STABLE OUTLOOK APPLIES TO APPROXIMATELY $218 MILLION OF DEBT OUTSTANDING
Michigan Dept.of Transp.ComprehensiveTran.
NEW YORK, Dec 1, 2010 -- Moody's Investors Service has affirmed the Aa2 rating and stable
outlook assigned to the Michigan Department of Transportation's
Comprehensive Transportation Bonds, which finance non-highway
transportation facilities in the state. Michigan has another transportation
bonding program, the State Trunk Line Fund (STLF), to provide for highways.
Bonds backed by the STLF, of which about $1.5 billion are outstanding, are also
rated Aa2 with a stable outlook.
The rating is based on the first-lien claim on state
Comprehensive Transportation Fund (CTF) revenues, which are derived from
taxes and fees dedicated by the state constitution to transportation
purposes, as well as a statutory limit on parity debt. These credit features are
offset to some extent by the vulnerability of the state's transportation revenue
sources to economic conditions, as well as the government's ability to reduce
-- Constitutional dedication of pledged revenues
-- Additional bonds test requiring two times coverage of maximum annual debt
-- History of strong actual coverage of debt service
-- Ability of government to reduce allocations to CTF
-- Statutory nature of additional bonds test
-- Economic sensitivity of pledged revenues, and adverse economic conditions
TRANSPORTATION REVENUES ARE DEDICATED BY STATE CONSTITUTION
The State of Michigan's Comprehensive Transportation Fund bonds are
limited obligations, payable from tax revenues dedicated by the state
constitution to transportation purposes. Receipts of the CTF are pledged
to bondholders on a first-lien basis. The state's constitution requires that at
least 90% of net revenues from motor vehicle fuel and registration taxes be
spent on road and bridge costs. Remaining revenue from these sources and as much
as a quarter of the state's net automobile-related sales tax collections are
allocated by statute to the CTF for the state's comprehensive transportation
needs, which include public transit, aeronautical facilities and rail
lines. Proceeds of CTF bonds therefore finance projects such as municipal
bus systems and passenger and freight rail facilities.
STATE LAW DETERMINES FLOW OF REVENUES TO BONDHOLDERS
Beyond the relevant constitutional provisions, Michigan state law (Act 51)
determines specifically how the transportation-related taxes (including
registration taxes, the 19 cents-per-gallon gasoline tax, the 15
cents-per-gallon diesel fuel tax, and various fees) are distributed. The bulk of
these resources (consisting of motor fuel taxes) are deposited in a larger
fund (the Michigan Transportation Fund) and then allocated in part to the
CTF. State law also requires that a portion of receipts from the application of
the state's 6% sales tax to various motor vehicle-related transactions that do
not flow through the Transportation Fund (including sales of auto and automotive
parts) is deposited directly to the CTF.
CTF REVENUES HAVE PROVIDED HIGH COVERAGE OF PROGRAM DEBT SERVICE
Historically, these revenues have provided high levels of coverage of projected
debt-service requirements. Actual fiscal 2010 CTF revenue would cover maximum
annual debt service (MADS) by 9.9 times. This high coverage ratio reflects a
reduction in MADS achieved through a 2009 debt restructuring that spread out
principal amortization from the 2009-2011 period. Current MADS coverage, which
compares with about 7.2 times prior to the restructuring, provides an ample
buffer against the economic conditions that could drive revenues lower.
ADDITIONAL DEBT LIMITED BY TERMS OF ACT 51
Under Act 51, new debt may be issued only to the extent that resulting MADS will
be no more than half of CTF receipts in the most recently completed fiscal year.
This test, requiring a minimum of two times debt-service coverage, is based on
statute and is therefore subject to legislative amendment. While any easing of
the test would have implications for the credit standing of these bonds, Moody's
views such an event as unlikely, given the long history of the existing
additional bonds test.
DEDUCTIONS FROM DEDICATED REVENUES MAY REDUCE DEBT-SERVICE COVERAGE
Most CTF revenues (about about two thirds) come in the form of transfers from
the Michigan Transportation Fund. Distributions for various purposes beforehand
can reduce the amount available to the CTF. The first distributions made from
the MTF cover the regular expenses of transportation tax collection, enforcement
and administration, other administrative costs, and 2% of net gasoline tax
receipts are used for state recreational facilities. CTF revenues backing the
bonds are subject to reduction, through legislation or executive action. The
state can affect the amount of dedicated revenues by altering tax rates.
Michigan's current gasoline tax was last changed in 1997, when it was increased
to 19 from 15 cents per gallon. In the case of the motor-vehicle related sales
taxes, the state has previously reduced the portion earmarked for deposit in
the CTF, affecting debt service coverage. This occurred in each of the five
fiscal years ending with 2008, but the impact on coverage was minimal.
MOTOR FUEL AND VEHICLE-RELATED REVENUES VULNERABLE TO ECONOMIC CYCLES
CTF revenues are influenced by state economic conditions affecting
motor-vehicle use and purchases. During fiscal 2010, CTF revenues declined 2.1%,
reflecting the state's long-running economic deterioration.
The outlook for the State of Michigan's Comprehensive Transportation Fund bonds
is stable, based on Moody's expectation that the statutory additional bonds test
will remain in place and on the state's track record of providing high debt
service coverage through allocations of transportation revenue to the CTF.
What could move the rating up:
-- Adoption of stronger limits on program leverage through covenants in bond
-- Adoption of rate covenants to maintain minimum debt-service coverage levels
What could move the rating down:
-- Easing or elimination of statutory additional bonds test
-- Significant diminution in actual coverage provided by CTF revenues because of
economic conditions or legislative or executive actions
The ratings on these current issue were assigned by evaluating factors we
believe are relevant to the credit profiles of the issuer, such as i) the nature
of the dedicated revenue stream pledged to the bonds, ii) the debt service
coverage provided by such revenue stream, iii) the legal structure that
documents the revenue stream and the source of payment, and iv) and the issuer's
management and governance structure related to payment. These attributes were
compared against other issuers both within and outside of the issuers' core peer
group. The issuers' grant anticipation revenue bond ratings are believed to
be comparable to ratings assigned to other issuers of similar credit risk.
The last rating action with respect to the Michigan Department of
Transportation's Comprehensive Transportation bonds was on November 12,
2009, when ratings on the outstanding securities were affirmed at Aa3 on
the municipal scale. The ratings were recalibrated to Aa2 on April 16, 2010.
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.
Public Finance Group
Moody's Investors Service
Marcia Van Wagner
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS Aa2 RATING ASSIGNED TO MICHIGAN DEPARTMENT OF TRANSPORTATION'S COMPREHENSIVE TRANSPORTATION BONDS
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