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Rating Action:

Moody's assigns Baa1 to $255M of So. Jersey Port Corp bonds; outlook stable

08 Nov 2017

New York, November 08, 2017 -- Issue: Subordinated Marine Terminal Revenue Bonds, Series 2017A; Rating: Baa1; Rating Type: Underlying LT; Sale Amount: $25,500,000; Expected Sale Date: 11/15/2017; Rating Description: Moral Obligation;

Issue: Subordinated Marine Terminal Revenue Bonds, Series 2017B (AMT); Rating: Baa1; Rating Type: Underlying LT; Sale Amount: $229,500,000; Expected Sale Date: 11/15/2017; Rating Description: Moral Obligation;

Summary Rating Rationale

Moody's Investors Service has assigned a Baa1 to New Jersey's $25.5 million Subordinated Marine Terminal Revenue Bonds, Series 2017A and $229.5 million Subordinated Marine Terminal Revenue Bonds, Series 2017B (AMT) issued by the South Jersey Port Corporation. Moody's has also affirmed the Baa1 rating on $248 million of outstanding Marine Terminal Revenue Bonds, which will be the senior lien after the current transaction. The outlook is stable. The Baa1 is notched off the State of New Jersey's A3 GO rating and reflects the state's commitment, as established in the corporation's enabling act and bond resolutions, to consider appropriating funds to replenish the port's debt service reserve fund (DSRF) to match maximum annual debt service. The state has a strong, demonstrated commitment to making these appropriations, given its 34-year history of replenishing the corporation's reserve fund; the state's history of including broad appropriation language in the budget, which is historically adopted well in advance of the corporation's December 1 request date, and the state's nonimpairment pledge.The state's replenishment commitment is equivalent for both liens, and state appropriations deposited into the sub lien DSRF cannot be transferred to the senior lien DSRF. While the state's replenishment commitment is equivalent for both liens, nothing requires the legislature to appropriate proportionately to the two liens' DSRFs. However, the risk of unequivalent appropriations does not warrant a full notch rating distinction.New Jersey's A3 rating primarily reflects its significant pension underfunding, large and rising long-term liabilities, a persistent 11% structural budget imbalance, and weak 1.3% fund balances. Despite large increases in pension contributions since 2012, the state's contributions remain well below actuarial recommendations. Moreover, tax cuts enacted in January 2017 and a reliance on optimistic revenue growth assumptions to balance the budget may make it harder for the state to keep pace with its statutory pension contribution schedule. The state nevertheless benefits from a diverse economy and high wealth, as well as the governor's broad powers to reduce expenditures.

Rating Outlook

The outlook on the bonds reflects the state outlook. The stable state outlook reflects our view that the current A3 rating is well positioned for the next 12-18 months due to solid economic performance and the expectation that any fiscal 2018 budget gaps will remain manageable. However, in the longer term, the state's credit profile will continue to weaken as large long-term liabilities grow and the state's budget is challenged by growing pension contributions in a low revenue growth environment.

Factors that Could Lead to an Upgrade

Increased pension contributions, far greater than the current 1/10 plan, that stabilize growth in the Adjusted Net Pension Liability (ANPL)

Near-term reduction in structural imbalance through sustainable budget improvements

Sustained improvement in budgetary balances and liquidity

Factors that Could Lead to a Downgrade

Port Bonds: Indications that the state's incentive to make annual appropriations has diminished

Indications that low revenue growth or high cost growth will make the 1/10 pension contribution increases unaffordable and heighten the risk of additional underfunding

Increase in structural imbalance

Reduced liquidity levels and/or increased liquidity support (cash-flow borrowing and other cash management tactics)

A significant increase in unfunded pension liabilities, for example due to weak investment returns

Legal Security

The 2017A & B bonds are being issued under a new indenture that secures bonds first with a subordinate lien on net revenues of the port corporation's operations. All senior and subordinate bonds are additionally secured by - and primarily paid from - the state's commitment to annually appropriate amounts sufficient to restore the debt service reserve fund (DSRF) to the required level. The state's replenishment commitment is equivalent for both liens, and state appropriations deposited into the sub lien DSRF cannot be transferred to the senior lien DSRF. While the state's replenishment commitment is equivalent for both liens, nothing requires the legislature to appropriate proportionately to the two liens' DSRFs. However, the risk of unequivalent appropriations does not warrant a full notch rating distinction.The trustee-held DSRFs aref required to equal maximum annual debt service on outstanding bonds. Senior lien debt service is partially funded with port revenues, however the port and state expect that all subordinate lien debt service will be funded through state replenishment of the DSRF. The state has a long history of annually appropriating sufficient revenues to replenish the port corporation's DSRF. In addition, the state's commitment to these bonds is further strengthened by its practice of including broad language in its annual appropriation act so that, upon receipt of a deficiency notice, the state can make the certified payment directly into the DSRF without further legislative action. Pursuant to statute, before December 1 of each year, the chairman of the port corporation must certify in a letter to the governor the amount necessary to restore the DSRF to MADS on all outstanding senior and subordinate bonds subsequent to the upcoming January 1 debt service payment. The governor, upon certification, is required to request that an appropriation be made by the legislature during the current state fiscal year, that is, before June 30th following the certification. The first state appropriation for the corporation was made in 1972, and the state has appropriated every year since 1989. After the issuance of the Series 2009 bonds, the state's average annual appropriation increased significantly to $18.5 million (see Exhibit 3). The state expects its annual appropriations to the port will increase significantly with the current issuance as MADS will increase to $40 million from $25 million, and no port revenues will be available to pay subordinate debt service. However, compared to the state's approximately $34.5 billion fiscal 2017 budget, this commitment will remain a very small 0.1% of total state appropriations. Additional borrowing that would further increase the debt service reserve requirement must be reviewed and approved by the state. The port corporation was created as an instrumentality of the state in 1968 and operates as a body politic within the State Department of the Treasury. The Board of Directors consists of 10 members appointed by the governor, in addition to the state treasurer. The corporation is authorized to acquire, construct and operate marine terminals along the Delaware River in Mercer, Burlington, Camden, Gloucester, Salem, Cumberland and Cape May Counties. The port corporation has statutory authority to issue bonds secured by the net revenues of its operations and state appropriations replenishing its DSRF.

Use of Proceeds

Proceeds will finance the second phase of the Paulsboro Marine Terminal project and certain capital projects at the Corporation's facilities, as well as capitalization of interest through January 1, 2019, the required deposit into the Debt Service Reserve Fund, and various bond issuance costs.

Obligor Profile

New Jersey is the 11th-largest state by population in the United States. Its gross domestic product per capita ranks 8th among the states (in current dollars).

Methodology

The principal methodology used in these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies 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 certain 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 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.

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

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.

Baye Larsen
Lead Analyst
State Ratings
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

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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

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