OUTLOOK IS STABLE
Capital Grants Receipt Bonds, Series 2011 (Federal Transit Administration Section 5309 Fixed Guideway Modernization Formula Funds)
Expected Sale Date
Capital Grants Receipts Bonds
NEW YORK, Jul 21, 2011 -- Moody's Investors Service has assigned an initial A1 rating to the
Southeastern Pennsylvania Transportation Authority's (SEPTA) $215 million
Capital Grants Receipt Bonds, Series 2011 (Federal Transit
Administration Section 5309 Fixed Guideway Modernization Formula Funds). The
bonds are secured solely by a pledge of anticipated federal transit aid
formula grants, and other funds established under the indenture. Proceeds of the
bonds, scheduled to price the week of July 25, will be used to finance
acquisition of new commuter rail cars, rehabilitation of a multimodal transit
hub, and fund a deposit into the debt service reserve fund.
SUMMARY RATING RATIONALE
The rating reflects SEPTA's role as the core transit provider to the
Philadelphia region's population of 3.3 million; a history of SEPTA's receipt of
a stable share of the region's federal transit funds, and a stable history of
federal support for transit programs; a satisfactory legal structure that
includes a 1.5 times additional bonds test and debt service reserve equal to 50%
of maximum annual debt service; and a relatively long 18-year final maturity
compared to some other similarly secured bonds.
-- Historic stability of the federal government's support of capital financing
for mass transit, despite the current lack of a long-term reauthorization bill
-- Strategic importance of SEPTA as the major transit provider in the
-- A legal structure that includes satisfactory bondholder protections including
a 1.5 times additional bonds test and a debt service reserve equal to 50% of
maximum annual debt service
-- Lack of a current long-term federal transportation finance reauthorization,
and uncertainty about future federal budget reductions
-- Relatively long maturity compared to some similarly-secured credits
DETAILED CREDIT DISCUSSION
BONDS SECURED SOLELY BY FEDERAL TRANSIT AID FORMULA GRANTS;
SATISFACTORY BONDHOLDER PROTECTIONS
The bonds are secured solely by a pledge of SEPTA's share of formula
grants through the Federal Transit Administration (FTA) of Section 5309
funds, used to provide capital assistance for rail system
modernization. Pursuant to the indenture, in each federal fiscal year (which
starts October 1), SEPTA covenants to apply to FTA for appropriation of Section
5309 funds on a priority basis in an amount sufficient to fund debt service and
any other indenture-required amounts for the next bond year (October 2 through
October 1) and to have the funds obligated as early as possible in the federal
fiscal year. Within 10 days that any Section 5309 funds in any federal fiscal
year become available to disburse to SEPTA, it will take all necessary actions
to facilitate their prompt payment. Through a letter of no prejudice, FTA has
agreed to the amount of SEPTA's current borrowing, to the use of bond proceeds
and to the term of the bonds; FTA's agreement is valid through the final bond
maturity. All Section 5309 grant receipts received by SEPTA are deposited
immediately into the Grant Receipts Deposit Fund held by SEPTA; within one
business day, those funds are required to be transferred to the trustee. On the
first business day of each bond year, the trustee is required to transfer
into the Debt Service Fund an amount sufficient to pay principal and
interest coming due during that bond year. Following those transfers, any
remaining Section 5309 fund may be released to SEPTA to use for any eligible
project or lawful purpose.
To issue additional bonds, the indenture requires SEPTA to show that its average
annual apportionment of Section 5309 funds in the current and prior two federal
fiscal years equals at least 1.5 times maximum annual debt service following the
proposed issuance. SEPTA must also receive a FTA letter of no prejudice agreeing
to the terms of the new issuance. Bondholders also have additional protection
from a debt service reserve fund equal to 50% of maximum annual debt service
(the initial deposit to the fund is being made with bond proceeds). If drawn on,
the indenture requires SEPTA to replenish the fund in no more than 12 equal
monthly payments to the trustee, commencing on the first day of the month
succeeding the withdrawal.
SEPTA'S SHARE OF PLEDGED SECTION 5309 FUNDS PROVIDES STRONG DEBT
The FTA's Section 5309 program is a formula grant program which provides capital
assistance for the modernization of rail systems that have been in operation for
at least seven years. The funds are distributed from the federal Highway Trust
Fund's Mass Transit Account (MTA), which receives 2.86 cents of the 18.4 cents
per gallon federal gas excise tax. MTA funds have generally grown over time, but
amid the economic downturn gas tax collections weakened and revenues in the
account declined in each of federal fiscal years 2008 and 2009, by 0.2% and
4.6%, respectively. MTA revenues increased slightly in 2010, by 0.1% and are
forecast to increase by 5.9% in the current federal fiscal year.
The formula for distribution has seven tiers and includes statutory amounts for
specific urbanized areas and amounts calculated by use of FTA metrics including
route miles and revenue vehicle miles. SEPTA shares the Section 5309 funds
allocated to the Philadelphia urbanized area with four other entities that
provide service within it (agencies in Delaware and New Jersey), but as the
dominant provider it has received an average of 86% of the total during the past
13 years, and never less than 84%. SEPTA must agree with those other agencies
on how to share the urbanized area's share of Section 5309 funds, which could
become a credit challenge if there are disputes or if the grant application
process is delayed. SEPTA's share of Section 5309 funds increased annually by
2.5% between federal fiscal year during the last 13 years, and totaled $94.6
million in federal fiscal year 2010. Based on that amount, coverage of
maximum annual debt service of the proposed new issue is 5.2 times. If fully
leveraged to the 1.5 times additional bonds test, those revenues could withstand
a 33% decline and still provide 1.0 times debt service coverage.
FEDERAL REAUTHORIZATION RISK INHERENT IN GRANTS RECEIPTS BONDS; FUTURE FEDERAL
DEFICIT REDUCTION MEASURES ALSO MAY BE A CREDIT CHALLENGE
The most recent five-year federal funding authorization program, the Safe,
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users
(SAFETEA-LU), provided $45 billion of guaranteed funding through the Highway
Trust Fund for mass transit programs, including Section 5307 and 5309
grants. SAFETEA-LU's authorization expired on September 30, 2009 and several
extensions have passed; the program is currently authorized through the end of
the current federal fiscal year, September 30, 2011. Discussions regarding the
next multi-year aid authorization continue, but reauthorization risk is inherent
in grant anticipation bonds. While we note the transit program's essentiality to
urban areas where transit is prevalent, and that formula funding has
been essentially stable, future federal deficit reduction plans also could
become a credit challenge if the funding is cut, the gas tax continues to
weaken, or the funds are reprogrammed for other purposes.
The outlook for SEPTA's Capital Grants Receipt Bonds is stable. SEPTA continues
to be the largest transit provider in its service area and we expect it to
continue to receive the largest portion of federal transit aid within it. The
lack of a long-term federal transportation reauthorization is a credit
challenge, and future federal deficit reduction measures could be, depending on
how they affect transportation formula funding.
What could change the rating-UP?
-- A stronger legal structure, such as a higher additional bonds test
What could change the rating-DOWN?
-- Disruption in the flow of federal funds due to either failure to enact
transportation reauthorizations, or due to future federal aid reductions.
The principal methodology used in this rating was Federal Highway Aid Grant
Anticipation Funding published in December 2008. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
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Public Finance Group
Moody's Investors Service
Baye B. Larsen
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
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MOODY'S ASSIGNS INITIAL A1 RATING TO $215 MILLION SEPTA CAPITAL GRANTS RECEIPT BONDS
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