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Dallas Area Rapid Transit Unfazed by Standard & Poor’s Downgrade

DALLAS — The chief financial officer of Dallas Area Rapid Transit said Monday that he is unconcerned by the effect of a downgrade by one of the major rating agencies on the upcoming sale of $825 million of revenue bonds supported by anemic sales tax income.

Standard & Poor’s dropped its AAA rating on DART’s revenue debt to AA-plus late last week.

Moody’s Investors Service quickly followed that move by affirming its Aa2 rating on the agency’s senior-lien debt. Moody’s rated DART’s 2009 bonds Aa3, but a global recalibration earlier this year resulted in the Aa2.

The transit agency’s CFO, David Leininger, said finances are strong.

“We are disappointed with the recent Standard & Poor’s action,” Leininger said. But “we are comforted to note that both Moody’s and S&P assigned the agency a stable outlook and that the assigned ratings of Aa2 and AA-plus are excellent ratings.”

The sale, which is set for next week, will consist of $100 million of tax-exempt refunding bonds and $725 million of taxable Build America Bonds.

The debt is supported by DART’s 1% sales tax in its 13-city service area, which includes Dallas, Richardson, Irving, and Plano, and by its bus and light-rail farebox revenues.

Standard & Poor’s analysts said the rating on the current offering and on DART’s $2.6 billion of outstanding senior-lien sales tax revenue bonds was lowered due to “an acceleration in the system’s bonding program, which, along with recent declines in sales tax revenues, has reduced expected coverage levels.”

DART had planned to issue $400 million of debt in fiscal 2011 and a similar amount in 2012, but moved up the 2012 sale to take advantage of the interest rate subsidy of the BAB program.

Leininger said the decision to issue bonds before the BAB program expires at the end of this year was in DART’s best interest.

“There are periodically instances in which the economic interests of the agency diverge from the interests of the rating agencies in regard to preservation of a rating,” Leininger said.

“In this current circumstance, the financial benefit to the agency, both short-term and long-term, of accelerating a bond issue previously scheduled for 2012 so that we can assure that we obtain the full advantage of the 35% tax credit makes the decision to upsize the total issue fairly straightforward,” he said.

Bank of America Merrill Lynch is the senior underwriter for next week’s DART issue.

Co-senior managers include Loop Capital Markets, M.R. Beal & Co., and Siebert Brandford Shank & Co. RBC Capital Markets and Southwest Securities are co-managers.

Vinson & Elkins LLP and West & Associates are co-bond counsels. Financial adviser is Estrada Hinojosa & Co. 

In a letter to the DART board, Robert Estrada, chairman of Estrada Hinojosa, said the new ratings should have little effect on next week’s sale.

“Since DART had previously carried a split rating of Aa3/AAA, bond yields have been set at the level of AA bonds in the past and the current ratings of Aa2/AA-plus means the 2010 bonds will be priced similarly, with little impact on your cost of funds,” Estrada said.

The 1% sales tax provides 79% of DART’s operating revenue, with fare collections totaling 11%. These bonds are the first debt issued by DART to include farebox collections as a dedicated revenue.

DART’s sales tax collections have increased at an annual rate of 3.4% since it was authorized 20 years ago. However, revenues fell 9.1% in fiscal 2009 with a 0.8% drop in fiscal 2010.

The forecast is for 5% growth in fiscal 2011. The latest long-term projection calls for a 3.8% annual increase over the next 20 years, down from an earlier estimate of a 6% jump.

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