Moody's Investors Service has assigned a Aa2 rating to the Triborough Bridge and Tunnel Authority (TBTA) senior lien Series 2009B General Revenue Bonds. We also have affirmed the Aa2 rating on the TBTA's outstanding senior lien bonds and the Aa3 rating on the authority's subordinate lien revenue bonds, and revised the rating outlook to negative from stable. The outlook change reflects increasing debt levels, in part due to the refunding of Metropolitan Transportation Authority (MTA) debt in 2008, and decreasing debt service coverage margins relative to historical levels.
The Aa2 senior lien long term rating is based on the critical transportation links provided by the authority's seven bridges and two tunnels in the New York Metro area, relatively inelastic traffic demand through economic cycles and toll rate increases, toll setting autonomy, and a manageable though growing capital improvement program. The rating also reflects the TBTA's role in the Metropolitan MTA, its required use of surplus for annual subsidization of the transit and commuter railroad systems and its recent capital borrowing to support the MTA's capital program.
USE OF PROCEEDS: Provide funds for TBTA capital projects. The Series 2009B bonds are being issued as fixed rate Build America Bonds (BABs) supported by a federal interest subsidy. The subsidy does not constitute part of the trust estate for TBTA bonds and the Series 2009B bonds are subject to optional redemption by the TBTA in event of an 'Extraordinary Event' which would prevent the subsidy from being paid.
LEGAL SECURITY: The general revenue bonds are secured by a first lien on net authority revenues from its seven bridge and two tunnel crossings.
DEBT RELATED DERIVATIVE INSTRUMENTS: The authority has approximately $1.93 billion in variable rate debt outstanding (including $150 million in mandatory tender bonds with a mandatory tender date of January 20, 2010) under its general and subordinate lien bond resolutions representing approximately 22% of its total outstanding debt. To hedge its interest rates, the TBTA has entered into nine separate pay-fixed, receive-variable interest rate swaps and one basis swap with counterparties rated by Moody's. The various swap agreements introduce several credit risks to the authority, including basis risk and termination risk. The swaps have a total notional value of approximately $2.2 billion, with a termination option by the counterparty limited to highly unlikely events, including a downgrade of the authority below Baa1 for swaps associated with senior bonds, and a downgrade of the subordinated bonds below Baa2 for swaps associated with those bonds. Under the authority's bond resolution, payments relating to debt service on the swaps are on parity with the payments for the associated bonds. All other payments, including termination payments, are subordinate and may be funded with bonds. As of August 25, 2009 the swaps had a negative mark-to-market of approximately $150 million.
Moody's expects the risks associated with variable rate bonds and derivatives will be manageable given currently available liquidity levels, including discretionary balances in the necessary construction reserve (NCR) annual average balances of approximately $155 million, held mostly in short term investments) and on-going excess cash flow of approximately $40 million a month that flows to support the transit operations of the MTA after payment of TBTA senior and subordinate lien debt service. The TBTA also has the ability to independently increase toll rates within a six-month timeframe.
STRENGTHS
* TBTA facilities provide critically important transportation links in the New York City metropolitan area
*Multiple facilities provide revenue diversity with no one facility accounting for more than 23% of total toll revenue; electronic toll collection now accounts for 74.4% of transactions and enables easy implementation of toll rate adjustments
*Traffic and revenue have been resilient through economic cycles and periodic toll increases. A toll increase was implemented on March 16, 2008 and another on July 12, 2009, followed by planned biennial toll increases
*Security provisions for senior and subordinate bonds are adequate and ensure that debt service and capital expenses are paid prior to any transfers to subsidize transit operations
CHALLENGES
*Legally required TBTA subsidies to transit agency reduce authority's liquidity and could result in increased leveraging for capital projects
*Debt service coverage ratios of both senior and subordinate obligations are expected to decline over the next several years as debt service increases
*Approximately 22% of debt is variable rate and authority has swaps, some of which are insured and could be terminated in the event of negative financial events relating to the insurer and a downgrade of the TBTA's ratings below certain levels
*Due to the annual transfers to MTA the authority has a relatively weak balance sheet; additionally the authority has no debt service reserve
*Traffic and revenue growth has recently slowed due to effects of toll increases, rising fuel costs and a weakening service area economy. The system remains somewhat vulnerable to construction-related disruptions
*Operating costs rose significantly in FY 2008 due to personnel costs, major capital maintenance expenses and E-ZPass system servicing
*Without planned rate increases in 2011 and 2013, debt service could fall to 1.75x for senior bonds and 1.35x for senior and subordinate bonds
RECENT DEVELOPMENTS
The July 29, 2009 Financial Plan for 2010 presented to the MTA/TBTA board includes 10% toll increases adopted by the board on May 11, 2009 effective July 12, 2009, plus projected toll increases of 7.5% in 2011 and 2013. The plan also includes a wage freeze 2009 and labor savings through various productivity enhancements.
Year-to-date 2009 toll traffic through July is down 2.3% compared to 2008, but revenues are up 0.1% due to the 5% toll increase implemented on March 16, 2008. Toll revenue is projected to increase 2.7% in FY 2009 due to a 10% increase implemented on July 12.
FY 2008 revenues were 1.9% higher than FY 2007 and transactions 2.9% lower due to the March toll increase; however, FY 2008 revenues were 2.7% lower than forecasted and transactions 1.4% lower due to the economic recession as well as high fuel prices and traffic diversion due to construction on Throgs Neck Bridge.
