Moody’s Investors Service late Tuesday upgraded to A1 from A2 the Southeastern Pennsylvania Transportation Authority, affecting $327 million of debt. The outlook is stable.
The rating boost indicates the connection between the mass transit agency’s dedicated revenues and bondholders. Pennsylvania’s treasurer each month directs the authority’s pledged state revenue straight to SEPTA’s bond trustee. Once debt-service obligations are met, the remainder then goes towards the authority’s operations.
In addition, the trustee must set aside enough revenue to cover debt-service payments for an entire fiscal year before SEPTA can begin receiving its share of the funds.
The authority’s fiscal year begins July 1. Typically, dedicated revenue begins to flow into the debt-service fund on March 1 and the fund has accumulated enough revenue by July 1 to cover debt payments for that fiscal year.
The upgrade “reflects the strength of SEPTA’s distribution of a statewide revenue stream pledged to the bonds, a legal structure that includes a trustee intercept of those revenues, and requirement that the trustee set aside a year’s worth of debt service by the start of the fiscal year,” according to Moody’s.
Pennsylvania law also prohibits any new-money issuance leveraged from SEPTA’s dedicated revenue. The pledged revenue consists of a portion of the state’s sales tax, a $2 per-day rental car fee, a 3% tax on vehicle leases, and a $1 fee on every new tire sold in the state.
The Public Transportation Assistance Fund distributes the dedicated revenue, with SEPTA receiving about 70% of the total.
Credit challenges include renewal risk of liquidity enhancement on variable-rate debt and put risk. Reducing the authority’s liquidity risk due to its variable-rate debt and swap portfolio could prompt an upgrade, Moody’s said.
“SEPTA’s unrestricted liquidity available to cover a put is narrow and would create short-term operating pressure,” the rating agency said. “Collateral posting and termination risk related to the two swaps that will remain in place after the current transaction are limited at SEPTA’s current rating level.”
The authority anticipates refinancing its Series 1999 fixed-rate bonds. The $240 million refinancing is set to price in early October with Citi as book-runner.
Fitch Ratings last week upgraded the authority to AA from A-plus. Standard & Poor’s rates the Series 2010 refunding bonds AA-minus.
SEPTA serves 1.1 million daily trips in Philadelphia and its neighboring counties through commuter rail, subway, and bus lines.