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MOODY'S DOWNGRADES SOUTH CAROLINA TRANSPORTATION INFRASTRUCTURE BANK REVENUE BONDS TO A1 FROM Aa3, ASSIGNS NEW RATING TO PLANNED $222 MILLION SERIES 2010 ISSUES

Global Credit Research - 08 Nov 2010

STABLE OUTLOOK APPLIES TO CURRENT APPROXIMATELY $1.98 BILLION OF OUTSTANDING DEBT

Municipality
SC

Moody's Rating

ISSUE

RATING

Revenue Bonds, Series 2010A

A1

  Sale Amount

$187,845,000

  Expected Sale Date

11/16/10

  Rating Description

Senior Lien Revenue Bonds

 

Revenue Bonds, Series 2010B

A1

  Sale Amount

$33,775,000

  Expected Sale Date

11/16/10

  Rating Description

Senior Lien Revenue Bonds

 

Opinion

NEW YORK, Nov 8, 2010 -- Moody's Investors Service has assigned a rating of A1 and stable outlook to the South Carolina Transportation Infrastructure Bank's Revenue Refunding Bonds, Series 2010. The issue consists of two parts, a $188 million component for new projects and $33.775 million to advance refund Series 2001A bonds for interest cost savings, without extending maturity. At the same time, we have lowered the rating assigned to the SCTIB's outstanding $1.98 billion of revenue bonds, to A1 from Aa3. The rating on these bonds had been recalibrated to Aa3 from a municipal scale rating of A1 on April 16, 2010.

RATING RATIONALE

The downgrade to A1 reflects the decline in debt service coverage provided by pledged revenues as well as hospitality taxes that back a portion of loan payments, and the South Carolina Transportation Infrastructure Bank's (SCTIB) limited resources compared to the amount of its puttable variable rate debt. The resulting relatively low coverage level is a function of comparatively lax constraints on program leverage, as well as revenues that have been undermined by the recent recession. The new rating recognizes strong oversight of the program by the State of South Carolina, which is rated Aaa with a stable outlook. Pledged revenues include economically sensitive truck and motor vehicle registration fees (on a junior lien basis behind state highway general obligation bonds), a portion of the South Carolina Department of Transportation's (SCDOT) federal highway and non-tax revenue funding and project-specific loan repayments to the SCTBI from entities including the SCDOT and one county.

Strengths:

-- Diverse stream of pledged revenues from state and local sources

-- Oversight by highly rated state

-- Addition of revenues in recent years

Challenges:

-- Weak additional bonds test allowing consistently high program leverage

-- Vulnerability of pledged revenues to economic pressures affecting motor vehicle use

-- Exposure to credit weakness of Transportation Infrastructure Bank borrowers

-- Relatively large variable-rate and swap exposure

INFRASTRUCTURE BANK WAS CREATED TO FINANCE LARGE PROJECTS

The South Carolina Transportation Infrastructure Bank (SCTIB) was created in 1997 by the state legislature to finance large transportation projects by making loans and grants to local governments or other entities. The bank's board consists of seven directors, including the chairman of the South Carolina Department of Transportation Commission and two appointees each for the Governor, the Speaker of the House of Representatives and the President of the Senate Pro Tempore. Approximately $1.98 billion of SCTIB revenue bonds on parity with the current issues are outstanding. The SCTIB revenue bond master resolution allows for the issuance of junior-lien bonds, but none are in existence or planned. To fund SCTIB projects, South Carolina has also issued $60 million of state general obligation bonds. The state issues bonds with a double-barreled security - consisting of its general obligation (rated Aaa/stable) and certain pledged transportation revenues - for transportation projects. Other debt structures, such as a Grant Anticipation Revenue Vehicles (Garvees), do not play a role in financing South Carolina's transportation projects. The bank's ability to issue its revenue bonds is therefore central to statewide transportation financing.

