OREANDA-NEWS. March 25, 2016. Fitch Ratings has affirmed the following ratings for the state of Louisiana:

--\\$954.37 million in outstanding senior lien gasoline and fuels tax revenue bonds rated by Fitch at 'AA-';
--\\$496.5 million in outstanding second lien gasoline and fuels tax revenue bonds rated by Fitch at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The first and second lien bonds are special and limited obligations of the state of Louisiana payable from and secured by pledged gasoline and fuels taxes. The second lien bonds are secured on a subordinate basis to the senior lien bonds.

KEY RATING DRIVERS

GENERALLY STABLE REVENUE STREAM WITH LIMITED GROWTH POTENTIAL: The bonds are secured by gasoline and motor and special fuels tax revenues that have shown stability over time, with modest losses during the recession. However, Fitch believes the revenue stream has limited growth potential.

STRONG DEBT SERVICE COVERAGE: Debt service escalates annually through a long final bond maturity in 2045; however, coverage of combined senior and second lien maximum annual debt service (MADS) is strong. The closing of the senior lien in 2009 ensures that no additional debt will be issued to dilute senior coverage while authorization for additional second lien debt has lapsed.

VARIABLE-RATE RISK HAS DECLINED: About 25% of second lien debt is in the form of variable rate obligations that have been synthetically fixed through floating-to-fixed-rate swaps. While the mandatory tender provisions associated with the bonds create an exposure to potential, though unlikely risks associated with the variable rate debt, the state has prudently fixed out several previous variable-rate obligations.

RATING SENSITIVITIES

The ratings are sensitive to the performance of pledged revenues and debt service coverage.

CREDIT PROFILE

The 'AA-' rating on both the senior and second lien bonds reflects the relative stability of pledged gasoline and fuels taxes and strong debt service coverage. The bonds were issued under the transportation infrastructure model for economic development (TIMED) program that was authorized by state statute in 1989. The program consisted of 16 projects: 539 miles of improved roadways along 11 highway corridors and three bridges throughout the state, as well as improvements at the Port of New Orleans and New Orleans International Airport. To date, the state has completed 14 projects under this authorization and anticipates funding the remaining two projects using other state and federal sources. TIMED revenues cannot be used for any other purpose except for TIMED bonds and construction.

MODEST PLEDGED REVENUE GROWTH

The bonds are secured by gasoline and fuels taxes. Debt service on the bonds is first paid by revenues from \\$0.04 of the state's \\$0.20 per gallon tax on gasoline, motor fuels, and special fuels, known as the Act 16 taxes, dedicated to the TIMED program. The remaining \\$0.16 per gallon tax deposited into the transportation trust fund, after flowing through the state's bond security and redemption fund for the benefit of the state's GO bondholders, is also pledged. Senior lien bondholders receive priority of payment from the pledged revenues, followed by second lien bondholders. About 25% of second lien debt (16% of total program principal) is in a variable-rate mode and synthetically fixed through floating- to fixed-rate swaps. Any termination payment related to the hedge obligations associated with the second lien debt is considered third lien debt.

The TIMED program and the pledged revenue stream have exhibited modest growth since 2012 following recessionary declines in fiscal years (FYs) 2008 through 2010. Pledged revenues grew 3.3% in FY 2011, but an unusual amount of large refunds in FY 2012 contributed to a reduction in pledged revenue of 5.3%. Pledged revenues have since grown 1.4%, 1%, and 3% in FYs 2013, 2014, and 2015, respectively. Despite the recent increases, Fitch believes that growth prospects for the revenue stream are limited. When combined with escalating debt service requirements, this trend is expected to result in a declining, although still satisfactory, trend of debt service coverage.

SOLID DEBT SERVICE COVERAGE

The rating reflects the security provided by the forecast collection of total pledged taxes, as the Act 16 tax alone is insufficient to provide full coverage of prospective debt service requirements. Act 16 tax collections of \\$121.3 million for FY 2015 provided 1.45x annual coverage of senior lien debt service in that year. Total pledged revenues, \\$606.4 million in FY 2015, provided ample 7.2x coverage of senior and 4.67x coverage of combined debt service obligations. Total fiscal 2015 pledged revenues provided comfortable 3.96x coverage of projected MADS in 2041 on senior obligations (final maturity) and 2.7x coverage of projected MADS in 2043 on second lien bonds.

Fitch believes dilution of coverage ratios is limited by the closure of the senior lien in 2009 as well as an additional bonds test that requires that pledged revenues in the prior 24-month period, or for each prospective fiscal year, cover average annual debt service for the second lien bonds at least 2x. Also, the authorization for additional bond issues secured by the pledged revenues expired on Dec. 31, 2012, which further supports Fitch's equal risk assessment for the senior and second lien bonds. The state has indicated its intent to include the remaining TIMED projects in the state's highway priority program funded through the state and federal transportation fund.