Fitch Affirms Santa Clara VTA, CA's Sales Tax Revenue Bonds at 'AA'; Outlook Stable

Fitch Ratings has affirmed Santa Clara Valley Transportation Authority, California's (the authority) bonds as follows:

--$151 million variable rate demand sales tax revenue refunding bonds series 2008A, 2008B, and 2008C at 'AA'.

--$56 million sales tax revenue refunding bonds series 2007A, 2011A at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from a senior lien on the 1976 0.5% sales and use tax, net of a collection administrative fee, levied within the county in perpetuity.

KEY RATING DRIVERS

HIGH DEBT SERVICE COVERAGE: The 'AA' rating reflects very high fiscal 2014 debt service coverage of 8.8x maximum annual debt service (MADS), no plans for further debt, and practical constraints to significant future leverage.

VARIABLE RATE STRUCTURAL RISKS: The bonds' strong debt service coverage is somewhat offset by variable rate structural risks. Roughly three-quarters of the bonds are variable rate with letters of credit and interest rate swaps.

STRONG ECONOMY AND TAX BASE: The county benefits from a strong economic base with substantial employment growth and investment in the high technology industry. The county's well diversified tax base continues to grow, and wealth and income levels are well above national averages.

SOUND SECURITY STRUCTURE: Bondholders enjoy a first lien on a broad-based sales tax and a high 2.0x MADS additional bonds test (ABT). The indenture includes a springing reserve should coverage fall below 3.0x MADS.

MIDRANGE OPERATIONAL/FINANCIAL METRICS: The authority has a low farebox recovery ratio, moderate net debt service coverage levels, and a good infrastructure renewal and replacement profile. The low farebox recovery ratio is partly mitigated by the authority's reliance on sales tax revenues for ongoing operations, resulting in a reduced correlation between operations and overall revenue performance.

RATING SENSITIVITIES

VARIABLE RATE EXPOSURE: The potential for rating upgrades is constrained by the bonds' currently high exposure to variable rate structural risks.

CREDIT PROFILE

The authority is an independent public agency primarily responsible for mass transit operations within Santa Clara County (general obligations bonds [GOs] rated 'AA+'; Stable Outlook), home to California's Silicon Valley and the City of San Jose (GOs rated 'AA+'; Stable Outlook).

STRONG, LARGE AND DIVERSE ECONOMY

Santa Clara County is large, with a population of 1.9 million residents on the southern edge of the San Francisco Bay Area. Wealth levels are well above average, and robust employment growth has lowered the unemployment rate; the October 2014 rate was 5.1%, below both state and national averages. Despite higher than average employment concentration in the high technology industry, the county is otherwise well diversified.

The county's sales tax base contains moderate concentration levels, with the top 10 payers generating 11% of total sales tax revenues. Sales tax revenues have grown by an average annual 1.9% from fiscal 1998-2014. Revenues experienced their greatest decline during the tech-led recession in 2002, falling a substantial cumulative 27.7% from fiscal years 2001 - 2003. The peak to trough decline during the housing-led recession in 2008, by comparison, resulted in a more manageable 15.9% loss. Sales tax revenues grew for the fifth consecutive year through fiscal 2014, surpassing the pre-recessionary peak in fiscal 2012. The authority's economic consultant estimates sales tax revenues will grow moderately over the next few years, which Fitch believes is reasonable, given the region's economic strengths and continued signs of expansion.

STRONG DEBT SERVICE COVERAGE

Fiscal 2014 pledged revenues of $186 million covers MADS of $21 million by a very high 8.8x. Coverage is likely to remain very high given the authority's reliance on surplus 1976 sales tax revenues to support the system's ongoing operations. Although the authority has other sales taxes, they sunset and are used predominantly to finance capital. Management has no plans to issue further new money issuances on the lien, and the bonds have a solid 2.0x MADS ABT. Fitch estimates sales tax revenues would have to decline by a severe 89% from fiscal 2014 levels for MADS coverage to reach 1.0x.

Fitch views the bonds' strong debt service coverage as offset somewhat by variable rate structural risks. Roughly three-quarters of the bonds are variable rate and hedged with interest rate swaps. The bonds have liquidity support from LOCs issued by Goldman Sachs, Citibank, and Morgan Stanley. The interest rate swaps have a negative $19.3 million cumulative termination value as of 11/28, though any such payments would be subordinate to debt service.

MIDRANGE OPERATIONAL/FINANCIAL METRICS

Fitch views the system's operational metrics as mixed and midrange overall. The system's pricing framework is weak, with a low farebox recovery ratio of just 12%, which nonetheless may rise after Bay Area Rapid Transit service is extended to the county. This weakness is somewhat mitigated by the system's dependence on sales tax revenues for ongoing operations, resulting in a reduced correlation between operations and overall revenue performance.

Fiscal 2014 net debt service coverage was 1.91x and Fitch projects coverage will range from 1.87x - 1.95x from fiscal years 2015 - 2019. Fitch views positively the system's infrastructure renewal and replacement framework, with net coverage of operating and capital expenses greater than 1.0x.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

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

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964015

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