NEW YORK, October 09 (Fitch) Fitch Ratings assigns an 'AA' rating to the
following Pennsylvania Turnpike Commission (PTC, or the commission) bonds:
--$80,765,000 motor license fund-enhanced turnpike subordinate special revenue
bonds, series B of 2013, sub-series of b-1;
--$19,896,790.8 motor license fund-enhanced turnpike subordinate special revenue
bonds, series B of 2013, sub-series of b-2.
The bonds are expected to sell via negotiation during the week of Oct. 14, 2013.
Additionally, Fitch affirms the 'AA' rating on approximately $775 million in
outstanding motor license fund-enhanced turnpike subordinate special revenue
bonds (collectively with 2013 sub-series b-1 and b-2, the bonds).
The Rating Outlook is revised to Negative from Stable.
The bonds are secured by a junior pledge on the trust estate, which consists
primarily of residual toll revenues, securing the commission's subordinate
revenue bonds. Ultimate security for the bonds and the rating, rest with the
ability to access certain monies in the commonwealth of Pennsylvania's (PA, or
the commonwealth) motor license fund (MLF) to fund debt service if necessary.
KEY RATING DRIVERS
STATE GO CAPS RATING: The Outlook revision to Negative reflects Fitch's view
that the commonwealth's general obligation (GO) rating caps the rating on the
bonds because the MLF is subject to interfund borrowing from the commonwealth's
general fund and there is no direct MLF revenue pledge. Following a July 15th
rating action, Fitch rates Pennsylvania's GOs 'AA'/Negative Outlook.
AVAILABILITY OF COMMONWEALTH MOTOR LICENSE FUND: While the bonds are intended to
be repaid from Commission revenues, the 'AA' rating rests upon the direction to
the state treasurer, contained in the authorizing legislation (Act 44), to draw
upon certain funds in the Commonwealth's MLF to make up any deficiency in debt
service deposits expected to be made by the Commission. Act 44 further includes
MLF FUNDS AVAILABLE WITHOUT ANNUAL APPROPRIATION: Appropriation on the part of
the Commonwealth is not necessary to access the MLF to cover a debt service
CERTAIN MLF FUNDS RESERVED: Reserved funds within the MLF and a debt service
set-aside account have been established to facilitate timely payment in the
event of any debt service deficiencies. The fund has exhibited large daily
balances in recent years, providing sound protection should a draw on the fund
MLF RECEIVES CERTAIN VEHICLE-RELATED REVENUES: The MLF receives a variety of
fuel and other vehicle-related revenues that are not expected to vary
significantly from year to year barring changes in tax rates or bases.
The rating is sensitive to changes in the commonwealth's GO rating. Leveraging
plans for the MLF as well as any changes in Commonwealth transportation funding
policy that affect the revenue performance of, or available balances in, the
fund could affect the rating. Additionally, the rating is limited by the lack of
a direct revenue pledge from the MLF.
The bonds being offered represent the 10th issuance of MLF-enhanced turnpike
subordinate special revenue bonds under Act 44 of 2007 of the commonwealth (the
act), which was designed to provide additional annual support for statewide
transportation projects. The rating is based on provisions in the act that
direct the state treasurer to draw upon certain funds in the commonwealth's MLF
in the event that debt service deposits expected to be made by the commission
are insufficient. The claim on MLF revenues is stated directly in Act 44 and no
further appropriation on the part of the commonwealth is necessary. Act 44
further states the commonwealth's commitment not to impair its commitment to
The commonwealth is permitted to borrow from the MLF to support general fund
cash flow needs. The reverse is also true, and the commonwealth also retains
the authority to issue tax anticipation notes as an alternative to interfund
borrowing. In Fitch's view, MLF balances are not fully segregated from general
fund operations given the general fund's ability to borrow from the MLF. This
linkage caps the rating on the bonds at the commonwealth's GO rating.
Constitutional provisions require interfund borrowing from the MLF to be repaid
by the earlier of eight months or July 31st. The commonwealth last borrowed
from the MLF in fiscal 2010 and the borrowing was repaid within the fiscal year.
