Congress' Short-Term HTF Fix 'Positive,' But No Rating Changes for Garvees

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Land surveyor working on a construction site.

DALLAS — The 10-month extension of the Highway Trust Fund passed last week by Congress is credit positive for $12 billion of state highway and transit grant anticipation revenue vehicle bonds, Moody's Investors Service said in its weekly credit outlook Monday.

Without the last-minute extension, Moody's said, the Transportation Department would have curtailed and delayed reimbursements, beginning in early August, from the HTF to states for ongoing highway and transit projects.

The short-term patch in in the bill sent to President Obama on Aug. 1 and set for signing this week extends the highway fund's solvency through May 31, 2015 with a $10.8 billion transfer from the general fund.

"For Garvees structured to be paid with 'just-in-time' reimbursements, an interruption in the flow of transportation grants could have resulted in insufficient pledged grant revenues, meaning those states would have to use other available funds to make debt service payments," Moody's said.

States that had planned to delay projects can now keep the work going during the summer construction season without having to delay projects or reallocate available funds to make up for an expected 28% cut in federal funding, Moody's said.

Reimbursements are being made normally even though the $10.8 billion highway fund fix has not yet been signed into law, a Transportation Department spokesman said Monday.

The Federal Highway Administration would have allowed grant recipients to give priority to bond payments ahead of other uses during a curtailment, Moody's noted, "a tool we expect that states would have used to ensure timely payment of debt service."

Moody's lowered its ratings in June on $8.5 billion of state and transit agency Garvees supported by the dwindling federal Highway Trust Fund. It lowered by one notch a total of 26 Garvee bond issues supported solely by federal transportation aid, including 20 state tranches and six by transit agencies.

Moody's June downgrades did not affect Garvee bonds backed by state revenue pledges in addition to the federal transportation grants.

Standard & Poor's said the 11th hour fix of the highway fund alleviates the immediate pressures on the 26 Garvee issuers it rates. However, it said the credit weaknesses of Garvee ratings were highlighted by congressional delay and uncertainty over renewing federal transportation funding.

No rating or outlook actions on Garvee issues will be made at this time, S&P analysts said,

The possibility is remote that federal transportation funding will be discontinued, S&P said. "Both the history of the program and its vital role in preserving and expanding the national highway system, as well as the significant funding needs facing surface transportation and the lack of resources to fund those needs, support continued reauthorization of the program for the foreseeable future," S&P said.

However, each rated Garvee issuer's debt plans will be monitored by analysts to see how they may be affected as Congress works on a long-term transportation plan during the 10-month reprieve.

Fitch placed all its rated stand-alone highway Garvees in the A category and stand-alone transit Garvees at BBB in 2012 when Congress passed the two-year Moving Ahead for Progress in the 21st Century funding bill. The ratings were reaffirmed in September 2013.

Scott Zuchorski, senior director in Fitch's global infrastructure and project finance group, said the short-term fix fails to resolve the highway fund's structural imbalance.

Revenue from dedicated gasoline and diesel taxes lag almost $20 million a year below annual federal highway and transit spending, he said, requiring regular transfers from the general fund.

"Congress didn't do anything about matching revenues with expenditures," Zuchorski said. "They just continued the status quo."

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