The TBTA has a diverse and balanced revenue stream with no one facility making up more than 23% of total toll revenues. The two largest facilities, the Robert F. Kennedy (RFK) Bridge (formerly the Triborough Bridge) and the Verrazano Bridge account for 23% and 22% of total toll revenues.
FY 2008 operating expenditures rose 10.6% due to a 16.5% increase in major maintenance needs and 5.4% increase in labor costs. FY 2009 budgeted expenditures increase by 3.6% and include a 7.7% increase for filling vacant positions. Going forward labor costs are forecasted to increase 4.25% annually and non-labor costs 2.5%.
FY 2009 revenue is forecasted to increase 2.7% due to toll increase and related traffic decline of 3.6%. Traffic is forecasted to decline -0.6% in 2010; -0.5% in 2011, and remain flat in 2012 and beyond. The forecast reflects actual performance through April 2009 and the impact of the July toll increase.
The debt service coverage ratio (DSCR) for senior bonds was 2.51x 2008, a decline from 2.89x in FY 2008. The DSCR is budgeted to decline further to 2.40x in 2009 and to 2.04x in 2010. The subordinate lien DSCR is budgeted at 1.76x 2009, but drops to 1.55x in 2010. While coverage is expected to remain above 1.75x for senior bonds per MTA board policy, total debt service coverage could drop as low as 1.3x in the current financial plan period through 2013 - a very low level for toll facilities in the Aa rating category. These coverage levels do not reflect future planned toll increases in 2011 and 2013, but do include expected debt service associated with the 2010-2014 capital program. Including planned rate increases in 2011 and 2013 to yield 7.5% revenue increases, debt service coverage on senior bonds would remain above 2x and senior and subordinate debt service would be 1.5x or above.
The TBTA is an annual issuer of debt to maintain and upgrade its aging bridges and tunnels which range in age from 73 to 39 years. A new five-year capital improvement program (CIP) through 2014 is to be submitted to board on 10/1/09. The CIP includes $2.5 billion capital projects through 2014, but funding is expected to span a seven-year period.
The 2005-09 CIP totaled $1.209 billion with nearly $400 million for RFK bridge widening/redecking and $218 million for Whitestone projects The URS review of facility conditions includes biennial bridge inspection reports by federal and state mandate and self-imposed biennial tunnel inspections. The last inspections completed in 2006/07 with new ones underway. Six of 7 facilities (RFK; Bronx Whitestone; Verrazano; Cross Bay and Queens-Midtown) are operating at or above 92% peak capacity and so network traffic growth likely will come from increased off-peak usage.
Approximately 22% of the TBTA's outstanding debt is variable rate and supported by liquidity facilities. The authority has 10 interest rate swaps, some of which are insured and could be terminated in the event of a negative credit events related to the insurer and a downgrade of the TBTA's ratings below certain levels. Despite the market upheaval in 2008 the MTA's total variable rate portfolio on an aggregate basis achieved a relatively low cost of funds of 3.54%, which is below the budget assumption of 4%. This is due to a well diversified portfolio and aggressive actions taken to address downgraded insurers and/or liquidity providers.
OUTLOOK:
The negative outlook reflects weaker traffic growth; increasing CIP needs and expected lower debt service coverage levels despite implemented rate increases. The ratings reflect solid credit fundamentals and assume that the TBTA will continue to grow revenues and support total debt service coverage levels above 1.5x primarily through the implementation of increases in toll rates as needed.
What Could Change the Rating - DOWN
Significant declines in traffic and revenues combined with additional borrowing for transit projects could place downward pressure on the rating. Senior debt service coverage levels persistently below 1.7x and total coverage levels below 1.5x would place downward pressure on the ratings.
What Could Change the Rating - UP
Sustained growth in traffic and revenues and debt service coverage margins could have a positive rating impact so long as the TBTA invests in asset maintenance and builds a stronger balance sheet by limiting support to the MTA.
KEY INDICATORS:
Type of System: Multi-asset toll bridge/tunnel system
Size of System: 7 bridges and 2 tunnels in NYC Metro area; 93% passenger vehicles
Toll Transactions, FY 2008 ('000): 296 million
Toll Revenue, FY 2008 ($000): $1.274 billion
Operating Expenses, FY 2008: $408 million
Growth in Operating Expenses, FY 2007-2008: 10.6%
% Change in Toll Revenue, FY 2007-2008: 1.9%
% Change Transactions, FY 2007-2008: 2.9%
CAGR Transactions, FY 2003-2008: 0.1%
CAGR Toll Revenue, FY 2003-2008: 4.5%
Senior Debt Service Coverage by Net Revenues, FY 2008: 2.51(x)
Senior Debt Service Coverage by Net Revenues, FY 2007: 2.89(x)
Total Debt Service Coverage by Net Revenues, FY 2008:1.98(x)
Total Debt Service Coverage by Net Revenues, FY 2007:2.14x)
Budgeted Senior/Total Debt Service Coverage by Net Revenues, FY 2009: 2.40/(x)/1.74x
Budgeted Senior/Total Debt Service Coverage by Net Revenues, FY 2010: 2.04/(x)/1.55x
FY 2008 Average EZ-Pass Participation: 74%
Operating Ratio, FY 2008: 30.9%
Debt Service Safety Margin, FY 2008: 33.2%
DEBT OUTSTANDING
Debt Outstanding: Senior lien: $ 6.52 billion
Debt Outstanding: Subordinate lien: $ 1.97 billion
Total % Variable Rate Debt: 22%
