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Rating Action:

Moody's assigns A3 to Pennsylvania Turnpike Commission's subordinate lien $442 million Turnpike Subordinate Revenue Bonds, Series A of 2021; outlook stable

06 Jan 2021

New York, January 06, 2021 -- Moody's Investors Service, ("Moody's") has assigned an A3 rating to the Pennsylvania Turnpike Commission's (PTC or Commission) subordinate lien $442 million Turnpike Subordinate Revenue Bonds, Series A of 2021. The outlook is stable.

RATINGS RATIONALE

The A1 senior and A3 subordinate lien revenue bond ratings reflect the commission's strong and well-established market position with a history of relatively inelastic demand in response to annual toll rate increases and a proven willingness to continue to annually raise toll rates at above inflation levels to meet targeted financial metrics. While the coronavirus outbreak has resulted in material drop in traffic and revenue, PTC's high proportion of commercial traffic has limited its revenue losses compared to toll roads that primarily serve passenger vehicles. While PTC's commercial traffic has already stabilized at levels near the prior year's performance, passenger traffic continues to lag in its recovery and will remain depressed for a few years.

The impact of the COVID-19 related drop in traffic and revenue on the financial metrics for FY 2020 (ended May 30) and FY 2021 is manageable due to the timing of PTC's fiscal year, continued adjustment of toll rates, resilient commercial traffic, and management's swift response to cut expenses in both the short and long-term. The 10-year capital improvement plan has also been reduced with less debt needed over the long-term as PTC expects to fund all annual capital needs on a pay-as-you-go cash basis starting in FY 2028. Annual toll rate increases support the rising total debt outstanding for both system capital investments and non-system needs under Act 44/89.

The ratings incorporate the turnpike system's essentiality as a key east-west transportation corridor in the eastern US with a very long operating history, well-managed financial operations with consistently strong senior lien debt service coverage ratios (DSCRs) and a satisfactory liquidity position. PTC improved its liquidity position by obtaining a short-term $200 million bank line of credit through June 1, 2021 to balance the broader demand uncertainty associated with the coronavirus outbreak. Over the long-term, revenue growth will primarily be driven by toll rate increases as normalized traffic growth will likely remain at or below 1% per year with commercial traffic providing most of the revenue growth.

The A3 subordinate lien rating incorporates the weaker legal security with no legal claim on turnpike revenues other than funds on deposit in the General Reserve Fund. This lien continues to be leveraged to make payments to the Pennsylvania Department of Transportation (PennDOT) as required under Act 44.

RATING OUTLOOK

The stable outlook reflects our expectation that the Commission will continue to implement annual toll rate increases to achieve forecast minimum DSCRs above 2.0x for senior revenue bonds, 1.3x for subordinate revenue bonds and 1.2x for subordinate special revenue bonds, including the separately secured Motor License Fund (MLF) enhanced subordinate special revenue bonds while maintaining strong liquidity levels as total leverage is forecast to continue to rise.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Unlikely to face upward pressure until it is clear the commonwealth will not further leverage PTC for non-system needs beyond current expectations

- Revenues continue to grow while maintaining total coverage levels in line with recent performance

- Liquidity remains above 365 days cash on hand

- Total leverage begins to decline or stabilize

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Toll increases are not implemented as planned or if traffic, revenues, or liquidity levels consistently fall short of forecast levels

- Senior lien net revenue DSCR falls below 2.0x or subordinate lien net revenue DSCR falls below 1.3x on a sustained basis

- Increased payments to the commonwealth for non-system needs beyond what is currently forecast

- Materially higher than currently forecast additional debt for capital improvements

LEGAL SECURITY

The senior lien bonds are secured by a first lien on net toll revenues of the turnpike after payment of operations and maintenance expenses and by the debt service reserve fund. The rate covenant for the senior bonds is the greater of 130% senior debt service or 100% of maximum annual debt service plus required transfers to the reserve maintenance fund, debt service reserve fund replenishment and certain short-term debt. PTC's senior lien fixed rate bonds, excluding the EB-5 loans, have debt service reserve funds equal to maximum annual debt service (MADS) while the outstanding variable rate bonds and notes do not have a debt service reserve fund. The senior lien additional bonds test is at least 1.75x prior year debt service, or at least 1.3x projected MADS and at least 1.3x projected debt service for two years after the end of capitalized interest.

The subordinate lien bonds are secured only by PTC payments from funds on deposit in the General Reserve Fund, created in the senior lien bond indenture. The subordinate lien bonds do not have a lien on toll revenues or other funds created in the senior indenture. The subordinate lien debt service reserve fund requirement is funded at the standard three prong test sized at the lesser of MADS, 10% of proceeds, or 125% average annual debt service. The rate covenant for the subordinate bonds is at least 1.15x annual subordinate debt service and 1.00x combined subordinate and special revenue debt service. The subordinate lien is expected to be leveraged to finance the majority of the $450 million annual required payments to the state under Act 44 through FY 2022.

USE OF PROCEEDS

Bond proceeds will be used to fund a portion of the Act 44 payment to the Commonwealth, capitalized interest, a debt service reserve and issuance costs.

PROFILE

The Pennsylvania Turnpike Commission is an instrumentality of the Commonwealth of Pennsylvania (Aa3 stable) with the power to construct, operate and maintain the turnpike system and to perform other functions authorized by Act 44.

METHODOLOGY

The principal methodology used in this rating was Publicly Managed Toll Roads and Parking Facilities published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091602. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

John Medina
Lead Analyst
Project Finance
Moody's Investors Service, Inc.
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New York 10007
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Angelo Sabatelle
Additional Contact
Project Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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