MULTIPLE REVENUE STREAMS PLEDGED TO DEBT SERVICE

Revenues pledged for debt service fall into two categories: ``series'' payments, consisting of loan repayments from local governments or other project sponsors, and ``system'' payments, consisting of state truck registration fees, motor vehicle registration fees, South Carolina Department of Transportation (SCDOT) federal highway and non-tax revenue, and certain investment income. In 2005, the state legislature added new sources of pledged revenues. These included the motor vehicle registration fees, phased in through fiscal 2008, and a new revenue source derived from SCDOT non-tax revenues, calculated as SCDOT non-tax revenues equal to 50% of state electric power tax receipts in excess of $20 million. Among system revenue sources, the most significant are registration fees. Those charged on trucks accounted for 30% of total fiscal 2010 pledged revenues, and those assessed on other vehicles accounted for 20%. SCDOT payments accounted for about 31% of 2010 pledged revenues, either as ``series'' payments on specific projects or statutorily determined amounts related to state gasoline tax collections and electric power tax revenues, discussed further below.

RECESSION OF 2007-2009 REDUCED PLEDGED TRUCK FEE COLLECTIONS

Truck registration fees made up 46% of ``system'' revenues in fiscal 2010, when they fell 4.1% to $56.9 million from $59.3 million the prior year. Fees based on weight range from $30 to $1,600 per property-carrying vehicle and from $12 to $120 for agricultural vehicles. Revenue from these fees -- which are assessed biennially and show alternating strength and weakness from year to year -- posted a minimal gain in fiscal 2008 and fell 2009. For the most recent two-year period, the average change in truck registration fee revenue was -5.1%, a deterioration from -2.9% a year ago. This decline reflects the December 2007 to June 2009 recession. To address uneven collection patterns in truck registration fees, the state established a Revenue Stabilization Fund (RSF) that receives 75% of excess revenues in strong years, for use in years when performance weakens. RSF moneys are considered pledged revenues. Truck registration fees have shown generally positive growth trends on a biennial basis. The balance was $22 million as of June 30, 2010.

LIEN ON TRUCK AND MOTOR VEHICLE REGISTRATION FEES IS JUNIOR TO STATE G.O. BONDS

The SCTIB revenue bonds have a junior lien on the truck registration and motor vehicle registration fee revenue. South Carolina highway general obligation bonds (rated Aaa, with a stable outlook) have a prior lien on these fees, as well as several other sources of transportation-related taxes and fees. Concerns about the prior lien are offset by the state's limitation on issuing debt secured by these revenues. The state constitution limits annual debt service on these bonds to 15% of the pledged transportation-related revenues.

PLEDGED REVENUES INCLUDE SCDOT'S PAYMENTS DERIVED FROM FEDERAL HIGHWAY AID REIMBURSEMENTS

SCTIB system payments include two allocations of the SCDOT's federal highway funds and other non-tax revenues. The larger of these two is statutorily set at an amount equal to revenues generated by one cent of the state's 16.8 cents-per-gallon gasoline tax. Revenue from this source in fiscal 2010 amounted to $25.7 million, flat versus the prior year. It fell 2.2% in fiscal 2008, after increasing 3.6% in fiscal 2007. The second, smaller SCDOT allocation began in fiscal 2008. It is determined as the amount equal to 50% of state revenues exceeding $20 million from electric power taxes. South Carolina assesses a privilege tax of 0.5 mill per kilowatt hour on electric power sales. SCTIB revenues based on this tax totaled $4.1 million in fiscal 2010, up 7% from the prior year.

LOAN REPAYMENTS PLEDGED TO DEBT SERVICE

A third of pledged revenues in fiscal 2010 consisted of loan repayments related to specific SCTIB-funded projects. In most cases, the borrower is SCDOT. Legally, counties, other municipalities or private entities benefiting from a project can make repayments that are incorporated into the revenues. In those cases, the lending standards of the SCTIB and a history of strong state oversight mitigate risks inherent in the revenues. Such loans must be reviewed by the state's Joint Bond Review Committee, a 10-member panel of the South Carolina General Assembly, before becoming pledged revenues. The master bond resolution includes rating or coverage criteria that must be met, and some additional comfort is provided by a mechanism that lets the state treasurer intercept state aid payments to municipalities that fail to meet their loan obligations. While this is a credit positive, because it reflects the state's involvement, the provision does not significantly enhance bondholder security, because the mechanics are not spelled out and it is possible that any intercept could be made after debt service is due to bondholders.

