Fitch Ratings has assigned an 'A' rating to the New Jersey Turnpike Authority's (the authority) approximately $275 million in series 2011A and B bonds which will refund the series 2003C-2 and C-3 bonds.
In addition, Fitch has affirmed the 'A' rating on approximately $7.72 billion in outstanding turnpike revenue bonds. Fitch does not rate turnpike revenue bond series 1991D, 1992B, 2009A-D (totals $558.7 million).
The Rating Outlook on all bonds is Stable.
KEY RATING DRIVERS:
--Strategic Importance: The New Jersey Turnpike is a critical inter- and intra-state transportation link with a mature traffic profile.
--Strong Rate-Making Flexibility: Considerable economic flexibility exists to increase toll rates but may be constrained by a politicized operating environment.
--Moderate Leverage and Financial Margins: Leverage is currently high but is projected to moderate to 10 times (x) in 2018 after including the authority's plans for $4.4 billion in additional fixed-rate debt, and coverage of maximum annual debt service (MADS) on outstanding and future debt equals a healthy 1.23x. Debt service coverage (DSC) returned to a solid 1.66x in 2010 from a low of 1.17x in 2008 but the authority expects to maintain DSC at 1.5x.
--Large Debt Plans Support Well-Defined Capital Plan: The authority has a $7 billion 10-year capital improvement plan (CIP) which requires $4.4 billion in additional debt through 2018.
--Subordinate Transfers: The state's dependence on annual transfers from surplus revenues have left the authority with lower liquidity and a dependence on future borrowing to fund a large part of its capital plan; while the significant level of transfers could be viewed as a risk, all resolution requirements of the authority are senior to the transfers.
WHAT COULD TRIGGER A RATING ACTION:
--Erosion of debt service coverage in the medium term below 1.5x for a sustained period due to lower-than-anticipated revenue yields from approved toll increases or higher-than-anticipated expense growth.
--Increases in leverage beyond the authority's planned $4.4 billion in debt to fund the balance of the 10-year, $7 billion CIP.
--The state's increased reliance on the authority to transfer funds to support state transportation projects without commensurate toll increases to ensure system preservation.
SECURITY:
The turnpike revenue bonds are secured by a lien on pledged revenues, which are defined as all tolls, revenues, fees, rents, charges, and other income derived from operating the turnpike (including Build America Bond subsidies), proceeds from business interruption insurance, amounts deposited in the revenue fund from the construction/special project reserve/or general reserve funds, and revenues from qualified swaps and investments. The bonds have a final maturity in 2041.
TRANSACTION SUMMARY:
The authority's system includes the 148-mile New Jersey Turnpike and its two extensions, and the 173-mile Garden State Parkway. About 1.7 million toll transactions occur on the system each day. Toll transaction growth on both the turnpike and parkway has had a negative 2.7% compound annual growth rate (CAGR) from 2000-2010 primarily due to the effects of the conversion to one-way toll collection from two-way plazas on the parkway which began in September 2004, while revenues have grown at a 5.1% CAGR primarily due to the December 2008 toll increases of 40% and 43% on the turnpike and parkway, respectively. Year to date for 2011 (through Sept. 30), traffic and revenue are down by 1% to 2% on both the turnpike and parkway. Operating expenses have grown at a 4.6% CAGR from 2001-2010, but the authority has represented that it will manage this to a lower level through 2016. Expenses in 2010 and 2009 were both flat compared with 2008, a strong performance relative to comparable systems, and are expected to decline 2% in 2011 and remain flat in 2012.
On Dec. 1, 2008 the authority implemented the first of two approved toll increases. The second increase will take effect on Jan. 1, 2012. Tolls for a peak-hour full-length trip on the turnpike increased 40% in 2008 and will increase 53% in 2012. Tolls for a car trip on the turnpike are now approximately $0.07 per mile and will increase to $0.11 in 2012. Truck tolls will also increase commensurately. Meanwhile, tolls on the parkway increased 43% in 2008 and will increase 50% in 2012. Tolls for a car trip on the parkway are now approximately $0.03 per mile and will increase to $0.05 in 2012. Fitch's 'A' rating incorporates the authority's representations that it will manage its finances to maintain approximately 1.50x debt service coverage. Under alternative scenarios, Fitch estimates a debt service coverage ratio of 1.50x-1.60x with coverage decreasing over time; meaningful revenue increases beyond 2012 will be necessary to maintain this level of flexibility.
The authority's current debt load is about $8.28 billion, 18% of which is variable rate that is synthetically fixed. The authority anticipates a series of new borrowings totaling approximately $4.4 billion between 2013 and 2018 to fund the balance of the 10-year, $7 billion CIP. The plan will be entirely debt-funded and anticipates improvements to both the turnpike and parkway.
It is Fitch's expectation that the current economic environment will continue to put pressure on the authority's ability to maintain debt service coverage ratios above 1.5x without further toll increases to deliver the CIP, but unlike in prior years, the authority has begun this effort with a stronger financial profile and a potentially longer window of stability. It is possible that economic recovery will take place over several years, which could result in revenue proving less than projected. Should this occur, Fitch expects the authority to scale back borrowing or increase tolls to maintain financial flexibility. Given the authority's history, political risk remains a concern, as action to restore balance may not be timely. However, the authority does retain considerable economic flexibility and has historically acted eventually to protect bondholders.
The New Jersey Turnpike Authority is a body corporate and politic of the State of New Jersey. The authority achieved its current form in July 2003 when it absorbed the New Jersey Highway Authority, which operated the Garden State Parkway. The two roadways now operate as a consolidated system. Both roadways have been in continuous operation since the 1950s.
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:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 5, 2011).
Applicable Criteria and Related Research:
Rating Criteria for Toll Roads, Bridges, and Tunnels
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832
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