Fitch Provides Additional Commentary on Regional Transportation District, CO Affirmation

AUSTIN, Texas--(BUSINESS WIRE)-- On Jan. 19, 2012, Fitch Ratings took the following rating actions on the Regional Transportation District (RTD), CO's bonds as part of its review of tax-supported debt of public enterprises:

--$246.3 million outstanding sales tax revenue bonds affirmed at 'AA+';

-- $976.7 million outstanding sales tax revenue bonds (FasTracks Project) affirmed at 'AA';

--$549.5 million outstanding certificates of participation (COPs) affirmed at 'AA-';

The Rating Outlook is Stable.

SECURITY:

The sales tax revenue bonds (senior bonds) are secured by a first lien on RTD's 0.6% sales and use tax. The sales tax revenue bonds (FasTracks Project) (FasTracks bonds) are secured by a first lien on the district's 0.4% FasTracks sales tax and a subordinate lien on the 0.6% base system sales tax. The COPs are subordinate to the senior bonds and FasTracks bonds and are repaid out of all available revenues of the district, subject to annual appropriation.

KEY RATING DRIVERS:

REFINEMENT RATING METHODOLOGY: The affirmation reflects Fitch's increased focus on operating risk and certain qualitative factors outlined in the July 15, 2011 press release 'Fitch Refines Methodology for Rating Tax-Supported Debt of Public Enterprises' and further clarified in the Jan. 19, 2012 press release 'Fitch Takes Various Rating Actions on U.S. Tax-Supported Transit Systems'.

STRONG BUT CYCLICAL TAX BASE: RTD's service area is strong but exhibits cyclicality as evidenced by the ongoing recovery of sales tax revenues.

SOUND DEBT SERVICE COVERAGE: RTD's debt service coverage by pledged sales tax revenue is sound, but could be vulnerable if future issuance exceeds current plans.

UNEVEN SALES TAX PERFORMANCE: RTD has a history of optimistic sales tax revenue projections, but responds effectively with mid-year adjustments when needed. Sales tax performance and the sustainability of their recovery, relative to system operating and capital needs, will remain an important rating driver.

LARGE REPRIORITIZED CAPITAL PLAN: The sizable capital plan has been reprioritized due to rising costs and revenue shortfalls, leading management to pursue a public-private partnership (P3) to build and operate its highest priority projects. The prospects for the P3 project improved notably with the recent approval of a $1.03 billion federal new starts grant.

LOW FAREBOX RATIO: Farebox recovery exceeds RTD's 20% goal, but remains low. Additionally, RTD has demonstrated its willingness to increase fares.

CREDIT PROFILE:

REPRIORITIZED CAPITAL PLAN

In affirming all ratings, Fitch considers the substantial rise in cost estimates for the FasTracks project, now $6.75 billion, up from an initial $4.7 billion for the full system as approved by voters in November 2004, along with the 0.4% additional sales tax needed to fund it. In response, RTD has revamped its financing plan to include significantly more in federal funds, as well private equity through a public-private partnership that was established in 2010. Also, RTD's Board of Directors has prioritized projects within the FasTracks program, and is proceeding with only system expansion that can be built and operated within the existing revenue base, as projected in a comprehensive financial model.

PUBLIC PRIVATE PARTNERSHIP

Management is contemplating seeking voter approval for a sales tax increase, recognizing that the full project now is not feasible without additional funding. However, to date the board has not approved such an action given its perceived lack of support during the economic downturn. Fitch acknowledges RTD's progress in reconciling the existing revenue resources with the new, much higher, full capital costs. Fitch views RTD's new public-private partnership as a notable accomplishment that is projected to generate significant capital savings and transfer the risk to the private sector.

