• On 21 May 2013, Moody’s announced rating actions on MBIA Insurance Corp., National Public Finance Guarantee Corp., MBIA Inc. and other related entities. Because of the large number of credits across several asset classes affected by these rating actions, including Moody's-rated securities that are guaranteed or "wrapped" by these companies, ratings appearing on this website may not yet reflect current information. For current information on affected credits, please visit www.moodys.com/fig.
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Rating Update:

Moody's downgrades 27 GARVEE bond ratings and revises outlooks to negative

Global Credit Research - 14 Nov 2012

Approximately $10 billion in outstanding debt affected; Arizona GARVEEs confirmed at Aa2 with a stable outlook

ALABAMA FEDERAL AID HIGHWAY FINANCE AUTHORITY
State Governments (including Puerto Rico and US Territories)
AL

Opinion

NEW YORK, November 14, 2012 --Moody's Investors Service has downgraded 27 GARVEE bond ratings by one notch and revised their outlooks to negative. The action affects 20 ratings of GARVEEs secured solely by a pledge of federal highway aid and 7 ratings of mass transit GARVEEs. Concurrently, we have also confirmed the Aa2 rating of the Arizona Transportation Board's Grant Anticipation Notes and revised the outlook to stable. For a complete list of the ratings affected by this action, see the end of the report.

SUMMARY RATING RATIONALE

The downgrade of the standalone GARVEE programs reflects increased credit challenges related to two primary factors: (1) the shorter duration of the current highway funding reauthorization and the possibility that more frequent reauthorizations could disrupt or reduce the funds available to pay the bonds; and (2) the structural imbalance of the federal Highway Trust Fund (HTF), which further increases programmatic risks of GARVEEs.

The outlooks on the standalone GARVEE programs are negative, due to the uncertainty around future federal reauthorizations and funding levels.

The confirmation of Arizona's Aa2 GARVEE rating and revision of the outlook to stable reflects our assessment of additional state funds that the state is legally obligated to apply to the payment of debt service if necessary.

STRENGTHS

-- Transportation infrastructure is essential to economic functioning of the U.S. and has defense benefits

-- Long history of uninterrupted flow of federal funds to states and, to a lesser degree, mass transit agencies

-- High leverage constraints and debt service coverage ratios for stand-alone highway GARVEEs; adequate leverage constraints and debt service coverage ratios for mass transit GARVEEs

CHALLENGES

-- Shorter two-year duration of current transportation reauthorization compared to prior ones increases likelihood of future changes that negatively affect funds available for debt service, including funding reductions and program suspensions

-- The federal government is under no obligation to continue the federal aid highway program; nothing prevents the federal government from making programmatic changes detrimental to bondholders

-- Insufficiency of ongoing fuel tax revenues to fund federal transportation needs necessitates general fund support, which has become less likely in light of federal budgetary pressure

DETAILED CREDIT DISCUSSION

SECURITY FOR THE GARVEE PROGRAMS

Standalone highway GARVEE bonds are backed by grants made under the federal aid highway program. Moving Ahead for Progress in the 21st Century (MAP-21) was signed into law July 7, 2012, after a series of ten short-term extensions of the prior authorization, which was originally set to expire on September 30, 2009. MAP-21 authorizes transportation funding through September 30, 2014 and the levy of underlying fuel taxes through September 30, 2016. Authorized spending levels are maintained at current levels with a minor adjustment for inflation. The $105 billion in authorized spending, which includes balances currently in the highway trust fund, is supported by $18.8 billion in general funds.

In the case of mass transit issuers, bonds are secured by a pledge of formula-based transit aid, usually the Section 5307 urbanized area formula program. Some mass transit agencies have issued bonds backed by a pledge of federal capital grants made under what was known as Section 5309, fixed guideway modernization formula, under the previous multi-year authorization and was moved by current reauthorization to Section 5337, state of good repair.

BONDS SUBJECT TO HEIGHTENED REAUTHORIZATION RISK WHILE GENERAL FUNDS REVENUES THAT HELP SUPPORT HIGHWAY SPENDING ALSO AT RISK IN ERA OF FEDERAL DEFICIT REDUCTION

A defining risk of GARVEEs is that the federal government is under no obligation to continue the program or to maintain funding at current levels. This risk has always been a factor in our ratings, but in our view is now heightened.

For at least the past quarter-century federal highway spending has been guided by a series of authorizations that have governed the program for periods of typically 5 to 6 years. Disagreements over the direction of federal policy and funding sources have occasionally affected the reauthorization process and created periods in which temporary extensions bridged the gap between one program and the next. The enactment of MAP-21 was preceded by ten extensions of the previous program, SAFETEA-LU, and resulted in funding for only two and a quarter years. During one of the SAFETEA-LU extension periods, Congress allowed authorization for another transportation program, the Federal Aviation Administration, to lapse as a result of a budget dispute.

The more frequent reauthorizations indicated by the shorter period of MAP-21 raises the risk that funding will be less reliable for the state GARVEE programs, which have maturities generally between 12 and 18 years. Greater reauthorization frequency also increases the risk of a lapse such as that experienced by the FAA. This materially greater risk for all standalone GARVEEs has been reflected in our rating action.

The federal highway trust fund is structurally imbalanced because gas tax revenues have stagnated due to the recession and greater fuel efficiency, and because balances accumulated under previous authorizations have been spent down. To bolster the fund, Congress transferred $34.5 billion from the general fund from fiscal years 2008 to 2010 to support spending levels, in addition to the $18.8 billion authorized in MAP-21. Without supplementary revenues, the Congressional Budget Office estimates that spending would need to decrease by about one-third to match fuel tax revenues.

