Fitch Ratings has assigned the following ratings to Utah Transit Authority, Utah's (the authority or UTA) bonds as noted below:
--$654.3 million sales tax revenue refunding bonds, series 2015A at 'AA';
--$199.3 million subordinated sales tax revenue refunding bonds, series 2015A at 'A+'.
The bonds will sell via negotiation on the week of January 26. Proceeds will refund a portion of the authority's outstanding senior and subordinate sales tax revenue bonds for interest savings.
In addition, Fitch affirms the following ratings:
--$1.1 billion outstanding senior sales tax revenue bonds at 'AA'.
--$958 million outstanding subordinate sales tax revenue bonds at 'A+'.
The Rating Outlook is Stable.
SECURITY
The senior and subordinate bonds are payable from a first and second lien, respectively, on certain gross sales and use taxes generated within the service area. The revenues are pledged through interlocal agreements with the counties of Salt Lake and Utah through at least 2045, which is beyond the final maturity date of the bonds. Pledged revenues also include interest subsidy payments received by UTA from the U.S. pursuant to the issuance of Build America Bonds (BABs). Some bonds additionally are payable from debt service reserve funds (DSRFs) met through a combination of sureties and cash. The 2015 bonds do not include such DSRFs.
KEY RATING DRIVERS
ADEQUATE SUBORDINATE COVERAGE: The subordinate bonds' 'A+' rating reflects adequate maximum annual debt service (MADS) coverage by actual fiscal 2013 sales tax revenues of 1.32x (under various assumptions described below), though annual debt service coverage is sound at 1.91x. Sales tax revenues are performing well with estimated fiscal 2014 collections up 6% year-over-year, marking the fifth consecutive year of positive annual growth.
SOLID SENIOR COVERAGE: The senior bonds' 'AA' rating reflects solid 2.28x coverage of MADS which stands up well to severe hypothetical revenue declines.
STRONG ECONOMY, REVENUE GROWTH: The service area's economy is quite strong, enjoying sound growth of pledged sales tax revenues and encompassing about 80% of the state of Utah's population. Utah benefits from low unemployment, a solidly expanding employment base, and a well-diversified economy and tax base.
BELOW AVERAGE FINANCIAL METRICS: Fitch views the transit authority's pricing framework and financial flexibility as weak and the system's farebox recovery and net coverage levels as low. However, as a newer system, infrastructure replacement needs are manageable.
PRESENCE OF FINANCIAL MITIGANTS: The authority's weaker than average financial metrics are somewhat mitigated by a history of strong community support and the system's significant dependence on tax revenues, resulting in a lower correlation between the performance of transit operations and pledged revenues.
RATING SENSITIVITIES
DEBT COVERAGE, FINANCIAL OPERATIONS: The ratings are driven in large part by debt service coverage levels and financial operations. Unexpected and material changes to the authority's financial operations, sales tax revenues or debt plans could impact the bonds' rating levels.
CREDIT PROFILE
The system covers approximately 1,400 square miles in six counties that collectively serve nearly 80% of the state's population (state general obligation bonds [GOs] rated 'AAA' by Fitch). The service area spans Utah's Wasatch Front, linking the city and county of Salt Lake (both GOs rated 'AAA' by Fitch), the region's cultural and economic hubs, with fast-growing suburban areas including the counties of Box Elder, Davis, Tooele, Utah and Weber. The authority's economic and tax bases are broad, diversified, and contain positive drivers for long-term growth, including historically very high birth and family formation rates that will continue to drive population growth.
STRONG STATE ECONOMIC PERFORMANCE
Utah's very well diversified economy has posted solid employment gains since the end of the housing-led recession, with non-farm employment well out-pacing national growth rates for three consecutive years, growing a healthy cumulative 9.1% from 2010-2013. November 2014 employment extends the trend, with 3.3% year-over-year growth, versus 2.0% for the nation. Strong growth has pushed total employment higher than pre-recession levels and the November 2014 unemployment rate fell to a very low 3.6%, compared to the national 5.8% rate.
POSITIVE REVENUE ENVIRONMENT POISED TO BOOST COVERAGE
The authority's sales tax collections have performed quite well over the past few years, reflective of the state's strong economic recovery. From fiscal years 2010-2013 sales tax revenues grew a cumulative 18.6%, surpassing their pre-recessionary peak reached in 2007. The impact of these gains on subordinate debt service coverage for much of the period, however, was muted due to significant new debt issuances over this time.
