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Virginia (Commonwealth of) -- Moody's assigns Aa1 to Virginia CTB's Series 2020 GARVEEs; outlook stable

·16 mins read

Rating Action: Moody's assigns Aa1 to Virginia CTB's Series 2020 GARVEEs; outlook stable

Global Credit Research - 20 Aug 2020

New York, August 20, 2020 -- Moody's Investors Service has assigned a Aa1 rating to the Virginia Commonwealth Transportation Board's (CTB) $102.7 million Federal Transportation Grant Anticipation Revenue Notes, Series 2020. The outlook is stable.

RATINGS RATIONALE

The Aa1 rating on Virginia CTB's Federal Transportation Grant Anticipation Notes (GARVEEs) is ultimately derived from the credit strength of the Commonwealth of Virginia (Aaa stable). The notes are paid first from certain federal highway reimbursements, subject to appropriation, but may be paid by appropriations from the commonwealth's Transportation Trust Fund (TTF) or General Fund. The one-notch distinction in the rating from the commonwealth's general obligation rating incorporates the essential nature of the projects financed by the notes and the moderately strong legal structure, including the risk of non-appropriation.

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 Virginia. 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 Virginia changes, we will update the rating and/or outlook at that time.

RATING OUTLOOK

The GARVEE notes carry the stable outlook of the Commonwealth of Virginia. Virginia's stable outlook is based on its strong governance and financial management structure as well as significant federal government support that will help the commonwealth address budgetary imbalances resulting from the coronavirus outbreak.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Given that the bonds are rated based on the commonwealth's Aaa rating and notched once off the commonwealth's rating because of the risk of non-appropriation, an upgrade is unlikely

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- A downgrade of the Commonwealth of Virginia's rating

- Non-appropriation of needed funds for debt service

LEGAL SECURITY

The GARVEE notes are being issued pursuant to legislation enacted in 2011 (the GARVEE Act), which is the successor program to Virginia's Federal Revenue Anticipation Notes (FRANs) authorized in 2000. The GARVEE Act allows for issuance of up to $1.2 billion of FRANs and GARVEEs to be outstanding at any time (all of the FRANs have matured and no additional FRANs may be issued). The indenture prohibits the issuance of any obligation payable by federal reimbursements that are senior to the GARVEEs, though it is the ultimate availability of General Fund revenue that drives the rating.

While the availability of the commonwealth's General Fund is a key credit feature, the primary payment source for the notes are highway reimbursements received by the commonwealth from the federal government under the Federal Aid Highway Program (FAHP) and then appropriated for debt service by the General Assembly. The FAHP reimburses states for transportation projects using funds raised from federal fuels excise taxes. Through the indenture and a payment agreement between the CTB, the Treasury Board and the Secretary of Finance, the CTB covenants to request annually by December 1 that the governor include in his budget request an appropriation sufficient to pay the succeeding year's debt service requirement. The CTB also covenants to use its best efforts to have the required debt service amount appropriated by the legislature. The commonwealth's appropriation pledge mitigates risks related to reauthorization of the FAHP, which has typically been done for six-year periods, but has also been subject to numerous extensions and delays. The current federal authorization, the FAST Act, expires at the end of September.

The notes are "direct" GARVEES, meaning that the Federal Highway Administration (FHWA) has agreed in a memorandum of agreement with the commonwealth to make payments for principal and interest, rather than for construction costs. By seeking payment in this way, the CTB insulates bondholders against the risk of failure to complete projects on time or on budget. The CTB has covenanted to seek obligation authority first from the FHWA for the current federal fiscal year's principal and interest payments. This commitment provides protection against delays in federal appropriations. The CTB has also covenanted to reserve the first available obligation authority annually for GARVEE debt service.

As indicated in the indenture, indirect federal reimbursements for approved projects flow first into the State Treasury and fund monthly deposits toward the next debt service payment with the trustee. Once project-specific reimbursements from the FHWA have been received by the trustee, indirect reimbursements are released back to the Federal Fund within the TTF. Legislation limits final maturities to 20 years, though CTB policy limits maturities to 15-year terms. Pro forma coverage of maximum annual debt service (MADS) on outstanding and new GARVEEs is 8.6 times based on average annual federal reimbursements received between federal fiscal year 2008-19. Projected MADS coverage including $498.8 million of future planned GARVEE issuances through 2023 is 6.5 times.

The indenture permits additional bonds based on the amount of federal reimbursements received in the current or preceding federal fiscal year. The additional bonds test (ABT) was amended in 2016 to a strong 4.0 times MADS coverage from 3.0 times. Generally, ABT provisions limit the risk that coverage will be eroded by debt issuance. However, for this type of program, the ABT does not address the possibility of reductions in the FAHP's overall funding levels or the share of highway funds apportioned to any one state. The CTB expects to pay all debt service from direct federal highway reimbursements. However, the legislation that authorized these GARVEEs also provides that the CTB may ask for a legislative appropriation from any funds of the TTF and that the legislature may appropriate monies from any other funds available. The TTF serves as the security for a number of the commonwealth's other transportation-related debt programs, including the Route 58 Program and the Northern Virginia Transportation District Program, all of which have TTF support. Coverage of MADS by the TTF on all its supported obligations, excluding federal funds, is 4.3 times based on CTB projections of future debt issuances and revenue estimates before accounting for the impact of the coronavirus. If there were no growth in TTF revenue, MADS coverage would be 3.8 times.

While the commonwealth is not legally obligated to apply these additional funding sources to the payment of these notes, the authorization to do so is a significant positive feature. Such a feature has added significance coming from Aaa-rated Virginia. We ascribe significant weight to the likelihood of the state assuring debt service payments through appropriations from the TTF or General Fund, if necessary.

USE OF PROCEEDS

Proceeds from the Series 2020 GARVEE notes will be used to finance a variety of Virginia transportation capital projects.

PROFILE

Virginia is the twelfth largest state by population (8.5 million people in 2019) and the thirteenth largest state by GDP ($554.2 billion in 2019 current dollars). The Commonwealth Transportation Board was created in 1950 and is responsible for policies regarding Virginia's highway system and transportation needs. The CTB is governed by a seventeen-member board comprised of the commonwealth secretary of transportation, the commissioner of highways, the director of the Department of Rail and Public Transportation, and 14 appointments by the governor.

METHODOLOGY

The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Pisei Chea 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 Nicholas Samuels 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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