CHICAGO — The Regional Transportation Authority of Illinois board yesterday approved a $140 million taxable working cash-flow note issue that will help the agency keep Chicago-area buses and trains in service as it awaits its overdue state aid.
Fitch Ratings yesterday downgraded the agency by one notch to AA-minus and assigned a negative outlook, warning that the state’s chronic tardiness and faltering sales tax collections have damaged the RTA’s financial flexibility.
Bank of America Merrill Lynch will be senior manager. Acacia Financial Group is financial adviser and Chapman and Cutler LLP is bond counsel.
Board members also called on Illinois to get its fiscal house in order so it can make good on its transit commitments. The state is behind a record $323 million in aid to the RTA, which has oversight of the Chicago Transit Authority, Pace suburban bus service, and Metra commuter rail. The funds are owed in the form of public transportation aid, debt-service support, and reimbursement for reduced fares.
Due to its budget and liquidity crisis, the state will leave about $6.4 billion in bills unpaid at the close of the fiscal year this month and may not get caught up on fiscal 2010 vouchers until December.
“We are expressing concerns as to the extent of the amount of debt we’ve had to go into because of the state,” said chief financial officer Joseph Costello.
The agency is on pace to deplete its cash for operations by the end of June, and so needs the infusion of funds before the end of July. The deal will sell early next month.
“We have enough cash to continue to cover debt service and fund operating needs, but it’s pretty tight,” Costello said.
Gov. Pat Quinn earlier this month signed legislation that increased to $400 million from $100 million the amount of cash-flow note debt the authority is permitted to have outstanding.
“Access to affordable and reliable public transportation is imperative for Chicago-area transit riders,” Quinn said in a statement. “This new law is part of our comprehensive plan to stabilize public transit by keeping fares flat, services running, and employees on the job.”
The notes will mature in 24 months, the maximum allowed under its note-financing authorization. The agency is seeking long-term ratings on the transaction, as it expects the larger-sized note program to be in place for some time due to the state’s fiscal turmoil. The agency’s 2009 working cash issue received top short-term ratings.
The RTA has $2.3 billion of outstanding GO debt that carries ratings of AA-plus with a stable outlook from Standard & Poor’s, Aa2 with a stable outlook from Moody’s Investors Service. The agency’s bonds are secured by a gross pledge of sales taxes and other state aid and the RTA maintains a policy of providng at least a 2.5 times coverage ratio.
In its downgrade, Fitch said it is concerned over both the state delays and sales tax collections that go to repay bonds. They are expected to grow just 1% this year, but then pick up. “Fitch believes the RTA’s sales tax growth assumptions after 2010 are somewhat optimistic with 2.9% annual growth through 2012 and 3.2% thereafter. Without a significant rebound in sales tax receipts, the RTA potentially faces heightened operating pressures and fiscal imbalance,” anlysts wrote.
The RTA considered a competitive sale for the notes, as it is required to use on its long-term GOs, but opted for a negotiated one to try to minimize the effect of the state’s crisis on pricing. Market participants have said all the negative news over downgrades and financial stress has hurt other state-related credits.
“The ability to use a negotiated sale will give us a chance to better explain the RTA’s credit strengths to the market,” Costello said. The agency is hoping to keep the note rate under 1.5%. The issue is taxable, as it fails to meet Internal Revenue Service rules for a tax-exempt cash-flow deal.
The transit authority issued its first cash-flow notes last spring, in a $260 million issue, as it faced state payment delays and dwindling sales tax revenues. It had previously turned to commercial banking relationships for more traditional cash-flow loans, but shifted to the capital markets due to increased credit costs. A portion of those notes may have to be rolled over next year if state payment delays continue.
While the notes will help on the operational side, RTA officials are hoping for an infusion of capital funds from the state’s upcoming $900 million of new-money debt next week. The state included $2.7 billion in funding for transit projects in its $31 billion capital program approved earlier this year, but the RTA has yet to receive any of the allocation. The agency has little bonding authority remaining from past authorizations.
The RTA yesterday unveiled its first formal capital needs assessment report, warning that $24 billion worth of infrastructure work is required over the next decade. About $13 billion is needed for overdue work on equipment and facilities.