Current record-high gas prices are not hurting the credit quality of state highway user tax bonds, according to Standard & Poor’s.
On Monday, the average U.S. retail gas price reached $3.94 a gallon, an all-time record, Standard & Poor’s wrote in its report released Wednesday entitled “State Highway User Tax Bonds Maintain High Credit Quality Despite Higher Gas Prices.”
Higher gas prices encourage drivers to use less gasoline by driving fewer miles and by using more fuel-efficient vehicles, wrote analysts David Hitchcock and Henry Henderson. Since state taxes on gas are fixed amounts on each gallon sold, less gas sold means less revenue for these revenue-supported bonds.
However, “overall, the magnitude of potential declines in future pledged revenue that we see likely from higher gas prices is, in our view, more than offset by generally high current debt service coverage, although, as the economy picks up steam, it may be more likely that pledged revenues will actually grow in the next few years,” the analysts wrote.
Neither sharp price increases nor major recessions have had substantial impact on U.S. gas consumption, the analysts wrote. The most recent recession saw a peak (2007) to trough (2009) decline in gas use of 5%. As the amount of fuel taxed in the United States has gone up by about 75% since 1970, this decline is fairly modest.
The report examined the state highway user tax-secured bonds that Standard & Poor’s rates. These amount to $39.2 billion issued in 24 states under 34 separate lien structures.
Among the 34 lien structures, the median coverage of maximum annual debt service is 3.3 times, which the analysts described as “high.” Additionally, the states have legal covenants that protect the debt service coverage, the analysts reported. “The median additional bonds test coverage multiple required for new debt issuance is strong in our view, at two times [maximum annual debt service].”
“Beyond fuel taxes, pledged revenues also often include other diverse transportation related tax sources not directly dependent on fuel consumption.” These include motor vehicle registration fees, license fees, and fees derived from other non-highway transportation activities.
Of the 34 separate lien structures Standard & Poor’s rated in this category, just three of them are rated in the A category. The rest are rated higher. Two of the ratings have negative outlooks and the others are stable.
Several factors led Standard & Poor’s to do a report on this sector now, Hitchcock said.
Given the large amount of par value in the sector, banks have been asking for an update on it. Gas prices have been rising to high levels recently. Finally, New York has recently sold bonds in this sector and Nevada and other states are going to sell them in the near future, he said.
