NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA-' rating on the following bonds of the North Carolina Turnpike Authority (NCTA):
--State annual appropriation revenue bonds, series 2009B (federally taxable-issuer subsidy-Build America Bonds).
The Rating Outlook is Stable.
In addition, Fitch has withdrawn the 'AA-' rating on North Carolina Turnpike Authority (NC) (state annual appropriation revenue bonds) appropriation revenue bonds series 2009A as the bond was not sold.
KEY RATING DRIVERS:
STATE APPROPRIATION: The bonds are secured by a $25 million continuing appropriation from the state and a pledge of the federal interest subsidy associated with the Build America Bonds (BABs). The state of North Carolina is rated 'AAA' and appropriations debt of the state is rated 'AA+.' The NCTA bonds, while secured by a state appropriation, were not issued by the state and do not benefit from the strong debt management oversight that supports other appropriations debt issued by the state.
FEDERAL SUBSIDY SHORTFALL: Debt is structured to the revenue stream but is in excess of the state appropriation, relying on receipt of the federal interest subsidy. Due to federal budget sequestration, there will be a shortfall in the interest subsidy payment and therefore in the debt service fund, that will be addressed through a draw on the reserve fund. The reserve was funded from bond proceeds in an amount equal to maximum annual interest subsidy and was intended to address any timing and/or administrative issues associated with receipt of the federal interest.
IMPORTANT PROJECT TO STATE: The Triangle Expressway, partially funded by the bonds, will serve as a major alternative to congested free roads and a key route to the Research Triangle Park (RTP), a major state employment center. The state has demonstrated its commitment to the project through construction and renewal and replacement guarantees. Construction is complete and tolling has begun.
RATING SENSITIVITIES:
FEDERAL BUDGET REDUCTIONS: A continuing or permanent reduction in federal funding of BABs interest subsidy payments that is not mitigated through issuer action other than continued draws upon the reserve fund will lead to a rating downgrade. The rating is also sensitive to changes in change in the credit quality of the state of North Carolina and evidence of reduced commitment by the state to the project.
SECURITY: The bonds are special obligations of the authority, secured by and payable from a $25 million state appropriation from the Highway Trust Fund and federal revenues pursuant to the Build America Bonds interest subsidy.
CREDIT SUMMARY:
The bonds were issued as one part of a multi-pronged financing for the authority's Triangle Expressway project. The authority also issued separately secured toll revenue and TIFIA bonds, both rated 'BBB-' by Fitch.
STATE APPROPRIATION AND FEDERAL INTEREST SUBSIDY
The rating on the authority's state annual appropriation revenue bonds reflects the strength of the pledged primary revenue stream -- an ongoing appropriation from the state of North Carolina's Highway Trust Fund - and the high degree of confidence at the time of issuance that the federal interest subsidy on the Build America Bonds for series 2009B would be received in a timely manner. As will be discussed further below, the federal interest subsidy payments have been received on time; however, upcoming payments will be reduced due to federal budget sequestration resulting in a deficiency in the debt service fund that will be addressed in the near term through draws on the reserve fund.
North Carolina general obligation bonds are rated 'AAA' and its general fund appropriations debt is rated 'AA+', reflecting the state's strong general credit standing and centralized oversight of appropriation debt. The appropriations debt issued by the authority does not fall under the direct management of the state, contributing to the lower rating. However, since issuance of the bonds, the Turnpike Authority has been merged into the state Department of Transportation.
BABS FUNDING SHORTFALL
The bonds are special obligations of the authority, secured by and payable from a $25 million ongoing appropriation from the Highway Trust Fund, a separate fund of the state of North Carolina. Debt service on the outstanding bonds was structured to this $25 million appropriation after applying the federal interest subsidy arising from the issuance of taxable Build America Bonds. An $8 million reserve fund equal to maximum annual interest subsidy payment, funded from proceeds, was intended to address any potential administrative or timing issues with the receipt of the federal funds.
The authority expects to draw approximately $300 thousand from this reserve fund to meet a portion of its upcoming July 1, 2013 debt service payment. This small draw upon the almost $8 million reserve fund is not currently a negative credit factor; however, if interest payments are further or permanently reduced, Fitch expects the authority to take action to ensure there are sufficient revenues to meet all debt service requirements. The $25 million appropriation commitment extends 10 years beyond the final maturity of the bonds, allowing some flexibility to restructure debt service.
FIXED STATE APPROPRIATION TO TURNPIKE AUTHORITY
The tolls and other revenues of the Triangle Expressway System are not pledged to state annual appropriation bond holders. The state appropriation funds are transferred quarterly to the authority in equal installments of $6.25 million. No additional bonds can be issued supported by the appropriation, other than refunding debt.
Revenues deposited in the Highway Trust Fund are generated by a 3% highway use tax on the retail value of motor vehicles purchased or titled in the state, 25% of all motor fuel tax revenues, and a portion of certain fees shared for the issuance of certificates of title. Fiscal year (FY) 2012 revenues totaled just under $1.1 billion, of which $689 million was spent on state transportation needs, $79 million was paid in debt service, and $182 million was transferred to other state funds, including $77 million to the state general fund.
STATE COMMITMENT TO THE PROJECT
The toll road will serve as a major alternative to congested free roads and a key route to the RTP (employment center). In addition to the annual appropriation, the state's commitment to the project includes a guarantee of operations and maintenance expenses, construction guaranty, and renewal and replacement guaranty from NCDOT. Construction of the final phase of the Triangle Expressway was completed slightly ahead of schedule in late December 2012 and tolling began on Jan. 2, 2013. A few 'punch list' items remain, and final acceptance of the roadway is expected later this month.
For more information on the state of North Carolina, please see the rating comment, 'Fitch Rates North Carolina's $300MM GOS 'AAA', dated March 1, 2013.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria', dated Aug. 14, 2012.
--'U.S. State Government
Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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=789604
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