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Fitch Rates Connecticut's $500MM 2nd Lien Special Tax Obligation Refunding Bonds 'AA-'
NEW YORK-(Business Wire)-September 5, 2008 - Fitch Ratings assigns an 'AA-' rating to $500 million State of Connecticut second lien special tax obligation (STO) refunding bonds, transportation infrastructure purposes, 2008 series 1. The bonds will sell via negotiation on or about Sept. 17th, and will mature Feb. 1, 2010-2022. Optional redemption provisions will be determined upon final negotiation. Fitch also affirms the 'AA-' rating on outstanding senior lien and second lien STO bonds. The Rating Outlook is Stable.
Connecticut's STO bonds are issued under a senior and second lien, and are secured by pledged revenues deposited to the state transportation fund. Pledged revenues include taxes and fees on motor vehicle fuel, used vehicle sales, licenses, a fixed share of tax on oil companies' gross earnings and other transportation-related revenues. The 'AA-' rating for the second lien bonds, on par with the senior lien, reflects an additional bonds test requiring 2 times (x) coverage of principal and interest on both liens. Moreover, the state covenants under the second lien that any senior issuance must meet all second lien requirements, both senior and second lien bonds are subject to an annual 2x debt service coverage test, and the bonds are backed by an aggregate debt service reserve funded at maximum annual debt service.
At present, $2.2 billion in senior lien bonds and $569 million in second lien bonds are outstanding. Second lien bonds have been issued periodically to refund outstanding senior lien STO bonds under a 1990 resolution. With the exception of one series, the outstanding second lien bonds' variable rate debt service is swapped to fixed, with swap-related payments, including termination, on parity with debt service. The new bonds will refund three of the four outstanding series.
The STO bond program features conservative forecasting and budgeting, twenty year maturity and flexibility to slow capital projects as necessary. Offsetting these strengths are debt service growth that is faster than pledged revenues, interdependence with the state's general fund that has led to revenue or cost shifts during periods of fiscal stress, and large needs for transportation capital spending. Fiscal 2008 estimated pledged revenues covered combined senior and second lien debt service by 2.6x. After funding senior lien debt service and reserves, followed by second lien debt service and reserves, funds are available for transportation-related general obligation bonds and operating expenses for the departments of transportation and motor vehicles.
Although the special transportation fund built a large fund balance in recent years, the impact of economic weakness on revenue collections combined with rising needs is leading to projected annual deficits from fiscal 2008 through the fiscal 2012 planning period. Fiscal 2008 is estimated to have ended with a deficit of $15 million and a fund balance of $178 million, or 17% of revenues. STO debt service consumed 39% of revenues. Motor fuels tax, which constitutes an estimated 46% of pledged revenues in fiscal 2008, grew an average of 1.8% per year over 10 years, but collections have declined since fiscal 2006 as higher prices curb consumption; the state projects average annual gains of only 0.8% through fiscal 2012. Oil companies tax deposits to the fund are statutorily determined by the legislature, and are scheduled to increase to support planned borrowing. Prior legislation guarantees that underperformance in the oil companies tax will be made up by supplemental general fund transfers. Despite planned transfers, fund balance in the current forecast is depleted in fiscal 2011.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').
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.
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