RATING AND STABLE OUTLOOK APPLY TO $100.1 MILLION OUTSTANDING BONDS
NEW YORK, Dec 17, 2010 -- Moody's Investors Service has affirmed its A1 rating on the Puerto Rico Highways
and Transportation Authority (PRHTA) Grant Anticipation Revenue Bonds, Series
2008. The bonds were issued to finance the construction of certain qualifying
highway transportation projects throughout the Commonwealth of Puerto Rico.
Progress on some of these projects has been slowed by a contractor default, and
PRHTA is seeking to rebid the affected contracts. The outlook is stable.
The rating reflects the first lien on the commonwealth's federal highway aid
reimbursements and a sound legal structure that includes the PRHTA's covenant to
obligate federal highway aid funds for debt service before any other purpose, an
additional bonds test that constrains leveraging of federal revenues by limiting
debt service to no more than one-quarter of transportation funds received, and a
debt service reserve fund equal to maximum annual debt service (MADS). These
strengths are partly offset by the funding implications of Puerto Rico's status
as a territory of the United States, the risk of potential funding
reductions upon future reauthorization of the federal highway aid program that
could have a negative impact on projected pledged revenues, and
program mechanics that lack stringency.
-First lien on federal highway transportation funds
-Agreement with Federal Highway Administration (FHWA) to fund debt service costs
ensures fund availability, subject to the Commonwealth's funding allocation
-Conservative additional bonds test limits leverage
-The Commonwealth of Puerto Rico receives federal highway aid based on a more
discretionary process than the formula-driven apportionments of the 50 states
-Like all highway financing programs reliant on (FHWA) funding, there is a risk
that Congress will not reauthorize funding, that even if authorized, dedicated
revenues could fall short of funding commitments, or that the federal program
will be reauthorized with significant changes.
-Mechanics of the program create risks to bondholders
BONDS SECURED BY PLEDGE OF FEDERAL HIGHWAY AID; STRONG BONDHOLDER LEGAL
The bonds, considered grant anticipation revenue vehicles (GARVEEs), are secured
by a first lien pledge of the Commonwealth of Puerto Rico's Title 23 federal
highway aid revenues. Pursuant to the indenture and the Memorandum of Agreement
(MOA) with the FHWA, each year the Puerto Rico Highways and Transportation
Authority (PRHTA), on behalf of the commonwealth, is required to obligate an
amount of its federal highway aid equal to debt service due in that year on its
outstanding GARVEEs. Obligating funds for debt service is required before
highway aid can be obligated for any other purpose.
Pursuant to the grant anticipation resolution, PRTHA requisitions funds from
FHWA to be deposited with the Trustee no later than three days prior to any debt
service payment date. The Official Statement for the 2004 issuance states that
the FHWA agreed to make payments directly to the Trustee pursuant to a
memorandum of understanding between the Authority and the FHWA. Discussions with
PRHTA, however, indicate that FHWA funds are being sent to PRHTA, and PRHTA is
then sending them to the trustee. A copy of the memorandum of understanding has
not been made available to Moody's. In our view, the indirect payment to the
Trustee, which relies on the Authority to serve as intermediary managing the
timing of payments, is a mechanical weakness.
ADDITIONAL BONDS TEST LIMITS LEVERAGE
The bond resolution limits additional leverage of the pledged revenues to four
times maximum annual debt service. The PRHTA has no current plans to issue
additional debt under this resolution.
The most recent Authority audit showed Federal capital grants for
transportation of $176 million, of which $128.7 million were used to fund
capital assets. This grant level provided 10.5 times coverage of maximum annual
debt service (MADS) of $12 million. The Authority states that is grant
allocation for 2010 was $117 million, providing 9.8 times MADS coverage.
WEAKER PROTECTIONS FOR FUNDING THAN STATES
Unlike states, the Commonwealth does not receive a formula-based apportionment
of Title 23 funds. Apportionment of federal highway aid to states has included a
floor guaranteeing each state 90.5% of its proportional share of apportioned
programs. Puerto Rico receives an "allocation" which is not
formula-driven and does not guarantee a minimum funding level.
FEDERAL REAUTHORIZATION RISK INHERENT IN GARVEE PROGRAMS
The most recent federal highway aid program expired in September 2009, and
funding has been provided through a series of continuing resolutions since then
as it did when previous authorizations expired. The Highway Trust Fund, (HTF)
which is funded primarily by gas taxes, has experienced shortfalls more
recently, reflecting a weaker economy, higher fuel prices, and fewer vehicle
miles traveled. The federal government took extraordinary action to bolster the
HTF in the near term ($8 billion was transferred into it at the end of
federal fiscal year 2008 and a $7 billion transfer was made in August
2009). Legislation enacted earlier this year provided for general fund
support of the HTF totaling about $19.5 billion, with $14.7 billion directed to
the HTF highway account and the remainder slated for the mass transit account.
Going forward, the federal government could change the funding and process for
allocating highway aid.
What could change the rating UP
-Change in the treatment of Puerto Rico in federal funding formulas to create
more funding certainty
-Direct payment of debt service to the Trustee by the FHWA
What could change the rating DOWN
-Reauthorization of federal highway aid program at levels insufficient to
support debt service
The principal methodology used in this rating was Federal Highway Aid Grant
Anticipation Funding published in December 2008. Other methodologies and factors
that may have been considered in the process of rating this issuer can also be
found on Moody's website.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information and confidential and proprietary
Moody's Investors Service information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of maintaining a credit rating.
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Marcia Van Wagner
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
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MOODY'S AFFIRMS A1 RATING ON THE PUERTO RICO HIGHWAYS AND TRANSPORTATION AUTHORITY (PRHTA) GRANT ANTICIPATION REVENUE BONDS, SERIES 2008
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