Ohio’s upcoming $190 million general obligation highway capital improvement bond deal will benefit from a second triple-A rating after Kroll Bond Rating Agency issued its inaugural rating.
S&P Global Ratings also rates the bonds AAA. Fitch Ratings and Moody’s Investors Service rate the bonds AA-plus and Aa1 respectively. The outlook from all four rating agencies is stable.
Goldman Sachs is the senior manager. Academy Securities Inc., Fifth Third Securities, Loop Capital Markets and UBS Financial Services Inc. are co-managers. PFM is the municipal advisor.
KBRA assigned its AAA rating ahead of Wednesday's scheduled pricing. The rating agency highlights the bonds' double-barreled security, which consists of a pledge of highway user receipts supported by the general obligation pledge of the state.
“In KBRA’s view, the constitutional provisions underpinning the bond authorization and pledge of the highway user fees provide stronger credit features to the HCIBs than would be present with solely a general obligation pledge,” KBRA said. “The structure makes holders of these bonds senior secured creditors of the State, in a superior position to general State general obligation bondholders and supports the rating.”
Fitch and Moody’s base their ratings on the state’s GO credit.
“Fitch does not rate the bonds relying on the separately pledged transportation-related revenues as we do not consider them to be sufficiently distinct from the state’s general operations to warrant a separate rating,” Fitch analyst Karen Krop said in an email.
Moody’s also noted that the pledge of state highway user revenues, consisting 67% of motor fuels and 33% of registration and license fees, is no higher than the state's Aa1 GO rating “due to a relatively weak legal structure compared to other highly-rated special tax bonds.”
“The highway user receipts are legally separated from the operations of the state and pledged to bondholders through constitutional and contractual means,” Jonathan Azoff, director of debt management in the Ohio Treasurer’s office, said in an investor presentation.
Azoff said that the revenue can only be used for certain highway projects and for paying debt service on the highway capital improvement bonds and thus cannot be used for general state purposes.
The state has $925 million outstanding in highway capital improvement bonds and is constitutionally limited to an annual issuance of no more than $220 million.
“In fiscal 2018, the pledged highway user receipts were $2.9 billion which would provide strong debt service coverage on the outstanding debt along with the proposed new issuance,” KBRA said.
There is also a constitutional limitation on the total par amount of bonds permitted to be outstanding at one time of $1.2 billion. “The state would maintain substantial debt service coverage if it were to issue bonds up to this cap,” Azoff said.
The state's budget stabilization fund has been restored after being drawn down during the recession and now totals $2.7 billion, or 8.3% of GRF revenues. Republican Mike DeWine, the state’s attorney general, will be Ohio's next governor, replacing Republican Gov. John Kasich who was term-limited. DeWine defeated Democratic candidate Richard Cordray.
