Fitch Ratings assigns an 'F1+' rating to the following state of Texas (the state) tax and revenue anticipation commercial paper (CP) notes:
--$500 million, series 2011B.
The series 2011B CP notes are expected to be offered Nov. 17, 2011. Liquidity will be furnished by the state's treasury.
KEY RATING DRIVERS
--Projected borrowable resources provide adequate coverage of series 2011B CP notes and the outstanding series 2011A tax and revenue anticipation notes.
--Legal protections are sound.
--State financial operations are generally conservative, although cash balances narrowed in recent years even as cash flow borrowing needs increased.
--Assumptions for economic and revenue performance in fiscal year 2012 appear conservative.
--State finances are dependent on consumption-based (primarily sales) taxes, and education, property tax relief and capital needs represent long-term pressures on the state's resources.
--Fitch rates the state's long-term general obligation (GO) bonds 'AAA' with a Stable Outlook. The tax and revenue anticipation notes do not carry a GO pledge.
SECURITY
The series 2011B CP notes are limited obligations of the state secured by transfers from the state general revenue fund.
CREDIT PROFILE
The series 2011B CP notes are the second of two planned tax and revenue anticipation note (TRAN) issuances to meet the state's fiscal 2012 operating cash needs. The 'F1+' rating reflects adequate coverage for both the series 2011B CP notes and the previously-issued series 2011A TRANs from projected general revenue fund (GRF) and borrowable resources and a history of conservative economic and revenue assumptions. These factors offset cash flow strain from the lingering impact of the recent recession on GRF and borrowable balances, evident in fiscal year 2012's larger projected borrowing need and narrower forecast coverage of cash flow obligations than in recent years. Economic and revenue performance has improved in recent months and revenues continue to exceed conservative forecasts.
The series 2011B CP notes have a claim on state operating resources along with the previously issued series 2011A TRANs, although the series 2011B CP notes are secured by separate proceeds and payment accounts. The series 2011B CP notes mature no later than Aug. 30, 2012 (the same due date for the series 2011A TRANs) and cannot mature between August 23 (the final payment date for the series 2011A TRANs) and Aug. 29, 2012. Up to $500 million in series 2011B CP notes may be outstanding, and no more than $100 million in series 2011B CP notes may mature on any single day prior to Aug. 1, 2012. The series 2011B CP notes, as with the series 2011A TRANs, do not carry a GO pledge.
Under the series 2011B CP note order, funds from the state treasury will be made available to purchase maturing notes that are not successfully rolled over. The state treasury provides liquidity for several separate GO CP programs and variable-rate bonds. As of Sept. 30, 2011, total commitments are $658.3 million with a maximum total daily commitment of $647.6 million; $517.8 million was outstanding on all liquidity agreements. The market value of the treasury portfolio was $27 billion of which 7.9% was in cash and repurchase agreements and 24% was due in three months or less.
The state has issued cash flow notes annually for more than two decades, including periodically issuing both TRANs and CP notes. In August 2011 the state issued $9.8 billion in series 2011A TRANs. The state's cash flow notes address an annual timing mismatch tied to large school aid disbursements early in the fiscal year. The forecast GRF cash flow low point in December 2011, at negative $13.2 billion, will be covered by the series 2011A TRANs, series 2011B CP notes, and intrafund borrowing.
The series 2011A TRANs and series 2011B CP notes together represent 14.6% of forecast fiscal 2012 cash receipts. Repayment is derived primarily from transfers from the GRF. The series 2011A TRANs benefit from six scheduled set-aside payments between March and August, 2012. The final set-aside of $2.45 billion takes place on Aug. 23, 2012, and the fiscal year ends on Aug. 31, 2012. The GRF has access to substantial borrowable resources to cover cash flow needs including transfers for set-asides on the series 2011A TRANs and repayment of the series 2011B CP notes. Borrowable resources are forecast to average $10.9 billion per month through fiscal 2012. Coverage of the combined final set aside for series 2011A and the series 2011B CP notes by fiscal year-end forecast balance is adequate, at 1.7 times (x).
Borrowable resources include the Economic Stabilization Fund (ESF), currently funded at $5 billion and forecast to rise to $6.2 billion by the end of fiscal 2012. After a $3.2 billion draw from the ESF in fiscal 2011 to help close the forecast fiscal 2011 operating budget gap, there are no planned draws on the ESF balance during the fiscal 2012 - 2013 biennium, and any draw would require a three-fifths vote of the legislature. Oil and natural gas production taxes, the source of deposits to the ESF, continue to overperform earlier estimates.
Excluding borrowable resources, the fiscal year 2012 GRF cash balance began on Sept. 1, 2011 at negative $862 million, compared to a negative $1.8 billion forecast balance as of the series 2011A TRAN issuance. The fiscal year is forecast to end at negative $5.7 billion cash balance, after repayment of the series 2011A TRANs and 2011B CP notes. The state has customarily forecast cash flows conservatively; the fiscal 2012 forecast reflects slowly accelerating economic growth as the state emerges from recession. Forecast expenditures also reflect broad spending cuts being implemented in the fiscal 2012 - 2013 biennium to maintain budgetary balance.
The long-term 'AAA' GO rating of the state reflects its low debt burden, conservative financial operations and a growth-oriented economy that is emerging from the recession at a faster pace than the nation. Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, including for transportation needs, education and property tax reductions. The state's budget for the fiscal 2012 - 2013 biennium relies on significant cuts to baseline projected spending to maintain balance, while preserving the remaining balance in the ESF, the state's budget reserve.
For further information on the State of Texas, please see Fitch's rating action commentary 'Fitch Affirms Texas Water Development Board State GO Bonds at 'AAA',' dated Aug. 29, 2011, on Fitch's web site, www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'Rating U.S. Municipal Short-Term Debt' (Dec. 23, 2010).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
Rating U.S. Municipal Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=592885
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