Rating Action: Moody's assigns Aa2 to Alabama Highway Finance Corp.'s Special Obligation Revenue Bonds, Series 2020A
Global Credit Research - 16 Jul 2020
New York, July 16, 2020 -- Moody's Investors Service has assigned a rating of Aa2 to the Alabama Highway Finance Corporation's (AHFC) planned $121 million issuance of Special Obligation Revenue Bonds, Series 2020A. The outlook is stable. At the same time, we have affirmed ratings on the separately secured Alabama special obligation highway revenue bonds, at Aa1, and on the Federal Highway Grant Anticipation Bonds Series 2012, at A1. The outlook assigned to these outstanding securities, all of which were issued by the Alabama Federal Aid Highway Finance Authority, also is stable.
The Aa2 rating on the AHFC bonds is supported by the pledge of a portion of revenue from per-gallon taxes on gasoline and diesel fuel taxes imposed by the 2019 Rebuild Alabama Act. The pledge consists of a statutory first claim on monthly revenue from the law's specific fuel tax increments, up to an amount equal to scheduled maximum annual debt service. Total revenue available to provide this statutory allocation will greatly exceed debt service requirements, even factoring in the effects of a recession driven by the coronavirus pandemic. We estimate coverage on this basis at 16 times debt service using the tax increments already in effect (6 of the 10 cents per gallon enacted) and at more than 25 times when the new taxes have been fully phased in (starting in fiscal 2022). Because the authorizing statute allows issuance of $150 million of this debt, the corporation could issue as much as $28.9 million of additional bonds if needed to finance the project discussed below ("Use of Proceeds"). Beyond the $150 million authorization, additional parity bonds are not allowed by the bond resolution, except to refund the initial bonds for debt service savings.
The Alabama Federal Aid Highway Finance Authority's special obligation revenue bonds' Aa1 rating is supported by very strong debt service coverage provided by revenue from two sources: the state's pre-existing motor fuel tax rates and from the state's share of Federal Highway Administration (FHWA) reimbursements for eligible projects. Together, these sources will provide ample debt service coverage. The program's leverage constraint requires that federal revenue alone provide three times coverage of future maximum annual debt service following the issuance of new debt. The legal structure ensures timely debt service payment from pledged revenue.
The A1 rating assigned to the 2012 grant anticipation revenue bonds issued by the Alabama Federal Aid Highway Finance Authority is consistent with substantial debt service coverage provided by FHWA grant revenue. The grant anticipation bonds' claim on the state's FHWA funding is on parity with the special obligation bonds that are additionally secured by state motor fuel tax revenue. The rating further incorporates the lack of additional state resources pledged for debt service and the need for periodic reauthorization by Congress of the federal highway program under which the grants are provided.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for the Alabama Highway Finance Corporation's special obligation revenue bonds. However, the situation surrounding the coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of the bonds changes, we will update the rating and/or outlook at that time.
The stable outlook is consistent with the strong coverage of scheduled debt service even in the face of adverse economic conditions.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Upgrade of the State of Alabama
- Only for AFAHFA-issued grant anticipation bonds: Addition of other resources to pledged revenue
ACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Downgrade of the state's general obligation bond rating
- Sharp decrease in taxable motor fuel sales in the state, reflecting economic stagnation, technological changes or any other conditions
- Creation of competing legal claims on pledged revenue or other statutory changes that potentially reduce available revenue
- Only for AFAHFA-issued bonds: Lapse in reauthorization of federal transportation funding that disrupts flow of payments to state highway programs, or reduction in federal funding amounts
The Alabama Highway Finance Corporation's special obligation bonds are supported by a statutory allocation of revenue from a 10-cent increment of the state's motor fuels tax that will be adjusted based on the National Highway Construction Cost Index. By statute, the Alabama Highway Finance Corp. is to receive transfers from this portion of motor fuel tax of as much as $980,000 per month ($750,000 from gasoline tax and $230,000 from diesel). Debt service will be capped at the annual amount from this allocation, $11.76 million, except for in the first year (with interest payable March 31, 2021, and principal and interest payable September 30, 2021). Principal and interest for fiscal 2021 will total $21.56 million, reflecting the $9.8 million of fiscal 2020 tax revenue collected through July and already deposited in the debt service fund. The corporation is authorized by statute to use the statutorily allocated share of fuel tax revenue as security for $150 million of debt with a maturity of as many as 20 years, for this specific project (see "Use of Proceeds"). Available Rebuild Alabama Act revenue not needed for debt service is funneled to the transportation infrastructure needs of the state and its local units. The corporation also has a privately placed, unrated 2014 bond outstanding, is backed by a portion of the state's revenue from license and registration fee receipts and, if necessary, a share of the state's pre-existing (18 cents per gallon) motor fuels tax. Debt service on those bonds, which have a final maturity in fiscal 2021 and are currently outstanding in the amount of $3.75 million, is amply covered by the license and registration receipts alone.
The Alabama Federal Aid Highway Finance Authority's highway revenue bonds are backed by a double-barreled pledge of grants received under the Federal Aid Highway Program and the state's motor fuel tax receipts. Federal aid payments are subject to a parity claim by the authority's 2012 Grant Anticipation Bonds (see below). The pledge of state fuel tax revenue consists of the state's statutorily defined share of gasoline tax revenue from taxes in effect before the Rebuild Alabama Act. A portion of the state's gasoline tax receipts is also pledged on a parity basis to secure the Alabama Highway Finance Corporation's 2014 debt, if other revenue pledged to that loan (from license and registration fees) are insufficient. Under the authorizing act for the highway revenue bonds, the Alabama Department of Transportation is directed to set aside the first receipts of gasoline tax or federal highway grants in each fiscal year to cover that year's debt service. Additional bonds can be issued, subject to a 1.5 times coverage test for the state-source revenue and a 3 times coverage test for federal revenue.
The authority's grant anticipation bonds are secured by a pledge of the state's grants received from the Federal Highway Administration. The bonds are subject to a leverage constraint requiring 3 times coverage of maximum annual debt service by the lesser of the prior year's federal funds received or the state's obligation authority.
USE OF PROCEEDS
The current issue will finance Alabama's contribution to deepen and widen the Mobile Ship Channel, which connects the Port of Mobile to the Gulf of Mexico. The project, with an estimated cost of $366 million, is being primarily financed by the federal government and executed by the Army Corps of Engineers. It will expand Mobile's ship channel to a depth of 50 feet (from 45 feet) and widen it by 100 feet for three nautical miles. These modifications will allow the port to accommodate two-way traffic and larger ("post-Panamax") vessels in order to compete with other ports in the region, including in Savannah, Georgia, and Charleston, South Carolina, and New Orleans.
Together with the premium amount, the bonds will generate proceeds of about $150 million, which will cover the state's $91.4 million contribution to the project's estimated cost as well as $48.1 million for maintenance by the Army Corps of Engineers. Residual proceeds of about $11 million would be available for ancillary project costs or contingency planning. Depending on the project's actual costs over the next few years, the corporation could borrow as much as $28.9 million more by issuing the rest of the statutorily authorized parity debt.
The Alabama Highway Finance Corporation is a public corporation created under the laws of the State of Alabama to provide funding for the state's share of construction costs for roads and bridges and to participate in the construction and maintenance of the state's roads and bridges, under the direction and supervision of the state's Department of Transportation. The State of Alabama (Aa1, stable) ranks 24th among states based on population, with 4.9 million residents. Alabama's economy, based on 2019 GDP of $231 billion, ranked 27th among states.
The principal methodology used in these ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Edward Hampton Lead Analyst State Ratings Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US 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. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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