NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating on Maine Municipal Bond Bank's (MMBB) new issuance of approximately $50 million grant anticipation bonds. Fitch currently rates their outstanding $104.9 million grant anticipation bonds 'A+'
The Rating Outlook is Stable.
RATING RATIONALE
Ratings for standalone GARVEE bonds are derived in large part by the relative strength of the federal transportation funding program. While there is a shortfall in the current revenue generating ability of the program when compared to projected outlays, there has traditionally been a short to medium term legislative solution to meet funding expectations. The program has proven to be an essential investment for the federal government with funding disseminated in a formulaic nature across all 50 states. The 'A+' rating further reflects the broad revenue pledge of the Maine Department of Transportation's federal transportation funds and the MMBB's leverage covenants which help to mitigate the risk of diminished federal transportation receipts.
KEY RATING DRIVERS
Continued Dependence on General Fund Transfers: Strength of the Federal Program - Midrange:
In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, and funding levels are less predictable. Also, the program is more dependent on frequent action to extend authorization and on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The essential nature of the investment in addition to the reliable formulaic distribution of funds underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF).
Strong Coverage and Protection against Leverage: Structural Features - Stronger:
Legislature approval is required to issue additional grant anticipation bonds. In addition, strong additional bonds test (1.5x MADS for each federal fiscal year within the current federal authorization period, and 3.0x MADS for federal fiscal years outside the current authorization period) moderates the potential of future issuance. No additional structural features such as a back-up pledge or a debt service reserve fund. However, MaineDOT obligates each year's federal transportation funds for debt service prior to any other purpose.
Flexibility to Adjust: Resources of the DOT - Midrange:
Federal funds only represent approximately 35% of total revenues. However, though MMBB has a practice of maintaining a Highway Fund balance which is available to service debt during any potential delays, no other working capital in excess of this fund are available for the GARVEEs.
Peers
Fitch's standalone highway GARVEE bonds, most of which are rated 'A+', tend to have strong additional leverage limitations of at least 3.0x current receipts to pay debt service. In contrast, standalone transit GARVEE bonds have materially lower leverage limitations of 1.5x, giving them less financial flexibility to protect against declines in federal program revenues and are thus rated 'BBB'.
RATING SENSITIVITIES
Negative/Positive - View of Federal Program Alters: A material change in Fitch's view of the strength of the Federal program to weak or strong from midrange;
CREDIT UPDATE
MMBB's GARVEE bond debt burden is currently relatively minimal at approximately $155 million, including the new issuance. Proceeds of the 2016A Bonds will be used to pay a portion of the costs of nine highway projects consisting of approximately 31 miles and the cost of issuing the bonds. The bonds are all fixed-rate and fully amortizing, benefits from a declining debt service profile and mature in 2028.
Performance Update
HTF's expenditures have been exceeding revenues over the past decade. The longer-term structural imbalance of the HTF was not addressed by the FAST Act passed in early December 2016. Recent legislation relies on approximately $78 billion in general fund and Federal Reserve transfers to keep the program afloat through federal fiscal year 2021. While the continued fund transfers have underscored the relative importance of transportation funding within the federal budget, they do not guarantee future commitments. Future funding levels beyond fiscal 2021 will be hard to predict, but it is Fitch's view that significant changes are needed either on the expenditure side or on the revenue side to put the program on a sustainable trajectory. In addition, the increase in corporate fuel economy standards approved in August 2012 is likely to adversely impact gas tax revenues which support the HTF going forward. In Fitch's view the more unsustainable the program becomes, the greater the possibility of policy changes that could adversely impact bondholders.
Fitch Rating Case
Fitch has performed an analysis of the federal grant program that assumes the CBO projection for outlays, translating into a 2.1% compound annual growth rate (CAGR) in HTF spending. In addition, Fitch estimates a negative CAGR of 0.3% in HTF receipts through 2025 based on a fuel consumption forecast for passenger cars run by the Environmental Protection Agency (EPA) given revised CAFE standards. Under such a scenario, the annual gap between HTF spending and receipts could be on average $21 billion from 2021 - 2025, meaning that by 2021 nearly half of the funding for HTF outlays would need to come from the general fund.
Under the scenario above, the FHWA would have to cut outlays to the states on average by 35% from fiscal 2022 through fiscal 2026 in order to match the receipts coming into the HTF. Based on this stress scenario, projections for MMBB result in an 8.6x maximum debt service coverage (MADs) and average debt service coverage (DSCR) of 13.3x from 2016 through debt maturity. Because highway GARVEEs maintain such robust additional leveraging provisions, a haircut at this level in 2022 would still result in maximum annual debt service (MADS) coverage across the board in excess of 2x.
Additional information is available on www.fitchratings.com
Applicable Criteria
Leveraging Federal Transportation Grants (Rating Criteria for GARVEE Bonds) (pub. 01 Dec 2015)
https://www.fitchratings.com/site/re/874011
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013433
Endorsement Policy
https://www.fitchratings.com/regulatory
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