The need for general fund transfers to support the program during a period of fiscal retrenchment creates a risk that funding for the program may be cut back. We believe that this risk is somewhat mitigated by the high coverage levels that generally characterize the sector. All rated GARVEE programs could withstand a 33% decline in pledged revenues at fiscal 2011 coverage levels. Credit quality is generally supported by very high debt service coverage ratios in the case of highway GARVEEs, where median fiscal 2011 revenues covered maximum annual debt service 11.0 times. Current coverage levels insulate most stand-alone highway GARVEEs from a reduction in federal transportation aid caused by the cessation of general fund transfers to the HTF. Some mass transit GARVEEs, where median debt service coverage is 2.3 times based on fiscal 2011 data and the median ABT is 1.5 times, have a higher exposure to the discontinuation of general fund transfers.

ARIZONA GARVEE RATING CONFIRMED

In the course of this review, the rating on the Arizona Transportation Board's Grant Anticipation notes has been confirmed at Aa2, with the outlook revised to stable. The action reflects our analysis of the additional security established in the note resolution that makes these bonds considered "backstopped" rather than "standalone." In the event that federal aid receipts are not sufficient to meet any scheduled debt service payment, the State Treasurer is required to transfer to the Grant Anticipation Note Fund, 5 days prior to the debt service payment date, moneys from the State Highway Fund and, to the extent note proceeds were used for eligible projects, from the Regional Area Road Fund. Both of these funds are subject to competing demands including the prior lien of bonds secured by the revenues of these funds. Nevertheless, available balances in these funds are quite strong. The average balance in the State Highway Fund 15 days prior to the last four debt service payment dates on the notes was $219 million or 3.4 times the maximum scheduled annual debt service payment on the notes. The average balance in the State Highway Fund and the Regional Area Road Fund combined was $588 million or 9.1 times.

AFFECTED ISSUERS

TO Aa2 FROM Aa1:

Ohio Department of Transportation (Major New State Infrastructure Project Revenue Bonds)

TO Aa3 FROM Aa2:

Alabama Federal Aid Highway Finance Authority (Federal Highway Grant Anticipation Refunding Bonds)

California Department of Transportation (Federal Highway Grant Anticipation Bonds)

Delaware Transportation Authority (Grant Anticipation Bonds)

District of Columbia (Federal Highway Grant Anticipation Revenue Bonds)

Georgia State Road and Tollway Authority (Federal Highway Grant Anticipation Revenue Bonds)

Idaho Housing and Finance Association (Grant and Revenue Anticipation Bonds Federal Highway Trust Fund)

Kentucky Asset/Liability Commission (Project Notes, Federal Highway Trust Fund)

Maine Municipal Bond Bank (Grant Anticipation Bonds )

Michigan (Grant Anticipation Bonds - 2009 series)

Montana Department of Transportation (Grant Anticipation Notes )

New Hampshire (Federal Highway Grant Anticipation Bonds)

North Carolina (Grant Anticipation Revenue Vehicle Bonds)

Oklahoma Department of Transportation (Grant Anticipation Notes)

Rhode Island Economic Development Corporation (Grant Anticipation Bonds)

Washington (Grant Anticipation Revenue Bonds)

West Virginia Commissioner of Highways (Surface Transportation Improvements Special Obligation Notes)

TO A1 FROM Aa3

Michigan (Grant Anticipation Bonds - 2007 series)

New Jersey Transportation Trust Fund Authority (Grant Anticipation Bonds)

New Jersey Transit Corporation (Senior Master Lease Certificates of Participation)

TO A2 FROM A1

Chicago Transit Authority (Capital Grant Receipts Revenue Bonds - Section 5309 bonds)

Chicago Transit Authority (Capital Grant Receipts Revenue Bonds - Section 5307 bonds)

New Jersey Transit Corporation (Subordinate Master Lease Certificates of Participation)

Puerto Rico Highway and Transportation Authority (Grant Anticipation Revenue Bonds)

Southeastern Pennsylvania Transportation Authority (Capital Grants Receipts Bonds)

Tri-County Metropolitan Transportation District, OR (Capital Grant Receipt Revenue Bonds)

TO A3 FROM A2

Alaska Railroad Corporation (Capital Grant Receipts Bonds)

OUTLOOK

The negative outlook on the standalone GARVEE bond ratings reflects continuing uncertainty surrounding federal transportation funding. The US sovereign rating is Aaa with a negative outlook stemming from risks related to high federal government debt ratios. De-prioritization of transportation funding relative to deficit reduction would be a credit negative.

WHAT COULD MAKE THE RATINGS GO UP

-- Significant and sustained increase in Highway Trust Fund revenues outside of general fund support combined with longer reauthorization periods and reinstatement of guaranteed funding protections

WHAT COULD MAKE THE RATINGS GO DOWN

-- Discontinuation or reduction in federal transportation grant program

-- Lapse in reauthorization of transportation spending

-- Sharp decline in underlying HTF revenues caused by economic stress, tax inefficiency or redirection of fuel taxes to general fund

--Individual GARVEE ratings could go down if further leveraging materially reduces coverage of maximum annual debt service

The principal methodology used in these ratings was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Marcia Van Wagner
Lead Analyst
Public Finance Group
Moody's Investors Service

Julius Vizner
Backup Analyst
Public Finance Group
Moody's Investors Service

Nicholas Samuels
Additional Contact
Public Finance Group
Moody's Investors Service

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Moody's downgrades 27 GARVEE bond ratings and revises outlooks to negative
No Related Data.

 

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