CHICAGO - Fitch Ratings on Friday revised its outlook on the Illinois State Toll Highway Authority's credit to negative as it prepares to enter the market as soon as next week with a $500 million financing that - based on current market conditions - could include $400 million of Build America Bonds.

The authority's board approved a resolution at its monthly meeting late last week authorizing the designation of a portion or all the senior-lien bonds under the Build America Bond program approved in the federal stimulus package.

The long-planned new money issue is one of the last needed to fund the tollway's nearly completed five-year-old $6.3 billion capital program that relies on $3.5 billion of debt to rebuild and expand the 286-mile system.

While California and the New Jersey Turnpike Authority have priced large BAB deals, the tollway transaction would mark the largest out of the Midwest to date. Goldman, Sachs & Co. and Morgan Stanley are senior managers. A.C. Advisory Inc. and Scott Balice Strategies LLC are financial advisers.

The tentative plan is to issue $400 million as taxable BABs and $100 million as tax-exempt, according to market sources. Authority spokeswoman Joelle McGinnis said the final decision on the amount of BABs would be made closer to the pricing date.

Like other BAB deals to come to market, the agency would apply for the federal government's 35% direct-pay interest subsidy under the program. The deal is expected to include make-whole call provisions over a traditional call. That limits refunding flexibility but results in lower interest cost.

Fitch affirmed the authority's AA-minus credit assigned to $3.3 billion of debt while revising the outlook to negative. Moody's Investors Service rates the authority Aa3 with a stable outlook and Standard & Poor's rates the system AA-minus and stable although neither had released reports on the new deal as of Friday.

Net revenues of the system secure the bonds. The authority is not treating the government subsidies as pledged revenues to repayment of the bonds but the authority intends to deposit the subsidies with the bond trustee to help cover bond interest payments.

Fitch blamed the outlook change on the potential drop in debt service coverage levels if toll revenues fail to grow rapidly. "Their forecast shows traffic recovering to 20% above current levels in a two- to- three period" to maintain a two times coverage ratio, said analyst Seth Lehman. "Our view is that given the economy and volatility of fuel prices which are out of the authority's control, they may not be able to meet those targets."

The authority's current revenue projections call for collections to rise by 21 % to $736 million by 2011.

Traffic growth in recent years has stagnated due to economic conditions, fuel prices and disruptions caused by ongoing reconstruction. Toll revenues grew by 1% in 2007 and 1.9 % last year. They were down 4 % for the first quarter. Debt service rises to $225 million next year from $165 million this year.

"The current economic conditions are affecting the whole sector, but we believe that our current revenue and traffic estimates issued by our traffic consultants are achievable," McGinnis said in response

In addition to the ambitious traffic forecasts, the authority anticipates operating costs will grow by only 3% annually while they have been growing recently at a clip of 6%. Any hike in interest costs from the authority having 40% of its debt in floating-rate mode - although synthetically fixed - also would hurt coverage ratios.

Legislation that may be voted on this spring could help the tollway address those concerns. To fully capture the value of the BAB program which most benefits issuers further out on the yield curve, lawmakers may extend to 30 years from 20 to 25 the limit now imposed on the final maturities of state-related debt, sources said. The tollway authority, which is planning on doing another $250 million of new money later this year, could issue those bonds on the long end improving debt service coverage ratios.

The authority's credit remains intact at a high level due to the region's diverse economy, growing population base and the essential nature of the authority's service linking a 12-county region through four interstate highways.

Questions remain over how additional debt the authority proposes to issue for its $1.8 billion second phase capital budget will impact its financials. The plan announced by the agency and former Gov. Rod Blagojevich last fall calls for the construction of car pool or "green lanes," an interchange at the Tri-State and I-57, improvements to the I-290/I-90 interchange, and other projects. Commercial vehicles will pay higher rates beginning in 2015 to help fund the program.

The second phase program has come under heightened scrutiny following Blagojevich's arrest on federal corruption charges last December and subsequent impeachment and indictment in recent months. Federal prosecutors alleged that he sought $500,000 in campaign contributions from a contractor that would benefit from the new program. Concerns were raised that it was Blagojevich's efforts to extract the funds ahead of the effective date on Jan. 1 of new campaign contribution rules for state contractors that prompted quick passage of the program.

Tollway board chairman John Mitola asked the agency's inspector general Tracy Smith to review the approval process and she issued a report last week saying it was appropriate and there was "no evidence of impropriety." Those projects remain on hold and new Gov. Pat Quinn has yet to voice a position on that program.

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