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Rating Update:

MOODY'S AFFIRMS A1 RATING ON THE PENINSULA CORRIDOR JOINT POWER BOARD'S FAREBOX REVENUE BONDS, 2007 SERIES A

26 Oct 2010

$23.1 million of debt affected

Transportation
CA

Opinion

NEW YORK, Oct 26, 2010 -- Moody's Investors Service has affirmed the A1 rating and stable outlook on Peninsula Corridor Joint Power Board's (JPB or the Board) Farebox Revenue Bonds, 2007 Series A. The A1 rating reflects ample debt service coverage and the fact that the JPB offers a popular service in an affluent service area, tempered by an organizational structure that allows one or more members to withdraw from the JPB or reduce monetary support, which is offset by a leverage constraint of 2.0x and required monthly deposits of revenue. The rating also reflects exposure to the risk of termination of several leveraged lease transactions.

LEGAL SECURITY: The bonds are limited obligations of the JPB and are secured by a first lien on passenger fares and all operating revenues. Pledged revenues are required to be deposited monthly with the trustee on a 1/6th and 1/12th basis. The additional bonds test is equal to 2.0x the lesser of (i) operating revenues in 12 out of the preceding 18 months, or (ii) estimated future fiscal year operating revenues.

INTEREST RATE DERIVATIVES: None

CREDIT STRENGTHS

* Ample 23.7x debt service coverage of maximum annual debt service

* Track record of raising fares and ridership growth

* Minimal fixed costs as Amtrak is paid to operate the system based on service

CREDIT CHALLENGES

* Proposed decrease in member contributions would negatively affect coverage

* Decreased liquidity would not be sufficient to make the maximum leveraged lease termination payment

* Any member of the joint powers board may withdraw given one year's notice

* Reduced service could negatively impact revenues

* Non-performance risk in operating contract with Amtrak

MARKET POSITION: EXPRESS SERVICE PROVIDES ALTERNATIVE TO CAR COMMUTE

Passenger rail service between San Francisco and San Jose has been in existence in one form or another since the Civil War. Southern Pacific operated the railway for over a century before declining ridership and increased costs led it to transfer responsibility to the state in 1980. In 1992, the service was transferred to the JPB, the product of a joint powers agreement (JPA) entered into by the City and County of San Francisco (Aa1), the San Mateo Transit District ("SamTrans") (Aa2) and the Santa Clara Valley Transportation Authority ("SCVTA"). The JPB operates Caltrain, as the service is known, which runs the 77 miles between San Francisco and Gilroy, 30 miles south of San Jose. SamTrans provides administration while operations are contracted out to Amtrak (A1 issuer rating). The contract with Amtrak has been extended through the end of fiscal year 2011, according to management. While the possibility of labor action by Amtrak's unions has threatened a disruption of service in the past, no strike has disrupted service while the JPB has operated Caltrain. Nevertheless, the possibility of a labor action involving the service provider is an operational risk that the JPB cannot control. Such an action would have a direct negative effect on revenues.

After declining 33% between 2001 and 2004 following the bursting of the dot-com bubble, ridership grew an average of 5.5% between 2005 and 2010. Management attributed the increase to the 2004 introduction of the "Baby Bullet" express service between San Jose and San Francisco, which cut down travel time from one and one-half hours to just under an hour. Although annual ridership declined 6.6% in fiscal year 2010, the results of an annual passenger survey showed that Baby Bullet express service ridership decreased by only 2.8% during peak hours between February 2009 and February 2010 while local service ridership declined 15.6%. This highlights management's ability to create and implement a service resilient enough to withstand a negative economic environment.

