Penn. Turnpike Agency Downgrade Strikes at Act 44

As both Fitch Ratings and Standard & Poor's have downgraded the Pennsylvania Turnpike Commission, state officials are becoming more skeptical of Act 44 plans for funding transportation infrastructure needs. Still, the PTC continues to move forward with the law's provisions, insisting that the possibility of downgrades was anticipated.

Gov. Edward G. Rendell signed Act 44 last year, allowing the PTC to issue up to $5 billion of special revenue bonds with no more than $600 million of those bonds to be issued in one year. Under Act 44, the PTC - in a public-public partnership - would lease Interstate 80 from the Pennsylvania Department of Transportation, starting with a $750 million payment this fiscal year, and begin tolling that road, if approved by the federal government. Expected payments total $83.3 billion over the 50-year term of the lease.

Still, with mounting opposition to Act 44, Rendell has returned to his original proposal for funding transportation needs in Pennsylvania: the leasing of the 537 mile-long Pennsylvania Turnpike. Rendell's administration has been exploring the possibility and is currently working with companies interested in bidding on a long-term turnpike lease. And with the recent downgrades of the PTC, Rendell is all the more adamant of pursuing his alternative plan.

"I think it reinforces the governor's intention to seek bids for the turnpike, and I believe that the bond rating reduction is just one more reason to believe that the governor's plan is the best one on the table," Rendell's spokesman Chuck Ardo said.

Fitch last Friday dropped the rating on $2.1 billion of PTC senior lien revenue bonds to A-plus from AA-minus. The downgrade reflects the higher overall leverage of the turnpike system, which, on a combined basis of both senior and subordinate liens, could reach between $13 billion and $14 billion over the next 12 years, Fitch said.

"The downgrade also reflects the fact that the senior lien revenue bondholders are not fully insulated from parity debt being issued to meet obligations under Act 44, which could result in deterioration of historically robust debt service coverage levels," Fitch said.

Standard & Poor's Monday lowered its rating to A-plus from AA-minus, asserting that the PTC will have "lower capacity to serve its debt in the future due to significant increase to its capital structure as a result of meeting large annual payment obligations under Act 44."

Standard & Poor's also assigned an A-minus rating to PTC's $250 million Series 2008A turnpike subordinate revenue bonds, which are to price this week by Citi. Assured Guaranty will insure the deal, which will be structured with tax-exempt bonds maturing from 2022 through 2038, and taxable bonds maturing from 2009 to 2022.

While Moody's Investors Service affirmed its Aa3 rating of the PTC's outstanding turnpike senior debt, it assigned an A2 rating to the Series 2008A subordinate debt, noting that the rating reflects the "expected substantial increase in debt the commission will incur to implement its substantial capital plan and to make the required payments under Act 44."

One of the biggest reasons for Fitch and Standard & Poor's downgrade, as well as Moody's two-notch rating difference in the subordinate and senior debt, is the uncertainty of implementing Act 44, the agencies said.

Rep. John E. Peterson, R-Pa., a vocal opponent to Act 44, notes that the PTC has yet to submit its formal application for tolling I-80, which requires federal approval. And without the tolling of I-80, the PTC will not have the revenues it needs to support so much debt.

The PTC "continues to borrow money and accrue this debt with no proposed plans other than tolling to pay for it, and not even an application," Peterson said.

Still, PTC CEO Joe Brimmeier insists that the downgrades are not a setback for Act 44.

"Downgraded ratings were always a possibility considering that there are a few missing pieces to the Act 44 puzzle," Brimmeier said. He said that the plan is to toll I-80 by 2010 and to increase existing tolls on the Pennsylvania Turnpike in January 2009.

"As long as we move along in this process and those revenue streams are in place, the agencies may well choose to upgrade their rating," Brimmeier said.

 

 

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