Moody's Investors Service said it has downgraded the rating on the Massachusetts Bay Transportation Authority's senior sales tax bonds to Aa2 from Aa1 and assigned a stable outlook.

The downward rating revision reflects reduced debt service coverage due to cumulative sales tax underperformance over the past decade; strained financial operations that have led to one-time actions to lower debt service costs for budget relief; a complex variable rate debt and swap portfolio combined with modest liquidity, and heightened risk in the variable rate portfolio related to liquidity facilities with banks that have been downgraded recently.

The senior sales tax bonds are secured by a first claim, before transit operations, on 1% of the first 5% of statewide sales tax allocated from the Commonwealth of Massachusetts' existing sales tax (raised from 5% to 6.25% effective August 1, 2009).

The bonds also have a subordinate lien on assessment revenues that are paid by cities and towns located in the authority's territory after assessment bond debt service (Aa1/stable outlook).

Additional security is provided by a Base Revenue Amount (BRA) providing a guaranteed floor on sales tax amounts pledged to the MBTA.

The BRA has prevented the loss of sales tax revenues during recessionary periods, although lack of sales tax growth is evident in declining debt service coverage levels and strained operations due to reduced sales tax revenues available to the authority after debt service.

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