S&P: Connecticut's Series 2016A And B Special Tax Obligation Bonds Rated 'AA' With A Stable Outlook
The STO bonds are secured by a first-lien pledge of revenues to the Special Transportation Fund (STF), paid before transportation operations. According to bond counsel, the funds are deemed to be appropriated each year and no further legislative approval is required.
We base our ratings on our assessment of the following factors: A diverse mix of pledged revenues, in our view, that are levied on a large statewide economic base (population: 3.6 million);Connecticut's history of adding to pledged revenues when it has increased the size of its transportation capital program, as evidenced by increased allocation of state sales tax beginning in fiscal 2016;Strong 2.45x coverage of future maximum annual debt service (MADS) after this issuance by state-estimated fiscal 2016 pledged revenues on combined senior - and second-lien bonds, excluding Build America bonds (BABs) interest subsidy and fund interest earnings, and 2.82x coverage on senior-lien MADS alone;State projections for annual debt service coverage (DSC) of more than 2.5x for senior-lien bonds, and more than 2.3x annual DSC on combined senior - and second-lien bonds after expected future debt issuances, through at least fiscal 2020, including BAB subsidies and interest earnings; andStrong bond provisions, including a 2.0x additional bonds test (ABT) for both first - and second-lien bonds, coupled with a fully funded debt service reserve account, and a 2.0x rate covenant. Credit risks include what we consider:A sizable, but well-defined, capital improvement program that includes $2.7 billion of planned additional new money bonds through fiscal 2020, and the potential for substantially more bonding after 2020 to the extent pledged revenue is increased in future years; and A pledged revenue stream that is somewhat susceptible to economic conditions related to changes in the price and availability of motor vehicle fuel and motor vehicle sales, or potential changes in statutory funding formula. We understand that proceeds from this bond issue will be used to fund various projects included in the transportation infrastructure program, and refund certain outstanding senior-lien bonds.
"The stable outlook reflects our view that the financial integrity of the fund and strong DSC levels will continue over the two-year outlook horizon," said S&P Global Ratings credit analyst David Hitchcock. "Economic trends are stable and increased sales tax revenue is currently being phased into the pledged STF to offset expansion of the transportation capital program," Mr. Hitchcock added.
We believe planned additional bonding will eventually lead to somewhat lower annual DSC levels beyond our two-year outlook horizon, while remaining above levels that we would consider strong. If DSC weakens significantly, or the historical state focus on the integrity and support for the STF weakened so as to deplete STF resources in a significant manner, we could potentially lower the rating or revise the outlook on the bonds. We do not see the potential for a higher rating in the next two years given the sizable projected debt issuance and the legal ability of the state to reduce future allocations of pledged revenue up to its 2x rate covenant.