Fitch Affirms Texas DOT's $3.1B TELA-Backed Bonds at 'AA-'; Outlook Stable
Fitch Ratings has affirmed the 'AA-' rating on approximately $3.1 billion in toll-supported revenue bonds of regional authorities in Texas, based on the enhancement provided by toll equity loan agreements (TELA) between the issuer and the Texas Department of Transportation (TxDOT):
--$1.776 billion in Grand Parkway Transportation Corporation (GPTC) Grand Parkway System toll revenue bonds, series 2013B and 2013E;
--$1.313 billion in North Texas Tollway Authority (NTTA) special project system revenue bonds, series 2011A-E.
The Rating Outlook is Stable.
The bonds are limited obligations of the issuing entities payable from toll receipts and other revenues and reserves of each system under their trust agreements, as well as by advances from TxDOT under their respective toll equity loan agreements, subject to biennial legislative appropriation.
KEY RATING DRIVERS
CREDIT ENHANCEMENT OF TXDOT: The rating is based on the credit enhancement provided by TxDOT in the form of TELA advances. The TELA enhancement has been made available to date on a limited basis to certain toll road projects of two regional authorities, including the GPTC in Houston, and NTTA in Dallas-Ft. Worth.
SUBJECT TO STATE APPROPRIATION: TxDOT's obligation to provide TELA advances is subject to biennial legislative appropriation. Amounts available for TELA advances in each year are sized at a minimum to cover eligible debt service and certain eligible operating and maintenance expenses for each project. Timing and draw procedures provide sufficient time to cure any deficiency prior to debt service payment.
SIZABLE STATE HIGHWAY FUND RESOURCES: Advances would derive from the state highway fund (SHF), TxDOT's main operating fund to which various transportation-related taxes and fees are constitutionally dedicated. SHF revenues have generally been stable and slow growing. Recent state actions are expanding SHF resources materially, although capital needs are likely to continue to outpace resources in the fast-growing state.
SUBORDINATE TO HIGHWAY OBLIGATIONS: Any draw from the SHF for TELA advances would be subordinate to TxDOT's existing debt programs and parity with other TxDOT operating commitments. Senior liens include an authorized $6 billion in SHF first-tier revenue bonds and short-term subordinate lien borrowing, and TxDOT may establish other debt programs with liens senior to TELA advances, although has no plans to do so. Other operating, maintenance and pay-go capital needs are parity to TELA advances.
AUTHORIZATION FOR TOLL ROADS: TxDOT is statutorily authorized to participate in toll road projects.
SUFFICIENT STATE HIGHWAY FUND RESOURCES: The rating is sensitive to the sufficiency of SHF resources to support the current TELA and parity commitments. Narrowing of SHF resources or a material expansion of senior or parity obligations with a claim to the SHF could pressure the rating.
TELA enhancement has been used for toll-supported revenue bonds issued by the NTTA and GPTC as part of larger financing for three highway projects to date, the George W. Bush Turnpike - Western Extension and Chisholm Trail Parkway in metropolitan Dallas-Ft. Worth, and a 55-mile segment of the SH 99 Grand Parkway, outside of Houston.
TxDOT's commitment to enhance TELA bonds was sized upon initial financing at specified maximum total and maximum annual amounts for each project, $6 billion for the two NTTA projects, and $9.6 billion for GPTC. In the event that toll and other pledged revenues of the respective system are insufficient, the TELA provides that the trustee may draw upon TxDOT's resources to cover eligible expenses, including TELA-eligible debt service and certain operating and other expenses, as defined in the trust agreements for each project up to the maximum annual amount. No draws have been made to date for either of the two NTTA projects, nor for the GPTC project.
TxDOT's commitment to enhance TELA bonds is subject to legislative appropriation. TxDOT covenants to submit an appropriation request to the legislature as part of its biennial budget submission, sufficient to cover anticipated TELA draws up to the maximum amount. Failure of the legislature to appropriate is not an event of default.
ENHANCEMENT SIZED TO DEBT SERVICE AND OPERATING EXPENSES
The TELA enhancement for each project extends through the life of the bonds, 2047 for the outstanding NTTA series and 2053 for the GPTC series. Within the aggregate maximum TELA commitment for each project, annual and aggregate maximum advances are established in varying amounts each year at levels intended to cover eligible categories of planned expenses within the flow of funds. These include annual debt service for the TELA-enhanced series, and certain operating, maintenance and capital expenses for both projects.
The $6.02 billion in total TELA commitment for NTTA ranged annually from $31.1 million in FY 2013 to $244.7 million in FY 2028. With cost savings on the projects through June 30, 2014, TELA-eligible costs are now lower than originally planned, at $5.9 billion. The $9.6 billion in total TELA commitment for GPTC ranges annually from $17.6 million in FY 2015 to $576 million in FY 2053.
SUFFICIENT TIMING IN EVENT OF DEFICIENCY
For the NTTA and GPTC, the project financing structures and flows of funds in their respective master custodial agreements differ, although the basic features of the TELA enhancement remain the same.
