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Fitch Rates North Carolina's $283.2MM GARVEEs 'AA-'; Outlook Stable

Posted on: Monday, 17 September 2007, 15:00 CDT

Fitch Ratings assigns an 'AA-' rating to approximately $283.2 million State of North Carolina grant anticipation revenue vehicle bonds (GARVEEs), series 2007. The bonds are expected to sell through negotiation by a Banc of America Securities LLC and UBS Investment Bank-led syndicate on or about Sept. 25th. Bond proceeds will finance a portion of the construction costs for certain federal aid highway projects and pay the cost of issuance. The bonds mature serially March 1, 2009-2019. The Rating Outlook is Stable.

The series 2007 bonds are the state's first issuance of an expected approximately $825 million-$900 million GARVEEs, which are secured by federal transportation funds and authorized by state statute, to finance $1.4 billion in statewide highway projects to increase capacity, improve safety and to rehabilitate existing assets. Project costs not financed by the bonds are expected to be funded with state resources.

A memorandum of agreement between the North Carolina Department of Transportation (NCDOT) and the Federal Highway Administration establish a sum sufficient debt service payment stream. However, the pledge of federal transportation funds under the trust indenture is more broadly defined to include all legally available federal transportation funds to provide coverage in the unlikely event these payments result in a deficiency. Similar to some other state transportation grant anticipation programs leveraging federal transportation funds, advance segregation for debt service is not on a cash basis but through a set-aside of obligation authority for federal transportation funds.

Fitch's 'AA-' rating is based on the long established track record of federal transportation funding, the state's covenant that in each federal fiscal year it will request obligation of federal transportation funds for that year's debt service payment before obligating federal transportation funds for any other purposes, and a strong additional bonds test of 3.0 times (x) maximum annual debt service (MADS). Fitch also considers the 11.5 year debt maturity profile for the series 2007 bonds and a 12 year maturity profile for subsequent issuances a key credit strength that helps to limit future federal surface transportation program reauthorization risk. State statute further limits debt issuance to either total principal outstanding can be no more than the amount of federal transportation funds received the year prior to issuance or MADS can be no more than 15% of average annual federal transportation funds expected to be received over the seven year period for the state transportation improvement program. Similar to some other state transportation grant anticipation debt programs leveraging federal transportation funds, the GARVEEs do not have the additional security of pledged or legally available revenues from state sources.

A risk for these bonds is the potential for significant changes in federal transportation funding policy with each new authorization period. An interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. The Safe, Accountable, Flexible, Efficient Transportation Equity Act - A Legacy for Users (SAFETEA-LU) took nearly two years to enact and runs through federal fiscal 2009. North Carolina's federal transportation funding under SAFETEA-LU represents an approximately 24% increase over levels received under TEA-21.

Continuing federal budget deficits and national security concerns coupled with the possibility of changing federal priorities and/or highway trust fund resource constraints do not guarantee that such federal transportation funding growth will continue during subsequent reauthorization cycles. North Carolina may be less susceptible to changes in federal transportation funding policy given its status as a donor state where it receives about $0.92 in federal transportation funds for each $1.00 the state contributes in federal motor fuel tax revenues.

The additional bonds test, statutory debt limits and strong MADS coverage of around 10.0x, assuming the additional issuances, provide sufficient protection from the risk of lower than expected federal transportation funding in the near term due to highway trust fund constraints. Assuming the continued practice of six year federal transportation authorization periods, the series 2007 bonds and the expected future issuances will typically span two such periods, which helps to mitigate reauthorization risk over the medium term.

Through NCDOT, the state is responsible for the planning, construction, operation, maintenance, and coordination of a multimodal transportation network, including a 79,000-mile statewide highway network. The North Carolina Board of Transportation, whose 19 voting members are appointed by the governor, is responsible for formulating policy, advising the NCDOT secretary, determining needs and approving and scheduling projects and programs.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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