NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following state of Hawaii highway revenue bonds:
--$106.07 million series 2014A;
--$33.31 million series 2014B.
The bond are expected to sell via negotiated bid on, or about, July 30, 2014.
Fitch has also affirmed the 'AA' ratings on $353.355 million of outstanding state of Hawaii highway revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are special, limited obligations of the state of Hawaii, secured solely by the pledged funds which consist primarily of the fuel license (gas) tax, vehicle registration fees and weight taxes, and rental motor vehicle and tour vehicle surcharge taxes. Senior lien bonds (the only active lien) have a first lien on the pledged funds once deposited in the State Highway Fund.
KEY RATING DRIVERS
STRONG BONDHOLDER SECURITY: Hawaii's highway revenue bonds have a first lien upon revenues deposited into the State Highway Fund. Additional senior lien issuance, which Fitch anticipates, requires satisfaction of a historical 2x additional bonds test (ABT). While transfers out of the highway special account are permitted, the certificate authorizing the highway revenue bonds subordinates them to other account expenses, including debt service.
SOLID DEBT SERVICE COVERAGE: Debt service coverage levels are robust, with estimated fiscal 2014 revenues covering maximum annual debt service (MADS) by nearly 5x. Recent statutory enhancements to pledged revenues helped offset recession-related declines and reflect the state's commitment to ensuring reliability of pledged revenues.
CYCLICAL REVENUES: Pledged revenues are principally derived from economically sensitive motor fuel and other vehicle-related taxes and fees. Revenues declined sharply at the height of the recession. Importantly, the state adopted statutory changes to stabilize pledged revenues.
RATING SENSITIVITIES
DEBT SERVICE COVERAGE: The rating is sensitive to ongoing maintenance of solid coverage by pledged revenues, in excess of the ABT.
CREDIT PROFILE
RATED SECURITY
Legal provisions for the bonds provide solid protection for bondholders. Highway revenue bonds have a first lien upon revenues deposited into the state highway fund, principally the fuel license (gas) tax, vehicle registration fees and weight taxes, and rental motor vehicle and tour vehicle surcharge taxes. Subordinate lien debt is permitted, though none has been issued nor is any contemplated. Transfers out of the highway fund are permitted, but only after senior and subordinate debt service obligations, operations and maintenance expenses, and required capital improvements have been funded. Further, transfers are only allowable if monies remaining in the fund exceed 135% of the next year's revenue requirements. Transfers occurred regularly between fiscal 1999 and 2006, but none are currently anticipated. The bonds also include a debt service reserve, funded at one-half MADS.
STEADY PERFORMANCE OF PLEDGED REVENUES
Pledged revenues offer strong coverage of debt service commitments, especially following recent statutory enhancements. Fiscal 2014 estimated collections of $256.22 million covered pro forma MADS (occurring in fiscal 2016) by a solid 4.6x. Coverage was relatively flat from the prior year, but up significantly (30%) from fiscal 2011 reflecting rate increases adopted by the 2011 legislature.
Going forward, the state's Department of Transportation forecasts continued strong coverage with projected annual pledged revenues growth between 0.5% and 1.3% through fiscal 2019. This pace is below the five-year historical average annual growth of 5.2% since fiscal 2009, but that rate reflects statutory increases to the rates for vehicle registration fees and weight taxes. Fuel tax revenues (comprising approximately one-third of pledged revenues, rates unchanged since 2007) were essentially flat over the past five years (0.1% average annual growth). In the state's base case scenario, MADS coverage never drops below a robust 4.5x. State projections exclude any revenues from three measures enacted by the 2014 legislature which could increase revenues: a $250 fine for mobile electronic device violations, a $200 fine for parking in a bike lane or path, and a car-sharing vehicle surcharge of up to $3 per day.
Even in a Fitch-developed stress case, coverage remained strong. Fitch calculated a stress scenario replicating the worst annual decline in pledged revenues as experienced during the recession (11.1% in fiscal 2009) followed by annual declines of 2.5% (the fiscal 2010 decline) through final maturity. Coverage declines but bottoms out at 3.7x for revenue bonds and the small amount of outstanding reimbursable general obligation (GO) bonds (issued for highway purposes and legally subordinate to highway revenue bonds) in fiscal 2019.
TIED TO STATE'S ECONOMY
Economic performance can negatively affect collections, though recent legislative changes and the strong coverage offset concern. The rental motor vehicle and tour vehicle surcharge taxes are especially vulnerable to cyclicality, declining 19.2% in fiscal 2009 as the tourism market weakened. The 2011 rate increases on other pledged revenues decreased the reliance on this stream and it became the third-largest source (17.2% of fiscal 2014 estimated pledged revenues) rather than the second-largest source as it had been historically. The fuel license tax is the largest source of pledged revenues and is also somewhat economically sensitive. Collections declined 2% in fiscal 2008 and 5.9% in fiscal 2009 and have been volatile since then with declines in two of the past four years and just 0.7% estimated growth in fiscal 2014. Generally, Fitch expects per-gallon gasoline tax revenues to be flat or declining for the foreseeable future partially due to the trend of increasing fuel efficiency. Registration fees (16.8% of 2014 estimated pledged revenues) and weight taxes (29.7%) are less susceptible to economic swings and remained more stable during the recession, and were also subject to significant statutory increases in 2011.
DEBT PROFILE
Fitch expects regular new issuances of highway revenue bonds as the state remains comfortably above the covenanted 2x MADS ABT and has ongoing transportation capital needs. Since 1993, the state has addressed its highway capital plan with revenue bond issuance instead of GO debt, and Fitch expects the state will continue this practice. Approximately $8.7 million of state reimbursable GO bonds for highway purposes remain outstanding and reimbursable from the state's highway fund, subordinate to revenue bond debt service. At present, approximately $353.4 million of highway revenue bonds remain outstanding.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's U.S. Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Economics.
Applicable Criteria and Related Research:
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840517
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