Fitch Rates $193MM PA Turnpike Comm Motor License Fund-Enhanced Bonds 'AA-'; Outlook Stable
The bonds are expected to sell via negotiation during the week of Sept. 19.
Additionally, Fitch affirms the 'AA-' rating on approximately $993 million in outstanding MLF-enhanced turnpike subordinate special revenue bonds.
The Rating Outlook is Stable.
The MLF-enhanced subordinate special revenue bonds are backed by a junior pledge on the trust estate, which consists primarily of residual toll revenues. Ultimate security for the bonds and the rating, rest with the ability to access certain monies in the Commonwealth of Pennsylvania's (the Commonwealth) MLF to fund debt service if necessary.
KEY RATING DRIVERS
AVAILABILITY OF COMMONWEALTH MOTOR LICENSE FUND: The 'AA-' rating is based on the Commonwealth's statutory and legal commitments to draw upon certain reserved funds in its MLF to make up any deficiency in debt service deposits. The bonds are intended to be repaid from toll revenues and have been to date. The fund receives a variety of fuel and other vehicle related revenues and historically exhibits large daily balances. Appropriation on the part of the Commonwealth is not necessary to access the MLF to cover a debt service deposit deficiency.
STATE ISSUER DEFAULT RATING (IDR) CAPS RATING: The ability of the Commonwealth to borrow from the MLF to support its general fund, and the lack of a direct pledge of MLF revenues, limits the rating on the bonds to the state's IDR of 'AA-'.
NO NEW DEBT ANTICIPATED: Under current law, MLF enhancement is not available for future new money issuances by the PTC thereby eliminating the potential for further leveraging. The fund remains fully available for all bonds issued by July 1, 2014 and all refunding issuances thereafter, including the proposed transaction.
SOLID GROWTH PROSPECTS: The MLF receives a statutory distribution of motor vehicle fuel taxes and other transportation-related taxes and fees. Source taxes and fees are economically sensitive in general and have increased significantly following a 2013 statutory change. The largest source, motor vehicle fuel tax, is expected to be a steady but slowly growing revenue source over time once the policy changes are fully implemented.
COMMONWEALTH RATING: The rating is sensitive to changes in the Commonwealth's IDR.
STATUS OF THE MLF: A shift in leveraging plans for the MLF as well as any further changes in Commonwealth transportation funding policy that affect the revenue performance of, or available balances in, the fund could affect the rating.
The rating on the bonds is based on provisions in Act 44 of 2007 (the act) of the Commonwealth that direct the state treasurer to draw upon certain funds in the Commonwealth's MLF in the event that debt service deposits expected to be made by the commission are insufficient. The claim on MLF revenues is stated directly in Act 44 and no further appropriation on the part of the commonwealth is necessary. Act 44 further states the commonwealth's commitment not to impair its commitment to bondholders.
MLF AVAILABLE FOR DEBT SERVICE
The structure of the transaction, including legal agreements enacted pursuant to the initial issuance of MLF-enhanced bonds, would avert a missed debt service payment. Neither the MLF nor its revenues are directly pledged to bondholders. Instead, the claim on MLF balances is stated in Act 44 which authorizes the bonds. The subordinate trust indenture governing the bonds lays out trustee notification requirements to the Pennsylvania Department of Transportation (PennDOT) in the event of insufficient commission revenues.
A memorandum of agreement (MOA) between PennDOT, the Commonwealth's office of the budget, and the state treasurer spells out the timing of notifications necessary should a draw on the MLF become necessary.
In addition, a special revenue bonds debt service sub-account, funded at closing with bond proceeds to reach 50% of maximum annual debt service (MADS), is available to be drawn upon if PennDOT or the Treasurer failed to transfer monies from the MLF. If MLF monies are received subsequent to a withdrawal from this account, such monies would go to restore it; however, the commission has no obligation to maintain the balance or replenish any funds withdrawn.
The MOA also creates a separate PTC special revenue bond account within the MLF. The state treasurer agrees to use best efforts to maintain the fund at a level equal to MADS on the bonds. This account is not pledged to bondholders, but the stated intent is to use balances in the account to cover deficiencies in commission payments for the bonds only in the event no other funds are available in the MLF. Under the MOA, the treasurer agrees to not access the account for interfund borrowing. The MOA requires replenishment from first monies into the MLF from certain sources if the account is drawn upon.
The commission's subordinate indenture specifies a rate covenant, setting toll rates to achieve 1.15x coverage of subordinate obligations and 1.0x combined subordinate and MLF-enhanced debt service coverage. PTC's policy goals, which it continues to meet or exceed, are 1.3x for subordinate obligations and 1.2x for MLF-enhanced debt.
Act 44 limits MLF-enhanced debt to $5 billion, with no more than $600 million to be issued annually. Act 89, enacted in November 2013, prohibits PTC from issuing new money bonds supported with MLF enhancement to support its obligations to PennDOT as of July 1, 2014. MLF availability for prior issuances and refunding issuances, including the proposed series, is not affected by Act 89.
AVAILABLE MLF REVENUES PROVIDE ROBUST COVERAGE
The Commonwealth's MLF receives proceeds of motor fuels taxes, vehicle registration fees, license taxes, operator license fees, as well as other excise taxes and federal transportation revenues. Pennsylvania's constitution requires such proceeds to be used exclusively for construction, reconstruction, maintenance and repair of and safety on public highways and bridges and for debt service on obligations incurred for these purposes.
Revenue performance has been fairly steady and should improve following enactment of Act 89. Pursuant to Act 44, approximately 50% of fiscal 2015 MLF revenues were available to cover deficiencies in debt service deposits for the special revenue bonds if necessary. MLF tax and fee revenues available for debt service on the bonds increased an estimated 16.9% in fiscal 2015 year-over-year, 10.7 the prior year, and 1.3% in fiscal 2013. Rate changes implemented under Act 89 drove the sharp growth in 2015 and 2014, and will continue to increase revenues through fiscal 2017 when the legislation is fully implemented.
Fiscal 2015 revenues available for the special revenue bonds provided robust coverage of 29.8x coverage of pro forma MADS. While growth prospects for the revenue stream (following implementation of Act 89 increases) are limited, coverage should remain extremely strong with no new money issuance permitted.
The MLF's average and minimum daily balances are significant, with fiscal 2015 levels averaging $903 million and a minimum of $385 million. These balances include only MLF revenues available for debt service on the bonds. While balances are down notably from prior years, reportedly due to increased paygo capital spending by the Commonwealth, coverage remains robust. The minimum daily fund balance in fiscal 2015 provided approximately 3.7x coverage of pro form MADS on the bonds. An additional bonds test limits MADS on all special revenue bonds, including the proposed issuance, to no more than one-third of the ending balance in the MLF for the prior year.
MLF balances are not fully segregated from Pennsylvania's general fund operations given the general fund's ability to borrow from the MLF. This linkage caps the rating on the bonds at the Commonwealth's IDR. The Commonwealth is permitted to borrow from the MLF to support general fund cash flow needs. The reverse is also true, and Pennsylvania also retains the authority to issue tax anticipation notes as an alternative to interfund borrowing. Constitutional provisions require interfund borrowing from the MLF to be repaid by the earlier of eight months or July 31st. The Commonwealth last borrowed from the MLF in fiscal 2010 and the borrowing was repaid within the fiscal year. The strength of the Act 44 provisions described above, including the lack of appropriation risk, support a rating on par with the IDR.
The PTC issues the bonds, but revenues available for MLF enhancement are all collected and controlled by the commonwealth itself and only made available to PTC as needed for debt service. Therefore, there is no exposure to PTC's operations.