OREANDA-NEWS. Fitch Ratings assigns an 'AA' rating to the following state of Hawaii highway revenue bonds:

--$98.13 million series 2016A;

--$100.98 million series 2016B.

The bonds are expected to sell via negotiation during the week of Aug. 8. Proceeds of the transaction will finance various highway capital improvements and refund outstanding debt for interest savings.

Fitch has also affirmed its 'AA' ratings on $407.9 million of outstanding state of Hawaii highway revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are special, limited obligations of the state of Hawaii, payable from pledged funds which consist primarily of the fuel license (gas) tax, vehicle registration fees and weight taxes, and rental motor vehicle and tour vehicle surcharge taxes. Senior bonds (the only active lien) have a first lien on the pledged funds once deposited in the State Highway Fund.

KEY RATING DRIVERS

SOLID LEGAL PROVISIONS: Hawaii's highway revenue bonds have a first lien upon revenues deposited into the State Highway Fund. Additional senior lien issuance, which Fitch anticipates, requires satisfaction of a historical 2x additional bonds test (ABT). While transfers out of the highway special account are permitted, the certificate authorizing the highway revenue bonds subordinates them to other account expenses, including debt service.

STRONG PLEDGED REVENUE PERFORMANCE: Pledged highway revenues have increased in line with U. S. economic performance and above the rate of inflation over the past 10 years, in part due to state policy actions to adjust tax rates and charges to offset economic volatility. Pledged revenues provide robust coverage of debt service in a scenario that considers full leveraging up to the 2x ABT, in combination with revenue declines anticipated in a moderate economic downturn.

EXPOSURE TO STATE OPERATIONS: Funding for highway operations and the taxes that support them are subject to the discretion of Hawaii's state legislature and may be influenced by broader credit conditions within the state. Accordingly, Fitch's rating on the bonds is capped at the state's Issuer Default Rating (IDR) of 'AA.'

RATING SENSITIVITIES

REVENUE PERFORMANCE: The rating is sensitive to declines in pledged revenues that materially impact debt service coverage on the bonds.

STATE IDR: Changes in Fitch's assessment of the state's credit quality could impact the rating on the bonds, which is currently capped at the state IDR.

CREDIT PROFILE

SOLID LEGAL PROVISIONS

Legal provisions for the bonds provide solid protection for bondholders. Highway revenue bonds have a first lien upon revenues deposited into the state highway fund, principally the fuel license (gas) tax, vehicle registration fees and weight taxes, and rental motor vehicle and tour vehicle surcharge taxes. Subordinate lien debt is permitted, though none has been issued nor is any contemplated.

Transfers out of the highway fund are also permitted, but only after senior and subordinate debt service obligations, operations and maintenance expenses, and required capital improvements have been funded. Further, transfers are only allowable if monies remaining in the fund exceed 135% of the next year's revenue requirements. Transfers occurred regularly between fiscal years 1999 and 2006, but none are currently anticipated.

Outstanding bonds are supported by both a cash-funded debt service reserve and sureties sized at 50% of maximum annual debt service (MADS), but the reserve will be eliminated for future issuances, including the current transaction.

STRONG REVENUE PERFORMANCE

Pledged revenues have proven resilient in the face of past economic pressures and Fitch expects that future revenues will continue to provide strong coverage of debt service requirements. Between 2004 and 2014, pledged revenues rose at a compound annual growth rate of 3.4%, equal to growth in U. S. gross domestic product (GDP) and well above the rate of inflation. Revenues dipped by a cumulative 13% in fiscal years 2009 and 2010, at the peak of the recession, but the combination of a recovering economy and state policy actions resulted in cumulative growth of more than 45% over the following five years. Fitch expects future revenue growth to continue to keep pace with inflation but results could be pressured by generally flat fuel license tax performance in recent years, which represents approximately one-third of pledged revenues.

Pledged revenues for 2016 (unaudited) provide strong 4.5x coverage of MADS. Coverage remains strong under two scenarios that assume full leveraging of pledged revenues up to the 2x ABT. In the first scenario, Fitch considers the impact of a 4% reduction in pledged revenues. This figure is based on the volatility of pledged revenues in past downturns and Fitch's expectations of future performance in a U. S. economic recession with a 1% decline in GDP. In the second scenario, Fitch considers the largest cumulative decline in pledged revenues over the past 15 years. In both cases pledged revenues retain a substantial cushion after modeled revenue declines and results are consistent with an 'aaa' assessment for the sensitivity and resilience of pledged revenues.

In practice, Fitch expects that the state will maintain coverage well above the 2x ABT utilized in this analysis. Management has typically limited debt service expenses to less than 20% of total annual highway revenues to insure sufficient funding for operations and maintenance, and plans to continue this practice in the future.

EXPOSURE TO STATE OPERATIONS

In rating dedicated tax bonds issued by states Fitch considers the independence of pledged revenues from state financial operations and any legal provisions that limit potential diversions or reductions of pledged revenues. Hawaii's general revenue bond law requires the state to maintain pledged revenues in amounts sufficient to meet commitments to bondholders but, while not anticipated, may be modified by the state legislature. Fitch's rating on the bonds is thus capped at the state's IDR of 'AA'.