Fitch Affirms New Jersey Transit Corp. Senior COPs at ‘A’
Fitch Ratings affirms the ‘A’ rating on $1.2 billion in outstanding New Jersey Transit Corporation (NJ Transit) senior certificates of participation (COPs). The Rating Outlook on the COPs is Stable. NJ Transit also has $348 million in outstanding subordinated COPs, which are not rated by Fitch.
The ‘A’ rating is principally based on the strength and the sufficiency of Section 5307 formula fund grant receipts to meet lease payments and the long established track record of federal transit funding. The rating takes into consideration the closed senior lien, its priority security interest in basic lease payments over the subordinated COPs, and the lack of cross default provisions.
NJ Transit has a limited obligation to make basic lease payments on the COPS solely from Federal Transit Administration (FTA) Section 5307 formula fund grant receipts, subject to annual appropriation with regard to each series of outstanding COPs by the New Jersey State Legislature. The senior COPs are further secured by a debt service reserve surety equal to $108.2 million.
A recent debate among transit providers and policymakers within the New York-Newark tri-state urbanized area over the distribution of fiscal 2007 Section 5307 formula funds grants has delayed NJ Transit’s receipt of these grants and poses a near-term credit risk. Similar to other debt programs leveraging federal transit funds, a risk over the medium to long term is the potential for material changes in federal transit funding policy with each new authorization period of the federal surface transportation program.
The ‘A’ rating and Stable Outlook on the COPs also reflect Fitch’s expectation that the parties involved in the debate over distribution of Section 5307 formula funds are likely to solve this issue in the short term given the magnitude and importance of these grants to fund regional transit agencies’ capital needs and preventive maintenance activities and, in NJ Transit’s case, to make lease payments on the COPs. Nevertheless, Fitch will continue to monitor this issue and could take negative rating action if a resolution is not achieved and Section 5307 grants are not distributed over the next several months. In addition, action could be taken if a pattern of greater political risk develops over the future distribution of these grants within the urbanized area.
Historically, the FTA has allocated Section 5307 formula fund grants to the seven urbanized areas within NJ Transit’s jurisdiction along with published criteria and calculations on how those grants are allocated. NJ Transit and other designated FTA grant recipients within the urbanized areas they serve have used this information to allocate Section 5307 formula grants among one another. This year, however, a change in the published criteria by FTA has led to a debate among principals of the New York-Newark urbanized area covering portions of New York, New Jersey and Connecticut as to how Section 5307 formula funds should be distributed among the three states. A resolution is dependent on consensus reached by NJ Transit and other transit providers and policymakers within the urbanized area.
While NJ Transit has received sufficient Section 5307 formula fund grant receipts to make its March 15, 2007 interest payment of $23 million on the senior and subordinated COPs, the successful resolution of the regional funding allocation debate is required so that sufficient grant receipts are available to make the Sept. 15, 2007 principal and interest payment of $101 million. Although the debt service reserve surety provides additional security pledged to certificate holders in the event of short-term delay in grant receipts, NJ Transit management has indicated a preference to use funds outside of the trust estate rather than the debt service reserve fund surety under such a scenario. Management estimates that NJ Transit has access to $1 billion in capital funds comprising $875 million in state transportation trust fund monies, $29 million in Section 5307 formula funds grants, and $91 million in other federal funds. While this provides NJ Transit with some additional financial flexibility where it may use state funds and other federal funds on a short-term basis to make near-term lease payments and reimburse them with future Section 5307 formula fund grants, certificate holders have no claim on or title to any funds other than Section 5307 formula grants and the debt service reserve surety.
Section 5307 formula fund grant receipts have been sufficient to provide strong debt service coverage, and basic lease payments have matched scheduled principal and interest payments on the various series of COPs, including the subordinated COPs.
Senior lien debt service coverage on the COPs equaled 2.08 times (x) in fiscal 2006 and has ranged from a low of 1.50x in fiscal 2004 to a high of 2.21x in fiscal 2001. Other than the ability to issue refunding COPs, the senior lien pledge has been legally closed through the fourth supplemental trust indenture. Issuance of subordinated COPs is subject to the following tests: average annual revenues for the current and future federal fiscal years within the current authorization period are not less than 1.25x total maximum annual debt service (senior and subordinated), and average annual revenues for the most recent three fiscal years are not less than 1.15x total MADS. Coverage of senior and subordinated COPs equaled 1.96x in fiscal 2006 and, assuming the resolution of the short-term regional funding debate, is expected to be at or above 2.00x through fiscal 2009, the end of the current federal authorization cycle.
NJ Transit, an instrumentality of the state of New Jersey, is responsible for planning, coordinating and operating the state’s public transportation network, the nation’s third largest. NJ Transit’s operations include an extensive fixed-route bus, commuter rail, light rail and para-transit network.
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