OREANDA-NEWS. Fitch Ratings has affirmed the following state of Oregon lottery revenue bond ratings:

--\\$3.18 million series 2006A at 'AA-';
--\\$14.21 million series 2007A (taxable) at 'A+'.

The rating on the 2006A bonds is enhanced by the state's moral obligation (MO) pledge to seek an appropriation to replenish debt service reserve accounts following any draws necessary to cover debt service payments.

The Rating Outlook is Stable.

SECURITY
Oregon's lottery revenue bonds are special obligations of the state payable solely from net lottery proceeds and investment earnings.

KEY RATING DRIVERS

SOLID DEBT SERVICE COVERAGE: Net lottery revenues have provided solid debt service coverage levels of at least 4x annual debt service expense. While coverage levels have declined over time, the issuance of additional bonds requires 4x coverage of prospective maximum annual debt service (MADS).

DISCRETIONARY PLEDGED REVENUES: Lottery spending is discretionary and sensitive to changes in personal income, employment levels, and population growth. Further, lottery participation is sensitive to competition from other forms of gaming as well as changing public tastes.

ENHANCEMENT BY STATE MORAL OBLIGATION: The rating on the series 2006A bonds is enhanced by the state of Oregon's (general obligation [GO] bonds rated 'AA+' by Fitch) pledge to seek an appropriation to replenish any deficiencies in debt service reserve accounts following draws necessary to cover debt service payments. Though both the series 2006A and 2007A bonds carry this MO pledge, only the series 2006A bonds are affected, raising the rating above what would be supported by the revenue stream and structure of the bonds on a stand-alone basis.

MO ENHANCEMENT REQUIRES CASH RESERVE FUNDING: The series 2007A bonds, while carrying the same underlying and MO pledge, are not assigned the enhanced rating. To be given credit for the MO enhancement under Fitch's criteria, debt service reserve funds must be cash-funded rather than through a surety policy, as is the case for the 2007A bonds.

STATE OVERSIGHT: The state department of administrative services has oversight over all issuance of lottery revenue bonds.

RATING SENSITIVITIES
The ratings are sensitive to steep declines in pledged revenues that significantly reduce coverage. The rating on the series 2006A bonds is also sensitive to changes in the state of Oregon's GO bond rating to which it is linked.

CREDIT PROFILE
The ratings on Oregon's lottery revenue bonds are based on a constitutional pledge of unobligated net lottery proceeds and certain investment earnings for bond repayment. Key credit factors include the substantial revenues available from the lottery, broad debt service coverage, and restrictive 4x additional bonds test (ABT), as well as the state's involvement and oversight. All of these serve to offset the discretionary nature of lottery purchases, the heavy dependence on video lottery, and potential competition for gambling dollars.

The state has also pledged to seek an appropriation to replenish any deficiencies in debt service reserve accounts following draws necessary to cover debt service payments. The higher 'AA-' rating on the 2006A bonds incorporates debt service reserve accounts that have been fully funded at MADS by cash and guaranteed investment contracts (GICs) governed by the state's conservative investment policies.

The lower 'A+' rating on the series 2007A bonds incorporates Fitch's criteria for ratings linked to an MO pledge (dated April 18, 2013) which requires debt service reserve funds to be either fully funded with cash, or if secured by a surety policy, with credit given according to Fitch's criteria for enhancement providers (both available at www.fitchratings.com). The surety policy covering the reserve for the 2007A bonds, which is provided by Assured Guaranty, does not allow for MO rating enhancement.

LOTTERY REVENUES HAVE FLUCTUATED OVER TIME
Lottery revenues remain below their pre-recession peak despite modest growth in video lottery income, which accounted for about 89% of fiscal 2014 lottery income. Between regulatory and recessionary effects, total 2014 lottery income of \\$635.4 million remains 16.5% below its fiscal 2008 peak of \\$759.7 million.

Preliminary estimates for fiscal 2015 indicate an estimated 2% growth in gross traditional game revenues and an estimated 7.4% growth in gross video lottery revenues. The state's lottery revenue forecast for the current biennium incorporates completion of the lottery's five-year, \\$215 million project to replace 12,000 VLTs and its central video gaming network by 2017 in order to remain competitive with other products in the gaming market.

The state projects income from traditional lottery games to remain fairly stable at around \\$60 million per fiscal year through 2021, while significant growth in income from the video lottery is projected following the conclusion of the replacement project. As the lottery is subject to competition from other gaming venues and enterprises, Fitch believes there is some risk to this forecast.

SOLID DEBT SERVICE COVERAGE
The pledged net lottery proceeds exclude lottery prizes and expenses. Net lottery revenue for fiscal 2015, inclusive of interest revenue, is estimated at \\$573.9 million, 2.8% above fiscal 2014. The allocation to the state's Economic Development Fund, from which lottery debt service is paid, is estimated to have been \\$538.3 million, providing 4.35x coverage of fiscal 2015 debt service. Annual debt service declines over time so that MADS coverage in fiscal 2015 is also estimated to have been 4.35x. The issuance of additional bonds requires meeting 4x coverage of projected MADS. The state has authorized \\$157.6 million in lottery bonds for the current biennial period.

ANALYTICAL FOCUS
Although most states operate lotteries within their borders, relatively few issue debt against the lottery-generated revenue stream. In its analysis of state lottery-backed revenue obligations, Fitch focuses on: the nature of the legal pledge and covenants, including the ABT; the history of the revenue stream; historical and projected debt service coverage levels and amortization; and operating characteristics, including the nature of the games offered and the competitive environment for discretionary gaming spending. For an 'A+' rating, Fitch expects a clear and strong legal pledge and covenants, an ABT of at least 3x MADS to offset the discretionary nature of the revenue stream, amortization within 20 years, and historically sustained, solid lottery revenues.