Fitch Puts MassPike's $2.24B of Highway System Debt on Negative Watch

Fitch Ratings yesterday placed the Massachusetts Turnpike Authority's $2.24 billion of Metropolitan Highway System debt on credit watch negative due to rising operating costs and an anticipated drop in debt service coverage.

At the same time, Fitch affirmed the authority's $162 million of Western Turnpike revenue bonds at A-plus with a stable outlook.

Of the MHS bonds, Fitch rates $1.28 billion of senior-lien debt BBB-plus and $959 million of subordinated debt BBB. Moody's Investors Service rates the MHS senior and subordinated bonds A3 and Baa1, respectively, both with a negative outlook. Standard & Poor's does not rate the credit.

Currently, debt service coverage in the short term on MHS debt is 2.4 times for senior bonds and 1.3 times for subordinated debt. Fitch expects debt service coverage to dip to below one times on the subordinate bonds within the next two years. MassPike's total debt service costs have increased by $25 million to $100 million in fiscal 2009, which began July 1. In addition, the authority faces a $70 million to $100 million budget shortfall.

While the authority raised tolls in January to meet increasing debt service costs, that hike didn't support growing repair and remediation costs of roughly $90 million on the central artery project, also known as the Big Dig and the Ted Williams tunnel.

Along with the toll-revenue increases, the authority has used revenue - totaling roughly $70.5 million over the past few years - from premium payments MassPike receives on two swaptions to help cover debt service costs.

"The credit quality for a triple-B plus and a triple-B is reflective of the ability to meet your debt service needs with some cushion - not just all your toll revenue after expenses - and these reserves that you've got, which will go away at some point, too," said Mike McDermott, a Fitch analyst.

In response to the rating action, MassPike executive director Alan LeBovidge acknowledged the authority's fiscal needs and stressed that Gov. Deval Patrick's administration inherited many of MassPike's woes. One of those is a funding strategy implemented in the late 1990s that made the authority responsible for operating and maintaining the non-tolled sections of the Big Dig and for supporting a share of the cost to build that infrastructure.

"Though we are pleased that our rating was not downgraded, the Fitch action underscores the serious financial challenges that continue to face the Turnpike Authority. Fitch's action recognizes that decisions made a decade ago about Central Artery funding today 'compromises the MTA's long-term financial flexibility,'" LeBovidge said in a prepared statement.

For the past year, LeBovidge has implemented staff reductions and spending cuts in order to make the authority run more efficiently. He has long favored reforms within the authority over raising tolls.

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