Fitch Ratings last week upgraded the Southeastern Pennsylvania Transportation Authority to AA from A-plus, affecting $327 million of outstanding debt.
The change gives the transit agency its second double-A rating. Moody’s Investors Service and Standard & Poor’s rate the credit A2 and AA-minus.
SEPTA provides bus and rail transportation in the Philadelphia area and connects the city to New Jersey and Delaware.
The upgrade is due to strong debt-service coverage over a period of time and a closed lien that prohibits future new-money issuance secured by existing dedicated revenue. Officials are still able to refinance prior debt backed by that revenue stream, which includes sales tax receipts, taxes on vehicle leases and rentals, and fees on the sale of new tires.
In 2007, Pennsylvania lawmakers passed Act 44, which provides the state with additional funds for transportation infrastructure. That law also closed the door on future new-money borrowing secured by SEPTA’s dedicated revenues.
“The upgrade reflects sustained solid debt-service coverage provided by a diverse set of pledged revenues and enhanced bondholder protection resulting from the legislative closure of the lien,” a Fitch report said.
Maximum annual debt service coverage was 3.35 times in fiscal 2010, which ended June 30. Sales tax receipts account for almost half of the dedicated funds while vehicle lease revenue provides 30%, according to Fitch.
Dedicated revenue dropped by 3.3% in fiscal 2009 and an estimated 8% in fiscal 2010, but officials anticipate total sales-tax revenue to increase by 3.8% in fiscal 2011. Even if the dedicated revenues fail to grow this year, debt-service coverage will remain strong, Fitch said.
While Act 44 ended new-money issuance off of SEPTA’s portion of sales taxes, vehicle rental and lease taxes, and fees on new-tire sales, the legislation also provides new revenue streams for the authority, according to SEPTA assistant treasurer Kurt Weidenhammer.
Agency officials anticipate issuing about $200 million of new-money debt in February, with the new revenue streams from Act 44 securing the bonds, he said.
Before then, SEPTA plans to refinance its fixed-rate Series 1999 bonds and end a floating-to-fixed rate swap. Terminating the swap will cost $35 million. Citi is the book-runner on the $240 million refinancing, set to price in early October.
SEPTA has paid $11.9 million in additional debt-service costs —$700,000 per month since March 2009 — due to the mismatched swap. In the agreement, SEPTA pays a fixed rate of 4.42% to counterparty Bank of America Merrill Lynch and receives 67% of the one-month London Interbank Offered Rate. In 2003 it received an up-front payment of $9.5 million from the counterparty in regard to the swap. Weidenhammer said the $9.5 million is still available as the agency has not spent the funds.
