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Rating Update:

MOODY'S DOWNGRADES SOUTH JERSEY TRANSPORTATION AUTHORITY'S SYSTEM REVENUE BONDS TO Baa1 FROM A3; RATING OUTLOOK IS STABLE

16 Mar 2011

Baa1 RATING APPLIES TO $494.3 MILLION OF REVENUE DEBT OUTSTANDING

Toll Roads
NJ

Opinion

NEW YORK, Mar 16, 2011 -- RATINGS RATIONALE

Moody's Investors Service has downgraded the underlying rating of the South Jersey Transportation Authority's (SJTA) Transportation System Revenue Bonds, Series 2009A-1, A-2, A-3, A-4 & A-5 to Baa1 from A3 and has affirmed the Baa1 rating on the Subordinate Lien Revenue Bonds, Series 2009. The total outstanding debt amount is $494.3 million, of which only $18.3 million is subordinate debt. The rating outlook is stable. The downgrade is based on several years of traffic decline, low liquidity compared to Moody's toll road median, and the negative pressures in the service area. In Moody's view the rating is stable at the Baa1 rating level.

The SJTA owns and operates a number of transportation related assets and projects in Southern New Jersey including the Atlantic City Expressway (ACE) and the Atlantic City International Airport.

LEGAL SECURITY: The bonds are backed by a pledge of the authority's net consolidated revenues. Net airport revenues to cover a portion of debt service payments related to the airport. Net revenues should be equal to the greater of a)1.20 times debt service or b) 1.00 times debt service and the amount necessary for R&R costs, state payments, subordinate debt, general project expenses and other required fund deposits.

INTEREST RATE DERIVATIVES: The authority is a party to two swap transactions with Bank of America, N.A.(Aa3, negative) and Wachovia Bank, N.A. (Aa2, negative) respectively. Under the swap agreements, the authority pays to the swap counterparties a fixed rate of 4.70% and receives from the swap counterparties a variable rate equal to 75% USD-LIBOR-BBA on an aggregate initial notional amount of $88 million. In 2005, the authority received an upfront cash payment of $7.6 million, net of all fees and expenses. The upfront proceeds from the swaption were deposited into a revolving fund for capital expenditures that are expected to be reimbursed by future federal grant monies and if needed, to make payments in connection with the swaption transaction. Scheduled payments under the swap are on parity with senior lien debt while those related to termination are subordinate.

STRENGTHS

* Essential road to the service area

* Air service is expected to increase at the airport

* Expected future debt financing needs remain fairly limited

CHALLENGES

* Decreased traffic transactions since 2008 and low forecasted growth

* Low debt service coverage, both current and projected, when compared to peer organizations

* Increased competition in the gaming industry which is highly related to the operations of Atlantic City Expressway

* Toll revenues subsidize weaker performing facilities owned by the authority, placing pressure on authority's liquidity

* Exposure to variable rate debt and derivative contracts places an additional stress on the authority's below average liquidity

RECENT DEVELOPMENTS

On August 4, 2009, the South Jersey Transportation Authority (SJTA) issued Transportation System Revenue Bonds (variable rate demand bonds); Series 2009 A-3 in the amount of $44,000,000 and Series 2009 A-4 in the amount of $44,795,000. The A-3 bonds are currently secured by a letter of credit provided by Bank of America, NA. In May 2009, SJTA also issued Series 2009 A-1 and A-2 Revenue bonds in the amount of $101 million, $96 million in Build America Bonds, and Subordinate Lien of $19 million.

The Authority is replacing the existing letter of credit with a substitute letter of credit provided by Wells Fargo Bank, N.A. The pricing and term of the existing letter of credit with Wells Fargo on the A-4 bonds will be amended with the same terms as the substitute letter of credit on the A-3 bonds.

RATING FACTORS

MARKET POSITION: INCREASED COMPETITION IN THE GAMING INDUSTRY COULD LIMIT TRAFFIC GROWTH

The South Jersey Transportation Authority's primary asset is the 47-mile Atlantic City Expressway (ACE) extending 10 miles east of Philadelphia to Atlantic City (GO rated Baa1/Negative), passing through Gloucester (GO rated Aa2), Camden (GO rated Aa2) and Atlantic (GO rated Aa2) counties. In addition to the toll facility, the authority also owns and operates the Atlantic City International Airport as well as various parking facilities in the area.

