Moody’s Investors Service Wednesday downgraded $2.68 billion of subordinate Pennsylvania Turnpike Commission bonds to A3 from A2 and assigned a negative outlook to the credit.
The rating change is due to expected future bond issuance that could force the turnpike to reduce operating costs and-or cut capital investment in order to maintain its debt-service ratios. The PTC sells debt to finance the capital needs of its 535-mile toll road, and to also make annual payments to the Pennsylvania Department of Transportation. Lawmakers crafted that arrangement under Act 44.
“The rating downgrade for the subordinate lien reflects the considerable amount of debt outstanding and future debt expected to be issued by the commission at the subordinate lien, largely to make required annual payments to [PennDOT] required under Act 44,” according to a Moody’s report. “The growing debt burden will require the commission to increase toll rates significantly higher than previously forecasted and-or make large cuts in operating and capital expenditures to maintain debt-service coverage ratios consistent with A-rated toll roads.”
Standard & Poor’s and Fitch Ratings both rate PTC’s subordinate debt A-minus with a stable outlook.
The downgrades come as the commission plans to sell $462 million of subordinate debt with JPMorgan as senior manager. The tentative pricing date is July 20, according to Nick Grieshaber, PTC’s chief financial officer.
That $462 million deal will include about $196 million of bonds secured with motor license fund revenue, which is mostly gas-tax revenue and motor fuels receipts. This will be the turnpike’s first-ever bond sale backed by the state’s motor license fund. The MLF bonds will be subordinate to PTC’s subordinate bonds.
Fitch rates the Series 2010A MLF bonds AA. That rating is higher than commission’s senior bonds as the MLF bonds will have access to both toll revenue and motor license fund revenue, said Fitch analyst Ken Weinstein. PTC did not request a rating on its MLF bonds from Standard & Poor’s, said analyst Joe Pezzimenti.
Moody’s assigns its Aa3 rating to PTC’s $2.26 billion of senior bonds. Fitch and Standard & Poor’s both rate the senior bonds A-plus.
Moody’s calculates that commission’s planned yearly 3% toll increases will offer senior debt-service coverage ratios at 2.31 times, subordinate debt-service coverage ratios at 1.13 times and MLF debt-service coverage ratios at 1.02 times.
“These ratios are well below the 1.50 times range for A-rated Moody’s toll roads,” according to a Moody’s report.
Grieshaber said the turnpike is concerned about coverage ratios and the new MLF credit is one way to ease the stress on the subordinate credit.
“We’re looking across the board and just trying to see what other areas could potentially increase revenue,” he said. “We’ve had some cost reduction initiatives in the past. We continue to look at that now and in the future.”
Other sales include a $208 million senior-lien refunding that Morgan Stanley will price in July and a $350 million new-money senior-lien Build America Bond deal set to price in July or August with Bank of America Merrill Lynch as book-runner.