A DECREASE IN MEMBER CONTRIBUTIONS WOULD DIMINISH COVERAGE IF SERVICE REDUCTIONS ARE REQUIRED TO BALANCE BUDGET

The JPA, most recently extended in 1996 for ten years, continues in full force and effect on a year-to-year basis until such time as two or more parties withdraw from the agreement. The agreement stipulates that any member may withdraw with one year's notice. Upon withdrawal, the Metropolitan Transportation Commission, the regional planning agency for the San Francisco Bay Area, would mediate outstanding issues between the parties. If two members were to withdraw, the agreement would expire and all property would be allocated to the constituent members following discharge of all JPB obligations. In the trust agreement between the JPB and the trustee relating to the farebox revenue bonds, the JPB covenants to use its best efforts to maintain its existence as a joint powers agency and agrees to transfer to the trustee amounts necessary to discharge all obligations of the issuer under the trust agreement if two or more member agencies withdraw. The failure to observe this covenant is defined as a default and would obligate the JPB to transfer to the trustee all farebox revenues held in order to pay all principal and interest then due. The Board itself consists of nine members, made up of three representatives of each county. Operational expenses are shared according to the number of morning passenger boardings in each county with the SCVTA being solely responsible for the cost of operating the San Jose to Gilroy segment. Capital project costs are shared equally.

SamTrans has proposed reducing its fiscal year 2012 operating contribution to $5 million from $15 million in fiscal year 2011. Should the other two members follow suit, the JPB would have to reduce service if no other external funds were forthcoming. One contingency plan would be to run a commuter-only service just in the morning and evening with 48 trains, which would reduce fare revenue and debt service coverage. Member contributions account for 35% of the fiscal year 2011 operating budget. Caltrain, as is the case with most mass transit providers, relies on external subsidies in order to operate.

STRONG COVERAGE AND SET-ASIDES COUNTERACT WEAK DEBT SERVICE RESERVE SURETY

Nevertheless, debt service coverage is quite strong at 23.7x maximum annual debt service (MADS) based on fiscal year 2009 revenues. On an annual basis, using fiscal year 2009 revenues, debt service coverage starts at 42x in fiscal year 2010 and declines to 23.7x by the bond's maturity in 2038. Moody's further stressed pledged revenues and assumed that, due to a decline in member contributions in fiscal year 2012, pledged revenues were to fall by half and remained at reduced level for the life of the bonds. Even in this scenario, MADS coverage would be 12x. No further debt issuance is contemplated in the near-term although this may change given the uncertainty of funding sources for large-scale capital projects.

The additional bonds test requires certification that the lesser of (i) operating revenues collected in any 12 of 18 months, or (ii) estimated annual operating revenues, are at least 2.0x MADS. On a monthly basis, the trustee is required to set aside 1/6th of the semi-annual interest coming due and 1/12th of the annual principal due. In lieu of funding the debt service reserve fund, required to be equal to the lesser of (i) MADS, (ii) 125% of average annual debt service, and (iii) 10% of par, the Board purchased a surety bond issued by Ambac (Caa2 insurer financial strength rating, possible upgrade). The significance of the lack of a cash-funded debt service reserve fund would increase if coverage were to decline to a level closer to the ABT.

The Board covenants to use its best efforts to maintain its existence as a public entity, to pay principal and interest as it comes due punctually, to transmit farebox revenues to the trustee on a monthly basis as needed, to not create a lien having priority with the Farebox Revenue Bonds, not to extend the maturity of the bonds, and to maintain and preserve Caltrain operations in good repair and working order at all times.

RISK OF SLOWING RECOVERY TO FAREBOX COLLECTIONS MITIGATED BY HISTORY OF FARE INCREASES

According to Moody's Economy.com, the Bay Area's economic recovery is slowing down, which could pressure fare revenue. The San Jose labor market is expected to continue to exhibit weakness in the short term, potentially reducing demand for Caltrain service, although San Francisco should benefit from increased infrastructure spending and the success of internet start-ups headquartered there. Caltrain does report a 5.5% increase in fare revenues in the first quarter of fiscal year 2011.

The Board has implemented fare hikes regularly with the last one occurring January 1, 2009 and the next scheduled for January 1, 2011, which will be a 25-cent per zone increase (amounting to a 75-cent increase in the base San Francisco to San Jose fare). Should member contributions decline, the Board currently intends to move up the next scheduled fare increase in 2013 to an earlier date. In August 2009, Caltrain reduced service from 98 weekday trains to 90. Starting January 2011, it will cut a further 4 mid-day trains from its schedule. The combination of fare-raising ability and ability to reduce expenses has demonstrated the Board's financial flexibility to cope with a difficult economic environment. The fiscal year 2009 farebox recovery ratio of 47.9% is relatively high and is indicative of operating efficiency and customer willingness to pay for service.

