OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating on the Arizona State Board of Transportation's (the board) approximately $195 million in outstanding grant anticipation notes (GANs), series 2009A, 2011A, and 2012. The Rating Outlook is Stable.

SECURITY

The GANs are backed by pledged future federal aid under grant agreements between the Arizona Department of Transportation (ADOT) and the Federal Highway Administration (FHWA). Available funds deposited in the State Highway Fund (SHF) and the Maricopa County Regional Area Road Fund (RARF) provide additional back-up security.

KEY RATING DRIVERS

RATING DRIVEN BY STATE REVENUE BACK-UP: The GANs are backed by the first lien on Arizona's federal highway funds and are further supported by available SHF and RARF funds, after the payment of debt service on state highway bonds and transportation excise tax revenue bonds. Fitch generally assigns a rating consistent with the higher of the federal grant or the back-up revenues. Currently, the highest rating assigned to standalone grant anticipation revenue vehicle or GARVEE bonds for which federal Highway Trust Fund (HTF) revenues are the only pledged revenue source is 'A+', reflecting Fitch's view of the strength of the Federal program. The 'AA' rating on the GANs reflects Fitch's view of the strong enhancement provided by the available SHF and RARF balances.

ABTs LIMIT LEVERAGING: Additional GANs leverage is limited by a strong additional bonds test (ABT) of 3.0 times (x) maximum annual debt service (MADS) based on federal aid revenues. Additional leverage of state highway bonds and transportation excise tax revenue bonds is also limited by 4x and 3x MADS ABTs for senior and subordinate highway revenue bonds, and 2x and 1.2x MADS ABTs for senior and subordinate transportation excise tax revenue bonds, respectively.

STRONG STATE FUNDING SOURCES: SHF revenues, supported by constitutional requirements that most highway user revenues only be used for transportation-related purposes, provide a strong back-up resource, though state diversions to benefit the general fund have negatively affected the SHF in prior years. RARF revenues, derived from a Maricopa County transportation-dedicated excise tax have seen good annual growth in recent years, with additional growth projected in the near term.

RATING SENSITIVITIES

REDUCTION IN AVAILABLE BACK-UP REVENUES: A significant decline in available SHF and RARF fund balances and/or excessive leveraging of highway revenue bonds and transportation excise tax revenue bonds could put pressure on the rating.

CREDIT PROFILE

ADOT operates and administers the state highway system under the policy directives and debt-issuing authority of the board. The department is responsible for 6,800 miles of highways and 4,787 bridges across the state of Arizona. In addition to the GANS, state transportation debt includes highway revenue bonds backed by SHF revenues (including motor vehicle fuel taxes, registration and license taxes and fees)and excise tax revenue bonds backed by Maricopa County transportation-dedicated excise tax revenues.

PLEDGE OF FEDERAL AID REVENUES; STATE REVENUE BACK-UP

ADOT has entered into grant agreements with the FHWA relating to the outstanding GANs. Under the grant agreements, the FHWA has agreed to make payments to ADOT for eligible project costs, to the extent federal funds are available, in amounts equal to GAN debt service. ADOT bills the FHWA for the amount of debt service in advance of the debt service payment date. All grant revenues under any grant agreement relating to the outstanding GANs are deposited with the State Treasurer who is required to deposit such grant revenues directly into the Grant Anticipation Note Fund.

Debt service on the GANs is payable from federal aid revenues paid to ADOT under grant agreements with the FHWA related to each GANs series. Since the grant agreements establish only a sum sufficient payment stream, the board has broadened the definition of pledged revenues to include all federal aid revenues received by ADOT and, to the extent necessary, available SHF and RARF resources.The GANs resolution requires that prior to the debt service due date, to the extent necessary to pay debt service after accessing available federal aid and notes proceeds account revenues, the state treasurer transfer available moneys from the SHF and RARF funds to the grant anticipation notes fund. Available SHF and RARF revenues are exclusive of any funds pledged to outstanding highway revenue bonds and transportation excise tax bonds. Available RARF revenues consist of RARF construction account balances, to the extent that GAN proceeds were used to finance items eligible to be paid for by that fund.

STRONG DEBT SERVICE COVERAGE FROM AVAILABLE BACK-UP RESOURCES

The SHF is funded chiefly by statewide fuel taxes and user fees via the Highway User Revenue Fund (HURF). As of Nov. 3, 2015, excluding federal funds, the SHF had a balance of about $419 million. The RARF, funded mainly by the Maricopa County transportation excise tax, had a Nov. 3, 2015 available balance, excluding federal funds, of about $389 million. ADOT projects continued near-term annual growth for HURF revenues (averaging about 3.4%) and RARF revenues (averaging about 5.6%), which seems reasonable given state economic growth trends. For the last five years, available HURF and RARF balances have exceeded $180 million and $370 million, respectively. Excluding federal funds, available fiscal 2014 SHF and RARF balances provided over 14x GANs MADS coverage, with SHF coverage at 5.6x and RARF coverage at 8.6x.