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27 Dec 2018
New York, December 27, 2018 -- Moody's Investors Service has assigned a Aa2 rating to the Massachusetts Department of Transportation (MassDOT) - Metropolitan Highway System's (MHS) $371.4 million Revenue Refunding Bonds (Subordinated), Commonwealth Contract Assistance Secured, Variable Rate (Term Rate), 2019 Series A and $70 million 2019 Series B. The outlook is stable.
The Aa2 rating reflects the limited pledge of $100 million of general obligation contract assistance payments from the Commonwealth of Massachusetts (Aa1 stable) for payment of MHS bonds, along with the subordinate claim on the toll revenues of the Massachusetts Department of Transportation Metropolitan Highway System (senior lien rated A2 stable). The one-notch distinction from the commonwealth's general obligation rating reflects the full faith and credit pledge of the commonwealth's annual payments, limited by the dollar amount. Favorably, the system has materially reduced its exposure to risks stemming from its variable rate portfolio. Some risk remains, with four sub-series temporarily converted to fixed rate and associated swaps suspended through approximately 2023.
The outlook on the bonds is based on the Commonwealth's outlook. The Commonwealth's stable outlook reflects our expectation that it will continue its trend of strong financial management, taking proactive measures to close budget gaps as they emerge. Reliance on one-time budget solutions or decreased liquidity would be indications of deviating from these practices.
FACTORS THAT COULD LEAD TO AN UPGRADE
- An upward change in Massachusetts' general obligation rating
- A continued reduction in risk to swaps and variable rate bonds
FACTORS THAT COULD LEAD TO A DOWNGRADE
- A downward change in Massachusetts' general obligation rating
- Increased risks to swaps and variable rate bonds increased leverage, diluting the coverage on the subordinate lien bonds
The contract assistance payments are full faith and credit general obligations of the commonwealth, but are limited to $100 million annually, except for the final two years (2038 and 2039) when the amount increases to $125 million. The payments are dedicated by MassDOT first to pay the debt service on the subordinate lien bonds. Maximum annual debt service coverage is projected at 1.19 times in 2039, the year of final maturity. The bonds also benefit from a subordinate lien on net toll revenues collected by the Metropolitan Highway System.
USE OF PROCEEDS
Proceeds from the Series A bonds will be used to refund the system's outstanding Series 2010 A3, A4, A5 and A6 bonds, converting from a variable rate to a fixed rate through January 1, 2023 with a soft put feature. The Series B bonds will refund the Series 2010 A2 bonds from variable to fixed rate. The refunding is expected to generate net present value savings, including the use of funds on hand from the debt service reserve fund.
In conjunction with this refunding, the system will fully terminate the swap associated with the Series A-2 bonds and temporarily suspended swaps on the A3-A6 bonds.
Earlier this year, the system refunded the outstanding Series 2010A-1 and A-7 bonds, converting the bonds from variable to fixed rate. In conjunction with that refunding, two associated swaps were terminated. The refunding was cost neutral, with funds from a debt service reserve fund used to offset transaction costs.
The Commonwealth of Massachusetts is the 15th largest state by population, boasting an estimated 6.9 million residents in 2017. Its gross domestic product, reaching $543 billion, ranks 11th among the states. Per capita income was 131% of the national average in 2017, the 2nd highest.
The Metropolitan Highway System consists of the turnpike east of Route 128 (the Boston Extension), three tunnels (Sumner, Callahan and Ted Williams) and the Tobin Bridge, as well as the existing Central Artery North Area (CANA) and the Central Artery.
The principal methodology used in these ratings was US States and Territories published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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