Financing for the NTTA SPS projects included TELA-supported first-tier bonds and a second-tier TIFIA loan; SPS projects are legally separate from NTTA's much larger network of tolled highways in the Dallas-Ft. Worth metro area. SPS toll receipts and other pledged revenues are deposited daily in the revenue account, with monthly transfers four days in advance for TELA-eligible first-tier SPS bond debt service and then for second-tier TIFIA loan debt service. Next, TELA-eligible project budget amounts are transferred for operations and maintenance, major maintenance and capital spending. Thereafter, certain non-TELA eligible annual budget amounts and reserve fund deposits are made, with excess receipts held in an SPS general fund.
Financing for the TELA-enhanced segments of the GPTC Grand Parkway project included first-tier debt without a TELA enhancement and a second-tier TIFIA loan (which has not been drawn yet); TELA-supported bonds are subordinate to the second-tier TIFIA loan. Grand Parkway system toll receipts are deposited in the revenue account, with monthly transfers five days in advance for non-TELA eligible senior operations and maintenance, for which there are currently none, first-tier revenue bond debt service and second-tier TIFIA debt service and debt service reserves. Then, TELA-eligible subordinate tier debt service is paid, followed by TELA-eligible junior operations, routine maintenance, major maintenance and replenishment of reserves. Excess receipts are held in the Grand Parkway enhancement fund.
The mechanisms for a TELA draw provide sufficient time to cure a deficiency in the TELA-eligible debt service accounts. In the event of an insufficiency in revenues to fully cover TELA-eligible debt service four days before the payment date (in the case of NTTA) or five days (in the case of GPTC), the trustee would sweep balances from certain subordinated accounts, including reserves, then request a draw from TxDOT. TxDOT is required to advance funds up to the maximum annual amount within three days. Any draw on the TELA enhancement would become a subordinate obligation within the projects' flow of funds.
TxDOT maintains close oversight of TELA-supported projects in both construction and operations phases and would have considerable advanced notice and the means to pursue corrective action before a TELA draw would be needed. Both NTTA and GPTC must maintain tolls in effect sufficient to cover project needs. In the case of the NTTA projects, TxDOT maintains an ability to step in through the life of the project. In the case of the Grand Parkway project, GPTC is closely linked to TxDOT, with governance and staffing by TxDOT and considerable TxDOT oversight of budgeting and financial performance.
SIZABLE SHF RESOURCES FOR TRANSPORTATION
The SHF, as the general operating fund of TxDOT and the main source of state transportation funding, is the source of funding for any TELA draw. Texas' Constitution requires that 75% of motor fuel taxes, motor lubricant taxes and vehicle registration fees be dedicated to transportation. Any related federal reimbursements are also dedicated. Certain other receipts are deposited to the SHF, but are not constitutionally dedicated.
Fitch generally views transportation taxes as being a slow-growing funding source. Given the state's pressing transportation needs, Texas has made several changes to augment available resources. In 2014, voters approved a measure diverting a portion of oil and gas revenues to the SHF that formerly had flowed to the state's rainy day fund. The state comptroller's biennial revenue estimate forecasted that this provision would bring $1.7 billion in revenues to the SHF in fiscal 2015, and an additional $2.4 billion over the fiscal 2016-2017 biennium.
Also, the 2015 legislature discontinued $1.3 billion in appropriations from the SHF that supported operations of other departments, including the Departments of Public Safety and Motor Vehicles. Moreover, it approved a measure to go to voters in 2015 that would dedicate $2.5 billion in statewide sales tax in excess of $28 billion to the SHF beginning in fiscal 2018; the same measure would dedicate 35% of motor vehicle sales, use or rental taxes to the SHF beginning in fiscal 2020. Both the recently-added funds from oil and gas revenues and the proposed funds from sales taxes are not intended to be used for toll projects.
Under the Comptroller's forecast, SHF receipts fall 11% in fiscal 2016 from fiscal 2015, to $9.7 billion, and fall 2.9% in fiscal 2017, to $9.4 billion. The declines reflect both the forecast trend of the new oil and gas revenues flowing to the SHF as well as a conservative outlook for federal receipts.
TELA DRAWS ON SHF SUBORDINATE
State appropriations for transportation are generally for categories of expenditure, and thus TxDOT has significant flexibility to plan for an expected draw during each fiscal year, including deferring, reducing or eliminating construction lettings for projects and deferring or reducing the amounts of planned pass-through financing commitments.
TELA draws from the SHF would be subordinate to payment of various senior debt obligations and on parity with basic operating expenses and certain other commitments. Debt programs with a priority claim include first-tier SHF revenue bonds, potential subordinate SHF revenue bonds, subordinate lien short-term obligations, and highway tax and revenue anticipation notes (HTRANs).
First-tier SHF revenue bonds are authorized at $6 billion, with almost $4.2 billion outstanding as of June 22, 2015. Additional bonds are limited by a 4x ABT and a 10x statutory ABT. To date, TxDOT has not pursued additional liens, but Fitch views this as possible at a future date given the state's transportation needs.
Expenses of the SHF that would be parity to a TELA draw include an array of administrative, maintenance and pay-go capital costs, as well as certain TxDOT commitments, such as pass-through financing agreements and toll equity grants.
Since GPTC bonds issued in 2013, TELA enhancement has not been provided to additional projects, and Fitch expects only limited use of TELA enhancement in the future.
Additional information is available at 'www.fitchratings.com'.
Rating Guidelines for State Credit Enhancement Programs (pub. 18 Apr 2013)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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