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New Issue:

MOODY'S ASSIGNS INITIAL A1 RATING TO $215 MILLION SEPTA CAPITAL GRANTS RECEIPT BONDS

21 Jul 2011

OUTLOOK IS STABLE

Transportation
PA

Moody's Rating

ISSUE

RATING

Capital Grants Receipt Bonds, Series 2011 (Federal Transit Administration Section 5309 Fixed Guideway Modernization Formula Funds)

A1

  Sale Amount

$214,820,000

  Expected Sale Date

07/25/11

  Rating Description

Capital Grants Receipts Bonds

 

Opinion

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.

Credit Strengths:

-- 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 Philadelphia region

-- 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

Credit Challenges:

-- 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 SERVICE COVERAGE

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.

Outlook

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.

PRINCIPAL METHODOLOGY

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, [and] public information, [and] confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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

Nicholas Samuels
Analyst
Public Finance Group
Moody's Investors Service

Baye B. Larsen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


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MOODY'S ASSIGNS INITIAL A1 RATING TO $215 MILLION SEPTA CAPITAL GRANTS RECEIPT BONDS
No Related Data.
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