LEASE TERMINATION RISK EXPOSES JPB TO CALLS ON DECREASED LIQUIDITY

JPB entered into several lease transactions that provided it with over $13 million in net proceeds but then fell out of compliance when guarantors AIG (A3 / Negative), FSA (A3 / Negative) and Swiss Re (A1) were downgraded. According to management, one equity investor, Bank of America Leasing and Capital, has granted it extensions through November 30, 2010 whereby it does not have to replace the guarantor, while the other equity investor, Wells Fargo Bank, has not responded to requests sent quarterly, which the Board interprets as tacit approval of an extension. As of June 30, 2008, the latest date for which information is available, total net termination risk amounts to $55.0 million. As of June 30, 2009, the Board had $21.0 million in cash and short-term investments. If all leases were terminated, the JPB would not have enough cash on hand to cover the required payments. Liquidity has decreased in recent years; Moody's calculates that in fiscal year 2006 net working capital as a percent of O&M expenses was 51.1%, by fiscal year 2009 that ratio declined to 28.9%.

The JPB maintains liability self-insurance up to $2 million and excess liability insurance up to $200 million through a number of carriers, which provides protection against possible claims, though insurance proceeds are not pledged as collateral.

The principal methodology used in rating Peninsula Corridor Joint Power Board was Mass Transit rating methodology published in June 2000. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Outlook

KEY STATISTICS

Service Area Population, 2009: 3.3 million

Type of system: Commuter train service

Annual ridership, FY2009: 11.4 million

Annual ridership growth, 2009-2010: -6.6%

Average weekday ridership, February 2010: 36,778

Average weekday ridership growth, February 2009 - February 2010: -6.0%

Compound annual growth rate in average weekday ridership, 2005-2010: 5.3%

Compound annual growth rate in average weekday ridership, 1995-2010: 3.9%

Compound annual growth rate in pledged revenues, 2005-2010: 12.3%

MADS coverage by pledged revenues, FY2009: 23.7x

Utilization, 2010: 3.2x

Farebox recovery ratio (FY2009): 47.9%

OUTLOOK

The stable outlook is based upon the expectation that operating revenues will provide sufficient debt service coverage. Potential service cuts would likely be accompanied by an increase in fares that will partially offset declines in fare revenues. Should significant service cuts take place, coverage should still be sufficient given the limited amount of debt outstanding.

WHAT COULD CHANGE THE RATING - UP

Significant sustained growth in coverage

Increased liquidity coupled with resolution of risks related to leveraged lease transactions

WHAT COULD CHANGE THE RATING - DOWN

Decrease in member contributions leads to service reduction and decline in debt service coverage by pledged revenues

Termination of JPB's leveraged leases

Significant ongoing disruption in service and fare collection

KEY STATISTICS

Service Area Population, 2009: 3.3 million

Type of system: Commuter train service

Annual ridership, FY2009: 11.4 million

Annual ridership growth, 2009-2010: -6.6%

Average weekday ridership, February 2010: 36,778

Average weekday ridership growth, February 2009 - February 2010: -6.0%

Compound annual growth rate in average weekday ridership, 2005-2010: 5.3%

Compound annual growth rate in average weekday ridership, 1995-2010: 3.9%

Compound annual growth rate in pledged revenues, 2005-2010: 12.3%

MADS coverage by pledged revenues, FY2009: 23.7x

Utilization, 2010: 3.2x

Farebox recovery ratio (FY2009): 47.9%

Contact

Patricia Reavey, Director of Finance

650-508-6434

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Julius Vizner
Analyst
Public Finance Group
Moody's Investors Service

Kevork Khrimian
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S AFFIRMS A1 RATING ON THE PENINSULA CORRIDOR JOINT POWER BOARD'S FAREBOX REVENUE BONDS, 2007 SERIES A
No Related Data.
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