DALLAS — Standard & Poor’s on Wednesday lowered its rating on the Arizona Transportation Board’s subordinate-lien highway revenue bonds to AA-plus from AAA with a negative outlook.
The downgrade comes in advance of a $477 million issue that is expected to include refunding bonds. S&P also placed a negative outlook on the board’s AAA-rated senior-lien revenue bonds.
The move follows a Moody’s Investors Service downgrade on Sept. 7. Moody’s lowered the board’s senior-lien rating to Aa1 from Aaa and the subordinate-lien bonds to Aa2 from Aa1.
Ratings analysts at both agencies cited legislative weakening of revenue pledges for debt backed by the highway user fund, which is made up of fuel taxes and vehicle fees.
“The downgrade and outlook revision reflect ongoing changes in state allocations of pledged revenues, which have diminished debt-service coverage levels,” S&P analyst David Hitchcock wrote in his report. “If debt service coverage declines from its current strong level due to the continued diversion of highway user taxes from the pledged state highway fund for other state operating purposes, or due to deteriorating highway user taxes, a further downgrade may result.”
Using new senior-lien maximum annual debt service after the partial refunding, Hitchcock said he expects senior-lien revenue-to-debt service ratios to fall from 4.61 in fiscal 2011 to a “still-strong” 3.46 in fiscal 2012, based on state projections and legislative reallocation of highway revenue.
The lack of a debt service reserve for either lien is offset by high coverage of debt service, Hitchcock noted.
“The negative outlook reflects our view of ongoing changes in state allocations of pledged revenues, which have diminished debt-service coverage levels,” Hitchcock said. “If debt service coverage declines from its current strong level due to the continued diversion of highway user taxes from the pledged state highway fund for other state operating purposes, or due to deteriorating highway user taxes, a further downgrade may result.”