Given the authority's limited plans for new issuances moving forward, including $65 million (about 2% of current par outstanding) of subordinate sales tax revenue bonds to be issued between fiscal years 2018-2020, Fitch would expect future revenue gains to result more directly in improved coverage levels.
Fiscal 2014 sales tax revenues are projected by the authority to have grown 6%, exceeding the authority's prior 4.2% estimate. The authority projects long-term sales tax growth of 5% annually beginning in fiscal 2017.
In spite of the authority's 5.5% average sales tax growth over the past 20 years, Fitch views the authority's 5% long-term growth forecast as somewhat aggressive. High historical rates of growth typically fall over time as regions become increasingly built-out. Nonetheless, the combined impact of inflation, albeit at low levels, the state's high population growth, and robust economic activity could drive sales tax revenues at rates that seem atypically high compared to those in other states and transit systems.
STRONG SENIOR COVERAGE AND LEGAL PROTECTIONS, SUBS JUST ADEQUATE
Debt service coverage of senior lien bonds is strong, even on a MADS basis, but all-in coverage (combined senior and subordinate debt service) is notably weaker due to escalating debt service. Fiscal 2013 sales tax revenues of $203.8 million covered senior and all-in ADS by a strong 2.96x and 1.91x, respectively (all cited coverage levels do not consider limited federal interest subsidies, which have an immaterially small positive impact on coverage levels).
Estimated fiscal 2014 sales tax revenues of $216 million cover MADS on the senior bonds at a high 2.42x (the 2014 bonds' bullet maturities are backed out of all cited MADS calculations to account for their expected refunding in several years), but registered a just adequate 1.39x on an all-in basis. Fitch estimates that sales tax revenues would have to decline 59% and 28% from estimated fiscal 2014 levels for senior and all-in MADS coverage to reach 1.0x, respectively. By comparison, sales tax revenues declined just 10.8% cumulatively during the recession.
The additional bonds test (ABT) for senior lien bonds is a sound 2x MADS, however, the subordinate lien ABT is low at 1.2x MADS. The ABTs assume that balloon bond bullet payments are refunded with long-term fixed rate bonds.
The authority recently raised its subordinate lien ABT to 1.2x from 1.1x, which Fitch views as a prudent policy change. Although Fitch views the modification positively from a security structure standpoint, the 'A+' rating incorporated the assumption that the authority would not leverage down to its former 1.1x ABT on an ADS basis. As a result, the improved ABT did not result in a positive rating action.
Although some outstanding bonds include DSRFs, the 2015 bonds are being issued without a DSRF.
BULLET MATURITIES LOOM IN FISCAL 2017 and 2018
In fiscal 2014 the authority issued fixed rate bonds with bullet maturities in fiscal years 2017 and 2018 that are callable six months prior to the their respective maturities. The bonds were issued to eliminate the issuer's exposure to variable rate debt. The authority intends to refund the bonds prior to their maturity dates, though it is currently unclear what bond structure will be used.
The 'A+' rating incorporates related refunding risks and assumes there will be a negative yet manageable effect on subordinate debt service coverage, especially when coupled with expectations of continued moderate sales tax growth without significant offsetting parity debt issuances. Also, the authority is setting aside interest savings from this refunding, which could potentially be used to pay off a portion of the bullet maturities as they come due. The authority now estimates that it will have $37 million of accumulated interest savings by fiscal year end 2018. By comparison, the cumulative bullet payments are $150 million.
FINANCIAL METRICS WEIGHED BY RISING DEBT PROFILE
The authority's financial metrics over the past several years through fiscal 2013 have been deteriorating primarily due to rising debt service and operating expenses. Coverage of total debt service net of operations was a solid 2.26x in fiscal 2008 but fell to a projected 1.11x in fiscal 2014. Financial performance moving forward will vary significantly with sales tax revenues, which make up a substantial portion of total revenues.
The 2015 refunding bonds lower the rate by which debt service escalates. Nonetheless, debt service steps up significantly and annually in fiscal years 2020 - 2023, adjusted for the anticipated refunding of the 2014 bonds.
Concerns over potentially weak future coverage are somewhat mitigated by the service area's solid prospects for growth and sales tax revenue gains, and a history of strong community support as measured by voter approval for related sales tax revenue hikes. Also, the authority's high level of taxes as a percentage of total revenues (about 60%) reduces the risk that weak operations will affect overall revenues, given the lower level of correlation between sales tax performance and fare box revenues.
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:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=975216
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