The Atlantic City Expressway is a vital entry point for the visitors for the Atlantic City's casinos and beaches which make the road exposed to the volatile nature of discretionary traffic. Traffic volumes vary significantly between the winter base level and the summer peaks. Between 2000 and 2009, ACE had an average transaction growth rate of 1.6% annually. Over the same period, the road's toll plazas (Egg Harbor and Pleasantville), which are located near Atlantic City, experienced lower average transaction growth rate of 1% annually. These historical figures tie into our expectation that ACE's traffic growth could be further hampered by Atlantic City's increased competition from Delaware and Pennsylvania's gaming industries going forward.

In 2009, ACE's traffic declined 12.7%, followed by a 5.6% decline in 2010 due to overall economic conditions, tourism and the seasonal traffic fluctuations. For the first two months of 2011, the traffic was down 2.2% which was affected by the extreme weather conditions in January 2011. Based on the traffic consultant's assumptions, ACE is expected to finish 2011 with a 1% decline and will start to recover with 1.6% growth in 2012 reaching an annual growth rate of 2.5% going forward. Moody's anticipates that while the road is essential to the service area, expected limited growth will dampen actual results from these somewhat aggressive growth assumptions.

FINANCIAL POSITION AND PERFORMANCE: LOW COVERAGE AND LIQUIDITY LEVELS ARE EXPECTED IN NEAR TO MEDIUM TERM

Despite declines in traffic, overall toll revenues grew 30% in 2009 due to the 50% toll rate increase that became effective in November 2008. However, actual un-audited 2010 financial results show a 3.66% decrease in toll revenues from $82.2 million in 2009 to $78.9 million. Fiscal year 2011 budget shows expected further decline in revenues to $77.5million. Toll revenues are estimated to grow at 2.5% after 2012 based on the traffic consultants report, which Moody's considers somewhat aggressive given the actual transaction performance in recent history. The authority revised its forecast based on these assumptions which is also reflected on the debt service coverage ratios.

The airport continued its growth through 2009 and reached its peak of 1.4 million passengers at the end of 2010. January and February 2011 numbers also show a year over year increase of 5% in passenger growth. Spirit Airlines (not rated) and Airtran Holdings (Caa1, ratings under review for possible upgrade) are currently the only airlines that serve the airport and have 16 daily flights. Despite this growth in activity, the airport subsidy has been increasing and continues to cut into the authority's liquidity position. While the subsidy is subordinate to debt service payments on the transportation revenue bonds, it has continued to be a credit concern.

With 278 days cash on hand, liquidity is still below the sector median of 601 days for A rated toll facilities. The $40.7 million in unrestricted cash and investments and discretionary reserves bears the additional risks of interest rate, basis, and counterparty risk due to the addition of variable rate debt to the SJTA portfolio and the 2005 swaption. The risk is limited given that these agreements have reasonable provisions and the swap counterparties are relatively strong, but it remains a consideration.

The authority's liquidity is also weakened by the agreement it has with the State of New Jersey, where the authority is required to pay $2.5 million annually to the state. After the 2008 toll rate increase, on June 30, 2009 the State of New Jersey requested an additional $8 million payment from the SJTA. In return for this payment, SJTA received a $4 million transportation grant from the Casino Reinvestment Development Authority (CRDA) to support the cost of some of SJTA's capital projects. The state then asked for $400,000 in 2011, which is already incorporated into the authority's budget. While all payments to the state are obligations deeply subordinate to debt service payments and subject to budget approval, SJTA's history of providing subsidy payments to the State makes this an on-going credit concern.

Un-audited financials show that, for 2010, the SJTA had 1.72 times senior debt service and 1.16 times consolidated debt service coverage, on a bond ordinance basis. The authority's forecast declines to 1.61 times coverage on its senior debt service starting from 2011 through 2014. On a consolidated basis, coverage is expected to be 1.07 times in 2011 and will be maintained around 1.1 times until 2015. It is important to look at SJTA's debt service on a consolidated basis as this method considers senior and subordinate debt service as well as airport subsidies and payments to the state. Moody's believes that with the projected consolidated coverage levels, SJTA is more in line in the current Baa1 rating category.

Additionally, Atlantic City's rating was downgraded by Moody's on November 2010 to Baa1 with negative outlook to reflect the city's stressed financial position. On March 2011, New Jersey Governor Chris Christie signed a rescue package for Atlantic City, which increases the city's annual marketing budget to $30 million from $4 million to more effectively promote the city nationally as a tourist destination. Moody's published a special comment stating that these events are credit positive for the challenged city, however did not change the outlook.

