STABLE OUTLOOK APPLIES TO $482 MILLION OF OUTSTANDING DEBT
Michigan State Department of Transportation
NEW YORK, Nov 1, 2010 -- Moody's Investors Service has affirmed ratings assigned to the State
of Michigan's $482 million of Grant Anticipation Bonds, at Aa2 for Series 2009
and Aa3 for Series 2007. The outlook for both issues is stable.
The ratings are based on a sole pledge of the Michigan Department of
Transportation's federal highway aid receipts. The bonds are secured on an
indirect basis -- by Federal Highway Administration (FHWA) reimbursements for
project work, rather than by reimbursements directly for debt service as in many
comparable programs. The pledged revenues provide ample coverage of debt
service, and leverage of the pledged revenues is limited by a strong additional
bonds test, requiring three times coverage of debt service. Series 2009 bonds
are rated higher because of an accelerated redemption feature in the event of
delayed or insufficient federal aid reauthorization.
-- Limit on future program leverage requiring three times coverage of maximum
annual debt service (MADS)
-- Strong current coverage of debt service
-- Accelerated redemption feature covering 2009 bonds
-- Michigan's ``donor'' status in federal highway program
--Extended exposure to federal aid program re-authorization risk
--Requirement for annual legislative appropriation of pledged funds
--Economic weakness of state
FEDERAL REIMBURSEMENTS ARE SINGLE PLEDGED RESOURCE
Federal Aid Highway Program (FAHP) reimbursements are the single source of
revenue pledged to the bonds. Revenues are derived from a federal excise tax on
motor fuels, primarily a tax of 18.4 cents a gallon for gasoline, which are
collected by the Federal Highway Trust Fund (HTF). Pledged funds are paid from
the HTF's Highway Account, which receives 85% of federal gasoline tax
revenues; the remainder flows to the Mass Transit Account. Unlike highway bond
programs in many other states, Michigan's program pledges no secondary source of
revenue to repay the bonds. If federal funds fall short or are delayed, the
state legislature may appropriate other transportation revenues from the
Michigan Department of Transportation, if available, to repay the bonds.
However, the legislature is not obligated to do so. An additional weakness is
that the payment of FAHP funds for debt service on the bonds is subject to
annual legislative appropriation.
REAUTHORIZATION RISK EXACERBATED BY LONG MATURITY
Although the FAHP has a long history, portions of it are subject to periodic
Congressional reauthorization. From September 2003 through August 2005 and from
September 2009 to present, Congress failed to enact a timely, comprehensive
reauthorizing law. The federal government instead relied on temporary extensions
of existing law to maintain the flow of funds. Delayed reauthorization so
far has not disrupted payments to holders of FHWA grant-backed bonds, often
referred to as Grant Anticipation Revenue Vehicles, or Garvees. Reauthorization
risk, a common feature of Garvee bonds, is of heightened concern for Michigan,
given the lack of state back-up pledge and long maturities of the Michigan debt.
The outstanding bonds' final maturity (for both series) falls in 2027.
ACCELERATION PROVISION MITIGATES REAUTHORIZATION RISK FOR 2009 BONDS
The bonds are likely to face three reauthorizations, given the practice of
six-year federal reauthorizations. In order to mitigate this risk, the state
implemented a provision that requires accelerated redemption of the 2009 bonds
during the 2018- through-2021 period, in the event Congress fails to enact
multi-year reauthorization with funding sufficient to provide three times
debt-service coverage. Removal of this provision is subject to rating agency
review. The provision will be triggered unless the Department of Transportation
can show reauthorization has been approved by August of 2018 for a
multi-year period ending no earlier than September 30, 2015. In the event this
mechanism is triggered, the 2009 bonds will be redeemed in equal parts in the
four years ending with 2021.
MOTOR FUEL TAX REVENUE SHORTFALLS OFFSET BY GENERAL FUND TRANSFERS
Declining motor fuel consumption nationwide -- caused by high gasoline prices,
economic conditions or shifts to more fuel-efficient vehicles -- can cause
available Title 23 funds to fall short of expected levels. To ensure sufficiency
of HTF balances, the federal government has provided short-term support for
the fund, including an $8 billion transfer from the federal general fund at the
end of federal fiscal year 2008 and an additional $7 billion transfer 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.
COVERAGE REMAINS STRONG
Coverage of maximum annual debt service (MADS) by federal revenues
remains strong, at about five times based on the state's 2010
obligation authority of $764 million. Obligation authority is the amount of
federal funding a state may commit to spend in a given year. Moody's analysis of
Garvees puts greater weight on contractual leverage constraints than current
coverage, however. The state in 2009 tightened its limit on additional parity
debt issuance, raising required MADS coverage by prior-year federal
reimbursements to three times from 1.5 times.
`DONOR' STATUS A STRENGTH, BUT ECONOMY MAY POSE CHALLENGE
Michigan is a donor state, meaning it has historically received less in
reimbursements each year than it collected in federal transportation taxes.
Under SAFETEA-LU, the most recent multi-year reauthorizing law, donor states
benefited from a rising minimum return on taxes they contribute to the program.
The guaranteed minimum percentage for donor states rose to 92% in 2008, from
minimum levels of 91.5% in 2007 and 90.5% previously. At the same time,
Michigan's adverse economic conditions may present a challenge in coming years.
Garvees are subject to the risk that issuer-specific factors (such as a
relative slowdown in a state's transportation activity) will erode federal
highway aid payments, given that federal aid reflects federal gasoline
taxes collected in a given state.
The rating outlook for Michigan's Grant Anticipation Revenue Bond program is
stable. The outlook is based on expectations the federal highway program will
remain a high national priority, keeping an ample amount of federal aid
available under future federal reauthorizing legislation. We expect Michigan to
continue to have access to the available federal funding and provide state
matching funds where necessary, given the scope and priority of its
transportation capital program.
What could change the rating -- UP:
--Amendment of bond documents to include stricter leverage constraints or limit
on program maximum maturity
-- Structural provisions to provide for set-asides of federal aid payments in
advance of debt service dates
What could change the rating -- DOWN:
-- Significant increase in leverage, leading to debt-service coverage below
-- Disruptions in project completion that impede flow of federal grant funds
-- Significant negative impact on the state's federal revenue expectations as a
result of federal reauthorization or other changes in the federal highway aid
METHODOLOGY AND LAST RATING ACTION
The principal methodology used in rating the State of Michigan's
Grant Anticipation Bonds was Moody's Federal Highway Aid Grant
Anticipation Financing, 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.
The last rating action with respect to the State of Michigan's Grant
Anticipation Bonds was on June 16, 2009, when the 2007 bonds' rating
was upgraded to a municipal scale rating of A1, and a municipal scale rating of
Aa3 was assigned to the 2009 bonds. Both ratings were subsequently recalibrated
to the global scale, 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 RATINGS ASSIGNED TO STATE OF MICHIGAN'S GRANT ANTICIPATION BONDS
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