Fitch Affirms Alaska Railroad Corp's $141MM Capital Grant Receipts Bonds at 'A'NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on Alaska Railroad Corporation's (ARRC) approximately $141 million capital grant receipts bonds, series 2006 and series 2007 (FTA Section 5307 Urbanized Area Formula Funds and Section 5309 Fixed Guideway Modernization Formula Funds). The Rating Outlook on all bonds is Stable.
The 'A' rating reflects the following credit strengths:
--Long history of federal transportation funding and Federal government involvement with ARRC;
--Strong debt coverage ratios in excess of 2.0 times (x) based on current annual receipts;
--ARRC's covenant each year to pre-fund debt service by setting aside pledged grant receipts one year in advance of a debt service payment, providing a significant mitigant against delayed or lower than expected grant receipts;
--Pledge of all of ARRC's share of Section 5307 and Section 5309 funds;
--Debt service reserve fund equal to 50% maximum annual debt service (MADS) providing an additional layer of protection;
--Additional bonds test of 1.5x historic MADS coverage (ARRC's need to maintain cash flow for pay-as-you-go capital moderates future leveraging of the program);
--Reauthorization risk limited to two congressional reauthorization periods with 10 years left to maturity;
--No competition with other transit agencies for section 5307 and section 5309 dollars as ARRC is the only entity of its sort in the State of Alaska;
--Formula funding allowing for a more predictable cash flow stream rather than relying on discretionary funds.
The 'A' rating also reflects the following credit concerns:
--Changes in federal transportation funding policy with each reauthorization period which could result in reduced funding levels for transit and/or formula funding distributions to ARRC;
--No additional structural features such as a back-up pledge of other revenues;
--Rapid depletion of the Highway Trust Fund (HTF) due to declining fuel tax collections resulting from increased motor fuel efficiency, declining vehicle miles traveled and rising construction costs.
KEY RATING DRIVERS:
Future rating actions are likely to be influenced by the following:
--A change in federal reauthorization funding policy to a more permanent policy of short-term authorizations rather than multi-year fundings (a multiyear reauthorization is unlikely prior to 2013);
--Insolvency of the Mass Transit Account (of the HTF);
--A marked shift in the ARRC debt structure to longer maturities and lower triggers to maximize future bond proceeds.
The bonds are secured by grant receipts consisting of all amounts received by the Alaska Railroad Corporation's share of Federal Transit Administration (FTA) Section 5307 and Section 5309 formula funds.
The Section 5307 Formula Program provides capital and operating assistance for public transportation while the Section 5309 Capital Investment Program provides capital assistance for the modernization of existing infrastructure systems. The funds are disbursed to qualified recipients from the Mass Transit Account (MTA) contained under the HTF. The MTA receives approximately 16% of federal gasoline tax revenues and 12% of federal diesel fuel tax revenues collected nationwide, with the remaining share of such revenues deposited in the Highway Account.
While interruption in the flow of federal highway funding is highly unlikely given the broad-based political support for the surface transportation program, multi-year reauthorizations of transportation legislations have often been delayed. Twelve short-term reauthorizations and nearly two years passed before the prior SAFETEA-LU program was enacted in 2005. Likewise, SAFETEA-LU expired on Sept. 30, 2009 without enactment of a new six-year reauthorization program. To avoid a halt in the Federal-aid Highway Program, Congress enacted three short-term interim authorizations, the last of which extended funding to Feb. 28, 2010. On March 18, 2010, the President signed the HIRE Act which included an extension of surface transportation programs through Dec. 31, 2010. Federal revenues become vulnerable to significant changes in federal policy at the end of each funding authorization period. The federal highway trust fund continues to operate below a breakeven level. As of March 2010, the highway account of the trust fund received a $19.5 billion general fund transfer under the HIRE Act - of which $4.8 billion was earmarked for the MTA - following a $7 billion general fund transfer in August 2009 and an $8 billion transfer in September 2008.
Reflecting a 2005 change in the formula funding allocation to ARRC, the corporation's FTA Section 5307 and Section 5309 formula funding levels under SAFTEA-LU represent a more than four fold increase over TEA-21 funding levels. While the significant increase in FTA Section 5307 and Section 5309 formula funds largely reflects a strategy to reduce the corporation's reliance on non-pledged federal discretionary funds and provide a more predictable capital funding source, future funding growth prospects may be limited given continuing federal budget deficits and national security concerns, coupled with the possibility of changing federal priorities and/or federal highway trust fund and mass transit account resource constraints. However, this risk is sufficiently hedged, consistent with Fitch's 'A' rating, given the long-term support for the national surface transportation program, ARRC's role serving an important transportation corridor with limited highway alternatives, and expected debt service coverage.
Unlike some of the other debt programs' leveraging of federal transportation funds, ARRC has a debt service reserve funded at 50% with an MBIA surety policy, in addition to pre-funding the following year's debt service by obligating federal grant receipts one year in advance. While not pledged, the corporation's adequate liquidity can also be used to pay debt service in the event of a temporary lapse in federal funding. Unrestricted funds, as of June 2010, stood at $18.7 million, $6 million higher compared to June 2009. Based on a Fitch sensitivity analysis, debt service coverage, assuming a scenario where federal grant receipts going forward will not grow beyond the $40.3 million expected to be received in 2011 is 2.4x protecting against potential future reductions in federal receipts. With the issuance of series 2006 and series 2007 bonds - totaling $165 million - ARRC has no further authorization from the state to issue new money bonds and will have to seek specific authorization by law should it decide to do so.
The ARRC is a public corporation created by the Alaska Railroad Corporation Act and is an instrumentality of the state within the department of commerce. The ARRC was created in 1985 as part of the transfer of the Alaska Railroad to the state from the federal government which owned the railroad since 1914. The corporation operates an integrated passenger and freight railroad along 685 miles of track serving ports and communities from Seward (Gulf of Alaska) to Fairbanks-North Pole.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);
--'Rating Guidelines for Leveraging Federal Transportation Funds' (March 22, 2007).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Guidelines for Leveraging Federal Transportation Funds
Posted: September 15, 2010
More Latest News »