SAN FRANCISCO — Alaska Railroad Corp.'s $135 million of bonds backed by federal transportation funds have been endangered by recent legislation.

That risk prompted Moody's Investors Service to downgrade the debt on Thursday to A2 from A1 and kept them on negative watch for another drop due to the potential loss of the grant funding that backs the paper.

Moody's said its pessimism is a result of the possibility that the Alaska Railroad could lose its Federal Transit Administration funding that solely backs its outstanding debt if Congress passes and President Obama signs the Senate's version of the national transportation bill.

"Such measures would leave insufficient revenue for debt service," according to the report from Moody's analyst Edward Hampton.

The rating agency said that if the railroad, an independent corporation owned by the state, loses the federal money it could result in a "significantly" lower rating.

The Alaska Railroad's chief financial officer, Bill O'Leary, said that there is a still a long way to go before the federal funding is decided and the bonds are affected.

"At this point, no decisions have been made on anything related to the bonds," he said. "There are a number of options available to us."

O'Leary said that once they heard they could possibly lose the federal dollars backing the bonds, they issued disclosure statements and alerted the rating agencies.

The outstanding bonds stem from $76 million of capital grant receipts bonds issued in 2006 and $88 million sold in 2007 by Alaska Railroad. It has no other public debt.

The concerns stem from last month when the Senate passed a national transportation measure that could cut some $30 million from Alaska Railroad's allocation.

The would eliminate language from 2005 transportation legislation that allows Alaska Railroad to count 60% of its tracks towards federal transit funds.

Current transportation funding has been extended until the end of June to give lawmakers more time.

O'Leary said a House version of the transportation bill would leave the railroad funds intact, adding that he hopes possible negotiations between the two legislative bodies could result in saving the funds.

"We think we are certainly better prepared in the House to make sure our story is told," he said.

Even if the funding remains, Moody's said risk of reauthorization of funds, which is endemic to federal grant anticipation revenue vehicle notes, or Garvees, will remain.

A chance exists that state funding could be used to help back the bonds, but so far no legislation has been introduced into the current budget negotiations.

Alaska's legislative session ends April 18.

The next budget discussion won't occur until Jan. 2013 when the legislature discussion a supplemental budget.

"Everybody is in a wait and see mode," said Deven Mitchell, debt manager for the state. "I think the railroad has very important role within the state of Alaska and has a lot of support in the leadership of the state."

The state has no risk in the bonds.

The bonds are rated A by Fitch Ratings and A-plus by Standard & Poor's.

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