the City further highlight the essentiality of the MTA's transportation system as a key element to the health and growth of the greater New York City economy. Fitch will continue to monitor the CPRB's approval process in the near term.