Act 44 provisions described below mitigate appropriation risk and support a
rating on par with the GO.
MLF AVAILABLE FOR DEBT SERVICE
Neither the MLF nor its revenues are directly pledged to bondholders. Instead,
the claim on MLF revenues is stated directly in Act 44 which authorizes the
bonds. The subordinate trust indenture governing the bonds lays out trustee
notification requirements to the Pennsylvania Department of Transportation
(PennDOT) in the event of insufficient commission revenues. A memorandum of
agreement (MOA) between PennDOT, the commonwealth's office of the budget, and
the state treasurer spells out the timing of notifications necessary should a
draw on the MLF become necessary. Fitch believes this structure would avert a
missed debt service payment.
In addition, a special revenue bonds debt service sub-account, funded at closing
with bond proceeds to reach 50% of maximum annual debt service (MADS), is
available to be drawn upon if PennDOT or the Treasurer failed to transfer monies
from the MLF. If MLF monies are received subsequent to a withdrawal from this
account, such monies would go to restore it; however, the commission has no
obligation to maintain the balance or replenish any funds withdrawn, lessening
the fund's significance among rating factors.
The MOA also creates the PTC special revenue bond account within the MLF. The
state treasurer agrees to use best efforts to maintain the fund at a level equal
to MADS on the bonds. This account is not pledged to bondholders, but the stated
intent is to use balances in the account to cover deficiencies in commission
payments for the bonds only in the event no other funds are available in the
MLF. Under the MOA, the treasurer agrees to not access the account for interfund
borrowing. The MOA requires replenishment from first monies into the MLF from
certain sources if the account is drawn upon.
The commission's subordinate indenture specifies a rate covenant setting toll
rates to achieve 1.15 times (x) coverage of subordinate obligations and 1.0x
combined subordinate and MLF-enhanced debt service coverage. Actual coverage by
toll revenues was higher at 1.8x in fiscal 2012, and an estimated 1.6x in fiscal
2013. Act 44 limits MLF-enhanced debt to $5 billion, with no more than $600
million to be issued annually. The Commission's annually reviewed long-term
projections currently anticipate issuance of approximately $200 million each
year through 2032. These projections do not anticipate any changes to the
commonwealth transportation funding framework, such as those currently under
discussion by the legislature.
TRANSPORTATION REVENUES FLOW TO MLF
The commonwealth's MLF receives proceeds of motor fuels taxes, vehicle
registration fees, license taxes, operator license fees, as well as other excise
taxes and federal transportation revenues. Pennsylvania's constitution requires
such proceeds to be used exclusively for construction, reconstruction,
maintenance and repair of and safety on public highways and bridges and for debt
service on obligations incurred for these purposes.
Revenue performance has been fairly steady. Pursuant to Act 44, approximately
72% of fiscal 2013 MLF revenues were available to cover deficiencies in debt
service deposits for the bonds if necessary. MLF tax and fee revenues available
for debt service on the bonds increased an estimated 1.3% in fiscal 2013
year-over-year, ahead of 0.5% growth the prior year. Fitch expects, given the
nature of the sources and the Pennsylvania economy, steady to slightly declining
performance going forward barring changes in tax rates or bases. Earlier this
year, the governor proposed transportation reform that would be expected to
generate substantial new revenues for transportation. The proposal also would
terminate the Act 44 obligations of the Commission by 2023. Various proposals,
including alternatives suggested by legislators, are under consideration in the
current fall legislative session. Prospects for passage of any proposal are
unclear to Fitch at this time.
The MLF's average and minimum daily balances are significant, with fiscal 2013
levels averaging $1.1 billion and a minimum of $709 million. These balances
exclude any MLF revenues not available for debt service on the bonds. While
balances are down notably from prior years, reportedly due to increased paygo
capital spending by the commonwealth, coverage remains robust. The minimum
daily fund balance in fiscal 2013 provided nearly 8x coverage of pro form MADS
on the bonds. The additional bonds test limits MADS on all special revenue
bonds, including the proposed issuance, to no more than one-third of the ending
balance in the MLF for the prior year.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
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