Fitch believes RTD's use of public-private partnerships to design, finance, build, operate, and maintain some of the planned new transit lines as protecting the FasTracks' sales tax revenue bondholders' security in that the P3 method replaces some initially expected FasTracks bond issuances. However, the capital portion of the payments to the private concessionaire is senior to the repayment of the COPs, lowering their payment priority. RTD approved Denver Transit Partners (DTP) as the concessionaire in summer 2010. In August 2010, RTD issued $398 million in private activity bonds on behalf of DTP (rated 'BBB-' by Fitch).

KEY $1 BILLION GRANT APPROVED

Along with additional equity, the partnership's funding will comprise 12% of the total FasTracks project. A key element of the P3 plan, a federal new starts grant totaling $1.03 B, has been approved for the $2.0 B project. The approved bid for the P3 project totaled $305 million less than RTD's budget, leading RTD to leverage its remaining capacity through a recently closed $280 million TIFIA loan from the DoT for additional FasTracks projects. The TIFIA loan is on parity with outstanding FasTracks bonds.

ONGOING SALES TAX RECOVERY

RTD's principal revenue source, sales taxes, rebounded by 7% in 2010 after posting a large 10% decline in 2009. Year end 2011 projections point to a 5.3% increase suggesting ongoing economic recovery. Future sales tax growth is projected to remain about level in 2012, followed by a 5.5% gain in 2013 and annual gains of 4.3% per year, which Fitch views as optimistic given the 4.5% average annual gain prior to the last recession and the two consecutive years of declines experienced in 2002 and 2003 and again in 2008 and 2009. However, RTD's management has proven responsive to weaker performance, taking actions such as delaying or eliminating capital projects, making service adjustments, and restructuring fares.

STRONG DEBT SERVICE COVERAGE

Debt service coverage for the senior bonds remains strong since the lien now is closed. Pledged sales tax revenue in 2010 covers maximum annual debt service (MADS) 6.7 times (x). Coverage of MADS for FasTracks bonds and the recent parity $280 million TIFIA loan remains sound at 3.7x. Including the capital portion of the service payments to the concessionaire and the $12 million annual obligation to the Denver Union Station Project Authority which are paid after FasTracks bond debt service, 2010 revenues cover combined MADS by 1.8x.

Including COPs reduces MADS coverage by 2010 revenues to a still adequate 1.7x. Fitch believes coverage levels are protected by RTD's need to use surplus sales tax revenue to subsidize operations as well as by RTD's policies regarding minimum coverage levels, including one that requires all revenue net of operating expenses to cover all debt and repayment obligations at least 1.2x. The TIFIA loan completes all of RTD's planned long-term financing needs for the reprioritized FasTracks program. For RTD's base system, which does not include the FasTracks program, 2012-2017 capital needs total $300 million for vehicle replacement, all of which are anticipated be funded with COPs.

RIDERSHIP TRENDS IMPACTED BY RECESSION

RTD has a low farebox recovery rate, relying instead on excess sales tax revenue to cover operating costs. The farebox recovery rate has been trending up, and at 26% in 2010, is now above RTD's stated 20% goal. Nonetheless, this level is below national averages. Ridership trends paralleled job loss trends in the Denver MSA. Ridership declined by 5.4% in 2009, although operating revenues increased due to a system-wide fare increase. Ridership declined again modestly by 1.1% in 2010 but 2011 trends point to a 1.1% gain. The adopted 2012 budget includes modest service reductions needed to accommodate nearly flat projected sales tax growth. Fare increases, last imposed in 2011, are assumed in RTD's financial plan but are not yet approved.

FASTRACKS EXPANSION

RTD currently provides primarily bus service and 34.8 miles of rail for a very large service area that encompasses 55% of the state population. The service area's socioeconomic indicators are characterized by above average wealth and improving employment trends. The FasTracks program calls for a major system expansion over 12 years, including 119 miles of new rail lines, 18 miles of bus rapid transit infrastructure, additional parking and stations, and improvements to Denver's Union Station.

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 Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.

Applicable Criteria Related Research

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'Fitch Refines Methodology For Rating Tax-supported Debt Of Public Enterprises'(July 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.