NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A' rating to $432.035 million of South Carolina Transportation Infrastructure Bank (SCTIB) refunding revenue bonds, series 2012B.
In addition, Fitch affirms the following rating:
--$2.1 billion in outstanding SCTIB revenue bonds at 'A'.
The Rating Outlook is Stable.
The bonds are expected to sell via competitive bid on Oct. 10, 2012.
The bonds are secured by:
--A first lien on pledged revenues composed of 1) system payments from a junior lien on truck and motor vehicle registration fees and 2) payments from the South Carolina Department of Transportation (SCDOT) from non-tax sources (primarily federal highway reimbursement funds) in amounts equivalent to certain tax revenues;
--Series payments (received pursuant to loan agreements with non-state entities and SCDOT, the latter also payable primarily from federal highway revenues);
--Transfers from the revenue stabilization fund (RSF); and
--Earnings on funds and accounts.
KEY RATING DRIVERS
SOLID SOURCES OF PLEDGED REVENUES: The SCTIB maintains generally solid, dedicated sources of system payments, with statewide transportation tax revenues providing a somewhat narrow but generally stable revenue stream and other payments derived from federal highway reimbursements funds. Total system receipts in fiscal 2012 varied modestly from forecast, with actual revenues essentially flat from the prior year.
EXPOSURE TO FEDERAL TRANSPORTATION POLICIES: Federal highway reimbursement funds, which are significant to both series and system payments, are subject to changing federal transportation policies but sizable coverage of SCDOT's payments to the SCTIB from federal funds and the SCTIB's pledge to limit its leveraging of these revenues, eases concern.
ADDITIONAL SOURCES OF PLEDGED REVENUE: Payments from participating municipalities in the state are also pledged to bond repayment for their respective debt obligations. While these revenue streams are relatively narrow and subject to economic fluctuations, available fund balances and statutory intercept provisions mitigate concerns.
SCTIB HIGHLY LEVERAGED: The SCTIB is highly leveraged, and the indenture provisions contain a weak additional bonds test and the ability to incur additional series payment obligations with the underlying repayment stream providing only 1.35 times (x) debt service coverage on senior bonds and 1.2x coverage on combined senior and junior lien bonds. There is no junior lien debt currently outstanding nor any planned.
STATE FISCAL ADVICE AND COUNSEL: The state of South Carolina (general obligation bonds rated 'AAA' with a Stable Outlook by Fitch) has an underlying commitment and need for road infrastructure funded by the SCTIB. The state treasurer provides fiscal advice and counsel to the SCTIB and would enforce municipal intercept provisions if needed. Financial management issues at SCDOT that resulted in missed payments to the SCTIB in 2011 have been resolved and no further issues are anticipated. Fitch believes the increased financial oversight at SCDOT was to the benefit of bondholders.
The SCTIB was created in 1997 by the South Carolina general assembly to help finance major transportation projects with loans and other financial assistance. The bank is governed by a seven-member board of directors, which includes the chairman of the SCDOT and two appointees each of the state's governor, speaker of the house, and senate president pro tempore. The bank is managed by the SCDOT, with the state treasurer's office providing advice and counsel on financial matters and serving as trustee.
The bank's revenue bonds are primarily secured by system payments and series payments (as defined above), as well as transfers from the RSF. Transfers from the RSF are designed to mitigate variability in truck registration fee revenues although these revenues have shown decreased variability the past two fiscal years. Earnings on funds and accounts, except for the debt service fund, are additionally pledged.
In fiscal 2012 truck registration fees ($61.8 million) and motor vehicle registration fees ($37.6 million) represented over 75% of system payments and about half of all pledged revenues. Other system payments are made by SCDOT pursuant to terms of intergovernmental agreements in amounts equivalent to a portion of revenues from a privilege tax on power sold in the state ($3.6 million) and the equivalent yield of one cent of the state gas tax ($26.1 million). Due to state constitutional prohibitions on the issuance of revenue bonds repayable from a tax source, SCDOT makes these equivalent payments from non-tax revenues, primarily federal highway reimbursement funds.