State oversight is balanced against a recent trend of deterioration in the credit standing of certain portions of the pledged loans. For example, a portion of the borrowings by Horry County (general obligation bonds rated Aa2) is insured by Ambac Assurance Corporation, which has a rating of Caa2 and is under review for an upgrade. The insurer's rating has declined from Aaa in early June of 2008. The impact on the SCTIB's bonds is limited both by Horry's own credit strength and the relatively small share of revenue that the Ambac-insured loan accounts for. Horry's payments are derived from a hospitality fee, the fiscal 2010 revenues from which fell slightly below payments due on the county's SCTIB loans. Concern over performance of this revenue source is mitigated by availability of significant loan reserves. Another instance of credit deterioration relates to a loan SCTIB entered in connection with a Lexington County transportation project. The loan agreement was between SCTIB and South Carolina Electric & Gas Company (SCE&G), and loan payments were guaranteed by SCE&G's parent corporation, SCANA Corporation. Ratings of both entities have deteriorated in recent years, to Baa1/negative from A3/stable for SCE&G and to Baa2/negative from Baa1/stable for SCANA. This loan also accounts for a small portion of pledged revenues, about 3% in fiscal 2010.

DEBT SERVICE COVERAGE REMAINS ADEQUATE

Maximum annual debt service including the current issue is projected at $161.7 million, in fiscal 2014. Actual fiscal 2010 pledged revenues totaled $191.7 million, or 1.19 times the projected maximum debt service. This represents a deterioration from 1.26 times a year ago.

The bonds have an additional bonds test that requires 1.35 times net debt service coverage. To calculate net debt service coverage, series payments are excluded from pledged revenue and debt service totals, and certain anticipated interest is also deducted from debt service figures. The additional bonds test allows substantially greater leverage than constraints in comparable revenue bond programs, because the coverage test is met on a prospective basis, using projected future revenues. Based on this calculation method, and assuming growth in revenues, minimum annual coverage of debt service over the life of the bonds is projected at 1.48 times in fiscal 2024.

SCTIB has a substantial amount of debt ($360 million, or 18%) in variable rate form. This debt is hedged by swap agreements with Bank of America, N.A. (Aa3, negative) and Wachovia Bank, N.A. (Aa2, negative). The banks have posted a total of $44.25 million of collateral in connection with these agreements. The mark-to-market value of the swaps is negative $80 million. Liquidity on the variable-rate bonds is provided through irrevocable, direct-pay letters of credit that expire on June 17, 2011. Apart from the bank letters, SCTIB's available liquid resources are weak in relation to puttable debt.

Outlook

The rating outlook for SCTIB's bonds is stable. The outlook reflects the long-term stability of a diverse pledged revenue stream that is expected to provide continued adequate coverage of debt service, as well as the importance of the bank's debt in financing the state's transportation improvements.

What could change the rating - UP:

- Structural changes strengthening the borrowing program, such as a stronger additional bonds test

What could change the rating - DOWN:

-Weakening of pledged revenues leading to a deterioration of debt service coverage

- Deterioration in credit of state

- Deterioration in credit of entities making pledged loan repayments

- Addition of pledges from financially troubled obligors

PRINCIPAL METHODOLOGY

The rating on the current issue was assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) and the issuer's management and governance structure related to payment. These attributes were compared against other issuers both within and outside of South Carolina Transportation Infrastructure Bank's core peer group. The South Carolina Transportation Infrastructure Bank's bond ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

REGULATORY DISCLOSURES

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 assigning a credit 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

Edward Hampton
Analyst
Public Finance Group
Moody's Investors Service

Maria Coritsidis
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
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USA

MOODY'S DOWNGRADES SOUTH CAROLINA TRANSPORTATION INFRASTRUCTURE BANK REVENUE BONDS TO A1 FROM Aa3, ASSIGNS NEW RATING TO PLANNED $222 MILLION SERIES 2010 ISSUES
No Related Data.
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