Fitch Affirms Louisiana's Highway Improvement Rev Bonds at 'AA-'; Outlook Stable
The Rating Outlook is Stable.
The bonds are special and limited obligations of the state payable from and secured by pledged truck and trailer registration taxes and fees.
KEY RATING DRIVERS
ESTABLISHED BUT VOLATILE REVENUE STREAM: The state's collection of truck and trailer registration taxes and fees is well-established, with distribution to the state highway infrastructure fund in place since 2007. Pledged revenues are susceptible to both state and national economic conditions and historically have been affected by significant weather-related events as well as the Horizon oil spill.
STRONG FLOW OF FUNDS: Strength in the flow of funds is the priority of pledged revenue for debt service on these bonds prior to transfer to the state's bond security and redemption fund. Also providing credit support is the requirement that a full year's debt service be funded from first dollars received prior to any other uses.
SOUND COVERAGE: The bonds benefit from sound coverage of debt service by pledged revenues, with a 2x maximum annual debt service (MADS) test (ABT) for additional bonds. There are no plans to issue additional debt under this security.
COMMODITY-BASED ECONOMY: The state's commodity-based, cyclical economy, heavily linked to oil and gas production and petrochemical manufacturing, has modestly diversified but almost one-third of the state's gross domestic product continues to be derived from these economic sources. The current low price for crude oil has delayed economic investments in the state, and, Fitch expects declines in related employment should prices remain subdued in the long term.
The rating is sensitive to shifts in the level of pledged revenues that would affect debt service coverage on the bonds.
Louisiana's SHIR bonds are secured by pledged revenues initially deposited to the state's Act No. 135 special revenue fund (Act 135 Fund). Pledged revenues consist of commercial truck and trailer registration license fees or taxes collected within the state, other than within the parishes of Orleans, Jefferson, St. Charles, St. John the Baptist, Tangipahoa, and St. Tammany. The pledge also includes fees or taxes levied upon commercial trucks and trailers engaged in interstate commerce that use state roads. The pledge does not include registration license fees or taxes for school and charity buses, motorcycles, commercial passenger vehicles, road tractors, and taxi cabs.
The 'AA-' rating on the bonds reflects the gross pledge of the designated revenue sources prior to excess revenues being made available to the state's bond security and redemption fund (BSRF). Pledged revenues have shown a fair amount of variability over time, with impacts from both economic and catastrophic weather conditions. No additional debt is expected to be issued under this security, remaining below the \$350 million in bonding authorized by the state, as the state has structured the bonds such that historical revenues will provide a margin just in excess of 2x coverage on \$23 million in total MADS.
Debt service is fully funded by first dollars received in the Act 135 Fund. Excess annual revenue after debt service set asides is required to be next deposited to the state's BSRF, which receives all non-dedicated revenues for the benefit of the state's general obligation bondholders. The balance is then transferred to the state highway improvement fund (SHIF) for operating expenses and other capital projects related to the state's system of non-federal-aid-eligible roads.
Pledged revenues are captured in two separate accounts in the Act 135 Fund: an intrastate SHIF account and an interstate SHIF account. Deposits are made on a daily basis to the intrastate SHIF account from the collection of registration taxes and fees on trucks and trailers that operate solely within the state. The interstate SHIF account receives pledged revenue on a monthly basis from trucks and trailers engaged in interstate trucking (operating in multiple states) through a collection agreement with the International Registration Plan that is managed through a well-established process by an independent collection agency.
Historically, significant annual fluctuations in either or both interstate (33% of fiscal 2014 pledged revenues) and intrastate (67%) pledged revenues have resulted from a number of factors. Among them are: the state's recovery from multiple hurricanes; the economic recession; the Horizon oil spill; as well as a rate change in fiscal 2012 for Class I truck registrations that boosted intrastate revenue collections by 66% and total collections by 40%.
The largest year-over-year decrease in total revenues since 2000 was a 14.7% decline in fiscal 2011, when a 34% decline in intrastate revenue was offset by a 46% increase in interstate revenue. A fiscal 2014 decline was expected when the bonding program was initially rated and the actual rate of decline was less than anticipated. Combined pledged revenue in fiscal 2014 of \$50.75 million provided 2.2x coverage of expected, combined MADS, which was approximately in line with Fitch's expectations for coverage under full expected leveraging. A further decline in pledged revenue was expected for fiscal 2015, but based on current fiscal year trends through January 2015 Fitch expects some growth in the pledged revenue stream. However, it will be tempered by potential impacts from the slide in crude oil prices from which the state has seen some economic and financial impacts.
Overall, a five-year average of combined pledged revenues through fiscal 2014 of about \$51.5 million provided 2.24x coverage of combined MADS. The January 2015 state revenue estimating conference (REC) certified a fiscal 2015 revenue estimate for the SHIF, which receives the balance of pledged revenues after first paying debt service on the outstanding bonds, based on collections through December 2014. The REC currently forecasts revenue in the SHIF to improve by 5.3% from fiscal 2014 and increase modestly through fiscal 2019, while the state expects a revenue boost in fiscal 2016 of 5.4% as trucks that registered in fiscal 2012 will be required to renew their registrations under the four-year registration requirement.
For additional information on the state, please see 'Fitch Rates Louisiana's \$228MM GO Bonds 'AA'; Outlook Stable' dated Feb. 11, 2015 and available at 'www.fitchratings.com'.