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Fitch Affirms Missouri Highways & Transportation State Road Bonds; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the ratings on outstanding state road bonds of the Missouri Highways and Transportation Commission (commission), as follows:

--$525.3 million senior lien state road bonds at 'AAA';

--$832.1 million first lien state road bonds at 'AAA';

--$504.7 million second lien state road bonds at 'AA+';

--$345.1 million third lien state road bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

Special revenue obligations of the commission, payable from state highway revenues constitutionally required to be used for highway purposes and deposited in the state road fund and the state road bond fund.

KEY RATING DRIVERS

SOLID COVERAGE ON BOTH INDENTURES: State road bonds were issued under a 2000 senior lien indenture and a 2005 subordinated indenture with first, second and third liens. Coverage of debt service by pledged revenues remains ample, despite relatively flat revenue performance in recent years in part due to the slow economic recovery and limited prospects for growth going forward.

NO ADDITIONAL BONDS POSSIBLE: The senior lien is closed, while subordinated liens established under voter-authorized Amendment 3 have reached their maximum issuance permitted by additional bonds tests (ABT).

DEDICATED REVENUES: The state's constitution dedicates highway user fees and taxes to roads and bridges. The state road fund supporting the senior lien bonds stands appropriated, requiring no further legislative action. Motor vehicle sales taxes deposited to the state road bond fund to support first, second and third liens require appropriation.

STATE OVERSIGHT: The bonds benefit from centralized revenue collection and careful oversight by the state, whose GO bonds are rated 'AAA'.

WHAT COULD TRIGGER A RATING CHANGE

--Declines in pledged revenues leading to erosion of solid coverage.

CREDIT SUMMARY

The commission issued state road bonds over the last decade to support statewide transportation capital projects, first under the 2000 senior lien indenture and subsequently under the Amendment 3-authorized 2005 subordinate indenture which provided for first, second and third lien bonds. The 2000 indenture has been closed since 2005 for all new bonding except refunding, while the subordinated first, second and third lien bonds have reached their limits on additional issuance under the bond documents.

The bonds' credit quality is tied largely to pledged revenue performance. Pledged revenues continue to provide ample coverage, despite lackluster growth afforded by the slow economic recovery and, in Fitch's view, the limited prospects for longer-term growth in transportation-related receipts. Residual pledged revenues after payment of state road bond debt service are available to back $864.4 million in MODOT-issued federal grant anticipation revenue bonds (GARVEEs) as well as to support MODOT current operations.

The 2000 senior indenture bonds are payable from various transportation receipts constitutionally dedicated for highway purposes and deposited to the state road fund. Receipts include portions of motor fuel taxes, motor vehicle fees, and sales and use taxes on motor vehicles. Moneys deposited in the state road fund stand appropriated for highway purposes without requiring further legislative action. Approximately $525.3 million in 2000 senior indenture bonds are outstanding.

The 2005 indenture first, second and third lien bonds have a first claim on a separate portion of motor vehicle sales tax that was formerly deposited to the state's general fund, in addition to having a second claim on state road fund receipts after the 2000 senior indenture state road bonds. The motor vehicle sales taxes dedicated exclusively to the 2005 indenture bonds are deposited to a separate state road bond fund. Sales taxes deposited to the state road bond fund must be appropriated but are constitutionally restricted to highway purposes. A total of $1.682 billion is outstanding under the Amendment 3 authorized first, second and third liens.

Highway user fees and taxes have historically been stable, although they exhibited notable weakness during the recession and are expected to remain relatively flat going forward. Before required diversions for collections, retirement and law enforcement costs, gross pledged revenues available to the bonds rose 1.9% in fiscal 2011 and 1.1% in fiscal 2012, which ended on June 30. Recent strong growth in motor vehicle sales taxes has been offset by ongoing weakness in motor fuel taxes.

Although diversions for collection costs are constitutionally capped at 3%, law enforcement and pension contributions are not capped. Pension contributions have risen rapidly given the MODOT system's low funded ratio and the recognition of investment losses from 2008 - 2009, although the state has initiated various reforms to benefit provisions and contributions to slow the growth of contributions over time. Net pledged revenues after all diversions fell 3.2% in fiscal 2011 and 0.9% in fiscal 2012, to $699.6 million.

With the closing of the 2000 indenture and full leveraging of liens under the 2005 indenture, the commission has no plans to further leverage existing state transportation taxes. The first, second, and third liens carry additional bonds tests of 4x, 3x and 2x, respectively, although MoDOT's more restrictive policy stands at 5x, 4x and 3x, respectively, levels which ensure sizable residual revenues for other departmental purposes, including backstopping GARVEE bonds and for operations.

Coverage of maximum annual debt service (MADS) on all outstanding state road bonds by fiscal 2012 estimated net receipts is solid, ranging from 8.21x for the senior lien to 3.78x for the third lien. Under a more conservative calculation of coverage which aggregates debt service across all liens and excludes the benefit of federal Build America Bonds interest subsidy on one series of third lien bonds, MADS coverage remains ample at 2.89x.

Although a debt service reserve is not established, a requirement that the state road fund, after current debt service, hold an amount sufficient for the succeeding year's debt service on senior lien bonds before revenues are disbursed for other purposes effectively provides a one-year reserve. Additional credit strength derives from administrative involvement with the state, which serves as a collection agency for all highway use revenues and provides administrative control over fund resources. Fitch rates the State of Missouri's general obligation bonds 'AAA.'

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (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

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Fitch Ratings
Primary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-9181
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings