Fitch Confirms South Carolina Transportation Infrastructure Bank Revs 'A'.

NEW YORK -- Fitch Ratings confirms the 'A' rating on approximately $368 million South Carolina Transportation Infrastructure Bank (SCTIB, or the bank) revenue refunding bonds, series 2003B. In addition, Fitch affirms the underlying 'A' rating on $2.1 billion in outstanding SCTIB revenue bonds (senior lien). The 2003B bonds were initially issued as auction-rate securities and the SCTIB has elected to convert the bonds, pursuant to the terms of the Sixth Series Resolution, to a variable-rate mode. The Rating Outlook is Stable.

Fitch's 'A' rating on the senior lien bonds reflects both the relatively stable quality of the revenue streams pledged to the SCTIB and the high level of leveraging. Importantly, the bank is very heavily leveraged with coverage from its primary revenue streams providing between 1.30 times (x) -1.40x coverage of debt service through the medium term, assuming no additional issuance. Interest earnings on various funds provide the cushion to absorb revenue volatility and meet the additional bonds tests, the key legal protection to bondholders.

Truck registration fees (TRFs), which are transferred to the bank by the department of motor vehicles, and federal highway reimbursement funds, which are paid to the bank by the South Carolina Department of Transportation (SCDOT or the department) in amounts equivalent to certain taxes and fees or pursuant to terms of intergovernmental agreements, are the bank's primary revenue sources. TRFs currently represent 33% of pledged revenues, while federal highway reimbursement funds equal 40%. As the amount federal highway reimbursement funds increase, they are expected to represent about 50% of pledged revenues, while TRFs are projected to remain around 30-35% over the medium term.

Since fiscal 1998 TRFs have grown at a 2.95% average biennial rate and have recovered from the adverse impacts of the economic downturn that contributed to an 8.2% decrease in fiscal 2002 compared to the comparable fiscal 2000 biennium. Between fiscal 2003 and 2007, TRFs increased at an average biennial growth rate of 10.8%. While growth has been robust since 2003, year-to-date TRF's are tracking slightly lower at approximately 3%, reflecting the current economic conditions. Given the importance of these fees for this credit and moderately escalating debt service requirements in the medium term, continued growth in TRF revenues is a material credit factor for these bonds.

While federal highway reimbursement funds have a long established track record, funding levels are subject to changes in federal transportation policy with each reauthorization of the national surface transportation program. Although the longer maturity profile of up to 30 years exposes bondholders to additional reauthorization risk relative to other debt programs leveraging federal highway reimbursements, this risk is sufficiently hedged and is consistent with Fitch's 'A' rating given the additional pledge of TRFs and other non-federal revenue sources. Additionally, Fitch's opinion is supported by strong coverage by SCDOT's total federal highway reimbursements of 5.3x compared to its maximum payment obligations to the bank, SCDOT's covenant to limit leverage, and the department's commitment to make its payments to the bank from other non-tax sources in the event federal highway reimbursements are not sufficient.

The ratings consider the relatively weak additional senior lien and junior lien bonds' tests, which allow for narrow margins of safety. Fitch's ratings on the bank's senior lien and junior lien bonds also recognize the state's commitment to the bank through the periodic dedication of new revenue sources to support the needed large transportation projects it is financing.

Pledged revenues, consisting of system payments, series payments, and transfers and interest earnings from the revenue stabilization fund, provide about 1.70x to 1.80x coverage of net debt service under the indenture on the bank's bonds. Fitch expects the SCTIB to issue additional bonds in 2009 and 2010 at which time debt service coverage is expected to decline to 1.40-1.50x. The senior lien additional bonds test requires a minimum of 1.35x coverage, while the junior lien test requires a minimum of 1.20x combined net senior lien and junior lien debt service.

Fitch's coverage calculation (which does not net series payments or interest earnings from pledged revenues and debt service, and as such is a more conservative calculation than that defined in the master resolution) indicates that senior debt service coverage at its lowest point will be about 1.39x, assuming no additional leveraging. Based on Fitch's coverage calculation fiscal 2007 pledged revenues covered senior debt service and combined senior and junior debt service by 1.50x and 1.44x, respectively. Junior lien debt service was paid in full in FY 2007. For 2008, Fitch expects senior lien debt service to be close to 1.40x, however, it could be slightly lower if TRF's are lower than estimates.

The SCTIB was created by an Act of the South Carolina general assembly in 1997. The purpose of the Act was to focus greater attention on larger transportation projects in the state, thereby allowing the SCDOT to devote resources to other transportation projects. The SCTIB selects and assists in financing major qualified projects in excess of $100 million by providing loans and other forms of financing assistance.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.