Fitch Ratings assigns an 'A' rating to approximately $99.5 million of South Carolina Transportation Infrastructure Bank (SCTIB) senior lien revenue refunding bonds, series 2009A. In addition, Fitch affirms its underlying 'A' rating on SCTIB's existing $2.3 billion of parity senior lien revenue bonds that are currently outstanding. The series 2009A senior lien revenue refunding bonds are scheduled for competitive sale the week of Sept. 14, 2009. The Rating Outlook is Stable.
Fitch's 'A' rating on the senior lien revenue bonds reflects SCTIB's strong, dedicated sources of system payments, the fact that payments from the South Carolina Department of Transportation (SCDOT) are derived from federal highway reimbursement funds, which have a long, established track record, the State of South Carolina's commitment and need for road infrastructure, and the integral involvement of SCDOT and the state treasurer, which provide strong project management and fiscal oversight.
Credit concerns include SCTIB's highly leveraged position with a weak additional bonds test, potential volatility in pledged revenue streams as a result of variation in specific state taxes and fees, SCDOT federal highway reimbursement funds which are subject to reauthorization risk, exposure to potential increases in liquidity/remarketing and swap termination costs associated with SCTIB's series 2003B variable-rate demand obligation bonds (VRDOs), and weak series payment pledge provisions, which only require the underlying repayment stream to provide 1.20 times (x) historical coverage of the required series payment.
The relatively stable quality of SCTIB's pledged revenue streams is counterbalanced by a high degree of leveraging. Coverage from SCTIB's primary revenue streams is anticipated to provide between 1.30x-1.40x coverage of gross debt service through the medium term, assuming no additional bond issuance. Interest earnings on various funds provide a cushion to absorb revenue volatility and meet the additional bonds tests, the key legal protection to bondholders.
Truck registration fees (TRFs), which are transferred to SCTIB by the Department of Motor Vehicles, and federal highway reimbursement funds, which are paid to SCTIB by the SCDOT in amounts equivalent to certain taxes and fees or pursuant to terms of intergovernmental agreements, are SCTIB's primary revenue sources. Effective May 2006, SCTIB began receiving motor vehicle registration fees and penalties as system payments, which also serve as an important source of pledged revenues to SCTIB.
Between fiscal 2001 and fiscal 2009, TRFs have grown at an average annual growth rate of 2% (which includes the effects of the recession earlier this decade as well as the effects of the current recession in 2008/2009). Reflecting current economic conditions, biennial growth in TRFs was only 0.45% for fiscal 2008 and SCTIB experienced a 2.92% biennial decline in TRFs for fiscal 2009. SCTIB anticipates no biennial growth in TRFs for fiscal 2010 and the resumption of 2% biennial growth thereafter. Given the importance of the TRF revenue stream for this credit and moderately escalating debt service requirements in the medium term, the resumption of biennial growth in TRFs is a key uncertainty for these bonds.
While federal highway reimbursement funds have a long established track record, funding levels are subject to changes in federal transportation policy with each reauthorization of the national surface transportation program. The U.S. House of Representatives and Senate passed bills to transfer $7 billion to the Federal Highway Trust Fund (HTF) from the general fund on July 30 and July 29, 2009 respectively. The President signed the bill on Aug. 7, 2009. The bill follows a September 2008 bill that transferred $8 billion into the HTF and extends a pattern of short-term fixes in the absence of longer-term solutions to the HTF's cash crunch. The transfer of general fund resources to the HTF does however underscore the relative importance of the highway program in the federal budget and is a positive action for state DOTs, like SCDOT. Continued federal action to ensure the uninterrupted flow of highway funding to the states is an important consideration for this credit since it is reliant on federal highway reimbursement funds from SCDOT for a large proportion of its pledged revenue streams.
Although the longer maturity profile of up to 30 years exposes SCTIB bondholders to additional reauthorization risk relative to other debt programs leveraging federal highway reimbursements, this risk is sufficiently hedged and is consistent with Fitch's 'A' rating given the additional pledge of TRFs and other non-federal revenue sources. Additionally, Fitch's opinion is supported by strong coverage by SCDOT's total fiscal 2009 federal highway reimbursements of 4.0x compared to its maximum payment obligations to SCTIB, along with SCDOT's covenant to limit federal highway fund leverage, and SCDOT commitment to make its payments to SCTIB from other non-tax sources in the event federal highway reimbursements are not sufficient.
The ratings also consider the high degree of current leverage and the relatively weak additional senior lien and junior lien bonds' tests, which allow for narrow margins of safety. However, Fitch's ratings on SCTIB's senior lien bonds also recognize the state's commitment to SCTIB through the periodic dedication of new revenue sources to support the needed large transportation projects it is financing. While SCTIB's current capital plan contemplates the potential issuance of an additional $450 million in new money revenue bonds during calendar 2010/2011, Fitch anticipates that the amount and timing of any new issuance will be dependent upon the maintenance of acceptable pledged revenue debt service coverage levels and the actual capital expenditure requirements of SCTIB's underlying project commitments. Although SCTIB's capital plan is premised upon maintaining a targeted average senior lien revenue bond debt service coverage ratio of 1.45x (calculated in accordance with the definitions under the indenture), this level is well below historical debt service coverage levels and actually leveraging up to this point could pressure the rating.
Pledged revenues, consisting of system payments, series payments, and transfers and interest earnings from the revenue stabilization fund, provided 1.84x coverage of net debt service under the indenture on SCTIB's senior lien revenue bonds for fiscal 2009. Fitch's coverage calculation (which does not net series payments or interest earnings from pledged revenues and debt service, and as such is a more conservative calculation than that defined in the master resolution) indicates that senior debt service coverage was 1.43x for fiscal 2009. Over the medium term, Fitch expects senior lien debt service coverage, based upon its own coverage calculation, to be between 1.35-1.40x assuming no additional leverage and dependent upon the ultimate level of TRF receipts. Over the same period, Fitch expects senior lien debt service coverage levels calculated under the terms of the indenture to be approximately 1.70x-1.75x. Fitch also assumes that series payments will remain less than a third of overall pledged revenues, which is consistent with historical levels.
SCTIB was created by an Act of the South Carolina general assembly in 1997. The purpose of the Act was to focus greater attention on larger transportation projects in the state, thereby allowing SCDOT to devote resources to other transportation projects. SCTIB selects and assists in financing major qualified projects in excess of $100 million by providing loans and other forms of financing assistance.
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