Fitch Rates Sonoma Marin Area Rail Transit District, CA's Sales Tax Revs 'A'; Outlook Stable

SAN FRANCISCO--(BUSINESS WIRE)--

Fitch rates Sonoma Marin Area Rail Transit District, California's (the district or SMART) bonds as follows:

--$190.2 million Measure Q sales tax revenue bonds, series 2011A 'A'.

The bonds will sell via negotiated sale on or about the week of April 16.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on Measure Q sales tax revenues, net of collection expenses. The bonds are additionally secured by a standard cash-funded debt service reserve fund.

KEY RATING DRIVERS

--FUNDAMENTALLY STRONG TAX BASE: The district features a well-diversified sales tax base that is underpinned by a strong local economy; however, sales tax revenues fell significantly during the housing-led recession.

--SOUND DEBT SERVICE COVERAGE: Initial debt service coverage is strong, with estimated fiscal 2012 sales tax revenues covering fiscal 2013 debt service about 3.8 times (x); coverage of maximum annual debt service (MADS) is a much lower 1.25x due to escalating debt service. No additional borrowings are planned.

--SMALL PROJECTED OPERATING MARGINS: Issuer projections show a low farebox recovery ratio of below 25%, and net coverage (including operations) hovers between 1.03x-1.15x from fiscal years 2016-2020, providing limited financial flexibility. Fitch notes the issuer plans to fund a six month operating reserve, which provides some offset to short-term sales tax volatility.

--LOW PROJECTED RIDERSHIP BASE, ESSENTIALITY: Fully ramped-up average daily ridership (ADR) is estimated at just over 3,000 (about 1% of total bi-county employment, resulting in community essentiality that Fitch views as weak). The goal of SMART is to ease congestion along the U.S. 101 corridor. While ridership may ease congestion somewhat, essentiality is viewed as weaker than other transit systems, though this may change over time.

--LOW REVENUE CORRELATION: The system's revenues will derive predominantly from sales taxes, which enjoy a low level of correlation to farebox revenues.

--SATISFACTORY LEGAL PROVISIONS: The bonds will include a standard cash-funded debt service reserve fund, and the additional bonds test (ABT) requires revenues to cover MADS a satisfactory 1.50x.

CREDIT PROFILE

SMART was created by the state in 2003 to construct and operate rail service in the counties of Marin (Fitch-rated implied general obligation rated 'AAA') and Sonoma (pension obligation bonds rated 'AA'), located in the northern San Francisco Bay Area. Voters in 2008 approved by a wide margin the Measure Q 1/4 cent sales tax, which is the district's primary funding source and which secures the sales tax revenue bonds. The sales tax base is well diversified and contains relatively low concentration levels. The top 25 sales taxpayers generate just 22% of the district's total sales tax revenues, and the top payer generates roughly 3%. Further, sales tax diversification by sector is high, with the largest sectors composed of restaurants (10% of total), service stations (10%), and department stores (9%). Although the sales tax base benefits from its diversity and the strong underlying economic characteristics of the counties, it has not been immune to the housing-led recession. From calendar years 2008-2009 total taxable transactions in the counties fell by a significant cumulative 19.1%.

Overall High Debt Service Coverage

Based on recent collections, the district estimates sales tax revenues for fiscal 2012 of $27.9 million, up nearly 9% from fiscal 2011. These revenues cover fiscal 2013 ADS by a very high 3.8x. Due to escalating debt service, however, the revenues are expected to cover MADS at a much lower level of about 1.25x. Because MADS is not achieved until fiscal 2028, the district has ample time for sales tax revenues to rise before increasing debt service would lower coverage to levels that would pressure the district's rating. The risk of additional leverage is mitigated somewhat by the bonds' satisfactory 1.5x MADS ABT. The ABT's definition of revenue is somewhat permissive, allowing for any 12 of the past 24 months of revenues. The district has no plans for further bond issuances, and its projected reliance on surplus sales tax revenues to operate the transit system could result in an effective barrier to leveraging that may ultimately be more stringent than the legal ABT.

Coverage Stands Up Well to Stress Tests

Coverage stands up well to Fitch-designed stress scenarios. Under a no-growth scenario, coverage would fall to about 1.25x in fiscal 2028, the year MADS is reached. Under a very severe test, if the district experienced two consecutive years of 19.1% sales tax losses (19.1% was the cumulative peak to trough decline in total taxable transactions during the recent recession) followed by 2% annual growth thereafter, coverage would remain at or above 1.09x through final maturity. Based on the issuer's projections, which conservatively haircut the sales tax consultant's projections by 100 basis points, ADS coverage bottoms at a respectable 2.17x in fiscal 2019.

Fundamentally Strong Underlying Economies

The district serves the counties of Marin and Sonoma, with a combined population of 736,300. Marin County's per capita income levels are extremely high at 184% and 197% of state and national levels, respectively. Sonoma County's income levels are lower, but still above average at 114% and 122%. Residents in both counties benefit from their location within the large and diverse San Francisco Bay Area employment market. Unemployment in both counties is well below the state average, though Sonoma County's rate is somewhat higher than the national rate. Poverty rates in both counties are low compared to state and national averages.

Project Overview

The series 2011A sales tax revenue bonds were sold as multi-modal bonds in December 2011 and are now being remarketed as fixed rate. Proceeds will fund about half of the district's initial operating segment (IOS) capital costs of a light rail line from Santa Rosa to San Rafael. The total costs are estimated at $366 million. Other major funding includes pay as you go sales tax revenues ($101 million) and bridge tolls from the Bay Area Toll Authority ($30 million). There are no plans for further sales tax revenue bond issuances.

A second operating segment would link the system to the San Francisco-bound Larkspur Ferry Terminal to the south, and to Cloverdale in the north. Funding for phase two has not yet been identified. The project was split into two phases when the housing-led recession caused projected Measure Q sales tax revenues to fall significantly below initial projections when approved by voters in 2008.

The project additionally involves the design, manufacture and delivery of passenger rail cars, construction and rehabilitation of about 40 miles of rail with adjacent bike and walking paths, the replacement of major bridges and tunnels, and other expenses. The district expects the IOS to be completed and operational by 2016. A ridership study found most trip demand will be generated by commuters moving along the congested US-101 corridor.

Weak Projected Financial Operations

The district's projected revenues cover debt service and projected operational costs by a low 1.03x in fiscal 2016 (the first projected full year of system operations). Under a Fitch-designed stress scenario coverage falls to an inadequate range of 0.85x-0.93x in fiscal years 2016-2020 assuming no sales tax revenue growth. These concerns are mitigated somewhat by issuer plans to fund a six month operating reserve, which provides some offset to short-term sales tax volatility.

The estimated farebox recovery ratio is a low 22.3%, which Fitch considers to be a weak pricing framework. The district has made conservative adjustments to numerous revenue and expense estimates produced by its consultants, and Fitch believes that a lack of operating history necessitates a conservative approach to such assumptions.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

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