DEBT AND CAPITAL PROGRAM: NO ADDITIONAL DEBT IS PLANNED

In 2009, the authority started a three-phased, three-lane widening project that will improve the road's capacity from the Garden State Parkway west to Route 73, a large portion of the expressway's length. The proceeds from the 2009 bonds are used to fund an approximate total of $179 million in projects at both the expressway and the airport. SJTA's capital program for the expressway will cost approximately $80 million for 2011 with congestions relief project being the largest in the program by $64 million. The rest will be mostly expended on major maintenance of roadway and bridge assets, primarily for bridge replacement and repair. The authority is planning to use a mixture of Series 2009 proceeds and restricted cash and investments to fund ACE's capital improvement plan for 2011.

The airport's capital improvement plan for 2011 is approximately $21.5 million, including a $16 million airport safety and operations program. More than half of these projects will be funded by Federal Aviation Administration Airport Improvement Program grants and state grants. The airport is also planned to complete a terminal expansion project that will add three additional gates by 2012.

While there is a 10-year capital improvement plan for 2011-2020, the authority is not planning to start a major project where it would need to increase tolls or issue additional debt and is currently not planning to do either of those.

Outlook

The outlook also reflects our expectation that the authority will perform at its current operating levels and experience narrow growth in the coming years in terms of traffic transactions. The authority's consolidated debt service coverage is also expected to be around 1.1 in the next several years. The stable outlook also reflects the continued essentiality of the toll road to the service area and the authority's sound management.

What could change the rating-UP

Significant transaction and revenue growth that produce higher consolidated debt service coverage along with continued efforts to increase the self-sufficiency of the airport, could lead to an upward movement in the rating.

What could change the rating--DOWN

Further drains on the authority's liquidity and reduced debt service coverage margins due to continued traffic and revenue declines or growing expenditures could place downward pressure on the rating.

RATED DEBT

Series 2009A-1 Transportation System Revenue Bonds, $62.015 million, Baa1

Series 2009A-2 Transportation System Revenue Bonds (Airport Bonds), $38.995 million, Baa1

Series 2009A-3 Variable Rate Transportation System Revenue Bonds, $43.875 million, Baa1

Series 2009A-4 Variable Rate Transportation System Revenue Bonds, $43.670 million, Baa1

Series 2009A-5 Transportation System Revenue Bonds (BABs), $96.260 million, Baa1

Series 2006A Transportation System Revenue Bonds (Airport Bonds), $50.365 million, Baa1

Series 2004A Transportation System Revenue Bonds, $19.460 million, Baa1

Series 2003 Transportation System Revenue Refunding Bonds, $4.205 million, Baa1

Series 1999 Transportation System Revenue Bonds, $117.085 million, Baa1

Subordinated Transportation System Revenue Bonds, Series 2009, $18.375 million, Baa1

KEY INDICATORS:

Facility Type: Multi-asset, regional

Road length: 47 miles

Senior Debt Service Coverage FY 2010: 1.72x senior lien

Debt per roadway mile FY 2009:$8,076

O&M expense/roadway mile FY 2009:$1,100

Toll Transaction Annual Growth FY 2010: -5.61%

Toll Transaction Annual Growth FY 2009: -12.7%

Toll Transactions, 5-year CAGR, 2006-2010: -2.95%

Toll Revenues, 5-year CAGR, 2006-2010: 7.00%

Transaction Traffic Volume FY 2010: 54,977

Annual Toll Revenue, FY 2010 unaudited: $78,914

Annual Revenue Growth FY 2010: -3.66%

Toll revenue as % of total operating revenue FY 2010:71.6%

CONTACTS

Ms. Kathleen Sharman

Director of Finance

Phone (609) 965-6060

The last rating action on SJTA was July 7, 2009 when the ratings were assigned to the Series 2009A, A2, A3, A4 & A5 and the Series 2009 Subordinated Bonds.

The principal methodology used in rating the authority bonds was "State and Local Government Owned Toll Facilities in the United States," which can be found at www.moodys.com in the Credit Policy and Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy and Methodologies directory.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining 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

Esra Akyol
Analyst
Public Finance Group
Moody's Investors Service

Maria Matesanz
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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New York, NY 10007
USA

MOODY'S DOWNGRADES SOUTH JERSEY TRANSPORTATION AUTHORITY'S SYSTEM REVENUE BONDS TO Baa1 FROM A3; RATING OUTLOOK IS STABLE
No Related Data.
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