OREANDA-NEWS. Fitch Ratings has affirmed the 'AA-' rating on the following North Carolina Turnpike Authority bonds:

--\$356.675 million state annual appropriation revenue bonds series 2009B (federally taxable-issuer subsidy-Build America bonds)

The Rating Outlook is stable.

SECURITY: The bonds are special obligations of the Authority, secured by and payable from a \$25 million state appropriation from the Highway Trust Fund and federal revenues pursuant to the Build America Bonds interest subsidy.

KEY RATING DRIVERS

STATE APPROPRIATION: The bonds are secured by a \$25 million continuing appropriation from the state and a pledge of the federal interest subsidy associated with the Build America Bonds. The state of North Carolina is rated 'AAA' and appropriations debt of the state is rated 'AA+' by Fitch. The NCTA bonds, while secured by a state appropriation, were not issued by the state and do not benefit from the strong debt management oversight that supports other appropriations debt issued by the state.

FEDERAL SUBSIDY SHORTFALL: Debt is structured to the revenue stream but is in excess of the state appropriation, relying on receipt of the federal interest subsidy. Due to federal budget sequestration, there has been and may continue to be a shortfall in the interest subsidy payment and potentially in the debt service fund. If funds on hand are insufficient, this will be addressed through a draw on the reserve fund. The reserve was funded from bond proceeds in an amount equal to maximum annual interest subsidy and was intended to address any timing and/or administrative issues associated with receipt of the federal interest.

IMPORTANT PROJECT TO STATE: The Triangle Expressway, partially funded by the bonds, will serve as a major alternative to congested free roads and a key route to the Research Triangle Park (RTP), a major state employment center. The state has demonstrated its commitment to the project through construction and renewal and replacement guarantees. Construction is complete and tolling has begun.

RATING SENSITIVITIES

FEDERAL BUDGET REDUCTIONS: A continuing or permanent reduction in federal funding of BABs interest subsidy payments that is not mitigated through issuer action other than continued draws upon the reserve fund may lead to a rating downgrade. The rating is also sensitive to changes in the credit quality of the state of North Carolina and evidence of reduced commitment by the state to the project.

CREDIT PROFILE

The bonds were issued as one part of a multi-pronged financing for the authority's Triangle Expressway project. The authority also issued separately secured toll revenue and TIFIA bonds, both rated 'BBB-' by Fitch Ratings.

STATE APPROPRIATION AND FEDERAL INTEREST SUBSIDY

The rating on the authority's state annual appropriation revenue bonds reflects the strength of the pledged primary revenue stream -- an ongoing appropriation from the state of North Carolina's Highway Trust Fund - and the high degree of confidence at the time of issuance that the federal interest subsidy on the Build America bonds for Series 2009B would be received in a timely manner. As will be discussed further below, the federal interest subsidy payments have been received on time; however, payments have been and may in the future be reduced due to federal budget sequestration. This would lead to a deficiency in the debt service fund that may be addressed through draws on the reserve fund.

North Carolina general obligation bonds are rated 'AAA' and its general fund appropriations debt is rated 'AA+, reflecting the state's strong general credit standing and centralized oversight of appropriation debt. The appropriations debt issued by the authority will not fall under the central management of the state, contributing to the lower rating.

BABS FUNDING SHORTFALL

The bonds are special obligations of the authority, secured by and payable from a \$25 million ongoing appropriation from the Highway Trust Fund, a separate fund of the state of North Carolina. Debt service on the outstanding bonds was structured to this \$25 million appropriation after applying the federal interest subsidy arising from the issuance of taxable Build America Bonds. A \$7.9 million reserve fund equal to maximum annual interest subsidy payment, funded from proceeds, was intended to address any potential administrative or timing issues with the receipt of the federal funds.

While receipt of the subsidy has been timely, it has fallen short of what was anticipated and structured to when the bonds were issued. To achieve federal deficit reduction goals, the federal government has been applying a 'sequester' to BABs interest subsidies, in an amount equal to 8.7% of the expected payment in fiscal 2013, 7.2% in fiscal 2014, and 7.3% in fiscal 2015. The 7.3% rate is assumed at a minimum to apply through fiscal 2023. The reduced amount has not caused a deficiency in the debt service fund to date because debt service in these early years remains below the combined revenue sources. However, it is currently anticipated that revenues will fall short in fiscal 2022 and 2023, leading the authority to draw on the debt service reserve fund if other funds are not available. The expected small draw upon the almost \$8 million reserve fund is not currently a negative credit factor; however, if interest payments are further or permanently reduced, Fitch expects the authority to take action to ensure there are sufficient revenues to meet all debt service requirements. The \$25 million appropriation commitment extends 10 years beyond the final maturity of the bonds, allowing some flexibility to restructure debt service.

FIXED STATE APPROPRIATION TO TURNPIKE AUTHORITY

The tolls and other revenues of the Triangle Expressway System are not pledged to state annual appropriation bond holders. The state appropriation funds are transferred quarterly to the Authority in equal installments of \$6.25 million. No additional bonds can be issued supported by the appropriation, other than refunding debt.

Revenues deposited in the Highway Trust Fund are generated by a 3% highway use tax on the retail value of motor vehicles purchased or titled in the state, 25% of all motor fuel tax revenues, and a portion of certain fees shared for the issuance of certificates of title. FY 2014 revenues totaled just \$1.18 billion, of which \$745 million was spent on state transportation needs, \$73 million was paid in debt service, and \$94 million was transferred to other state funds. Transfers from the highway trust fund to the state general fund have been eliminated.

STATE COMMITMENT TO THE PROJECT

The toll road serves as a major alternative to congested free roads and a key route to the Research Triangle Park (RTP) (employment center). In addition to the annual appropriation, the state's commitment to the project included a construction guaranty and continues to be demonstrated with a guarantee of operations and maintenance expenses, and renewal and replacement guaranty by NCDOT. The project has been completed and is fully operational with tolling in place.

For more information on the state of North Carolina, please see the press release, 'Fitch Rates North Carolina's \$250MM GOS 'AAA', dated March 27, 2015. For more information on the Triangle Expressway Project, please see the release, 'Fitch Affirms North Carolina Turnpike Authority System Revs at 'BBB-'; Outlook Stable', dated Jan. 21, 2015.