In fiscal years 2009 and 2010, each pledged system revenue source, including the payments from SCDOT, exhibited variable weakness resulting from the national recession, with total pledged system revenues declining in those years. System revenues improved in fiscal 2011, with increases in each revenue category; however, while the SCTIB forecast continued improvement in these revenue sources in fiscal 2012, both motor vehicle registration fees and wholesale electric power payments slipped that year. Overall, system revenue growth was a lower 0.8% on an actual basis compared to the 1.7% growth forecast. The forecast for fiscal 2013 of 1.5% revenue growth appears reasonable although the economic sensitivity of pledged system revenues creates uncertainty, particularly in the later years of the forecast.
Although the SCTIB's claim on the fee revenues is junior to the payment of state GO highway bonds, Fitch believes constitutional limitations on issuance of GO debt and the strong coverage of the GO bonds from other revenues minimize the impact of the subordination.
Series payments are those received by the SCTIB pursuant to loan agreements with SCDOT and non-state entities, primarily Horry County (GO bonds rated 'AA+'). Horry County loan repayments are made from a portion of a county hospitality fee, which essentially matches debt service on its obligations, and state intercept provisions are available in the event of nonpayment. As with its system payments, SCDOT pays its series payment obligations primarily from federal highway reimbursement funds received by SCDOT. Such payments from SCDOT represented about half of all series payments in fiscal 2012.
SCTIB and SCDOT amended their master funding agreement in October 2011 with one provision increasing SCDOT's guarantee that available federal highway fund reimbursement funds would provide no less than 3x coverage of its obligations to the SCTIB. The lowest annual federal highway reimbursements in the last five fiscal years provided 6x coverage of the department's maximum payment obligations to SCTIB, with fiscal 2012 funds providing more than 11.7x coverage. SCDOT has covenanted to limit federal highway fund leverage and committed to make its payments to SCTIB from other non-tax sources in the event federal highway reimbursements are not sufficient.
The state and the bank have expanded and adjusted pledged revenues over time. Additional changes in the amended master funding agreement included the provision of a first priority claim and lien on federal reimbursement funds received by SCDOT to SCTIB; SCDOT's commitment to make payments due to SCTIB within five business days of SCDOT's receipt of federal funds; and the provision of written notice to SCTIB within 10 business days should the SCDOT be unable to make its monthly payment to SCTIB in full. These new provisions were part of SCDOT's tackling of cash flow and financial reporting issues that arose in calendar 2011 and Fitch believes the increased financial monitoring and oversight benefited SCTIB bondholders.
The relatively stable quality of SCTIB's pledged revenue streams is counterbalanced by a high degree of leverage. Fitch believes that the SCTIB's additional bonds test (ABT) coverage definitions are weak, since they tend to overstate debt service coverage by netting off series payments. The ABT for senior bonds requires that historical and projected net pledged revenues (defined as pledged revenues less series payments and earnings on the project fund) cover annual net senior debt service (defined as senior debt service minus series payments and earnings on the senior debt service funds) by at least 1.35x. The ABT for the junior bonds requires that historical and projected net pledged revenues cover net senior and junior debt service (defined as junior debt service minus earnings on the junior debt service funds) by at least 1.20x.
The SCTIB has approved about $4.2 billion in transportation projects; $2.78 billion are complete and $1.2 billion is currently underway. The current business plan contemplates issuance of up to $2.74 billion in revenue bonds and $60 million of state general obligation bonds for approved capital projects. The bonds being issued and all outstanding bonds are senior lien bonds; there is no junior lien debt outstanding and none is planned. The current issue refunds the outstanding series 2003A and 2004A bonds for debt service savings; a senior lien new money offering is planned for 2013. About $360 million in outstanding series 2003 debt is outstanding as variable-rate direct placement loans with Bank of America and Wells Fargo and are synthetically fixed through swap agreements with those institutions. A standard debt service reserve fund is fully cash-funded at $168 million as of June 30, 2012.
The bank targets average annual senior lien revenue bond debt service coverage of 1.45x, but this is calculated in accordance with the definitions under the indenture, with the series payment deductions. Fitch projects minimum annual coverage of gross debt service to be about 1.3x.
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.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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Source: Fitch Ratings