Fitch Downgrades South Jersey Transportation Authority System Revs to 'BBB+'; Outlook to Stable.

NEW YORK -- Fitch Ratings assigns a 'BBB+' rating to the South Jersey Transportation Authority's (SJTA) $47.3 million transportation system revenue bonds, 2006 series A (Alternative Minimum Tax). At the same time Fitch downgrades the unenhanced ratings on the authority's approximately $230.8 million of outstanding transportation system revenue bonds to 'BBB+' from 'A-'. The 2006 series A bonds are expected to sell via negotiation led by Goldman Sachs on or about Jan. 5 and carry bond insurance. The Rating Outlook is revised to Stable from Negative.

The rating downgrade reflects increased leveraging of expressway revenues to fund non-expressway needs that may not be self-supporting, a weaker financial profile, the possibility of still additional bonding to support the five-year capital improvement plan (CIP), and the lack of material financial and/or operational improvement at the Atlantic City International Airport (ACY). These pressures, which increased throughout 2004 and 2005, were not anticipated when the transportation system revenue bonds were upgraded in 2003. Consequently, the authority's credit profile is now commensurate with the 'BBB' rating category.

The Outlook revision to Stable from Negative anticipates continuing strong utilization of the Atlantic City Expressway (ACE), modest revenue improvement at ACY stemming from the authority's newly gained control of airport parking, and the economic (not political) ratemaking flexibility of the authority.

Proceeds of the series 2006 A bonds will fund construction of a multi-level parking garage at the Atlantic City International Airport (ACY, redemption or payment at maturity of the authority's $10,400,000 subordinated notes (series 2005), a debt service reserve fund, bond issuance costs, and capitalized interest costs for a period of two years. The subordinated notes, not rated by Fitch, were issued on March 30, 2005 to settle certain litigation which arose from the authority's buy-out of the developer/operator of the existing surface parking lot at ACY. As of April 1, 2005, SJTA assumed full ownership of the parking operation at the airport.

SJTA ratings are based upon the mature nature of the Atlantic City Expressway, the authority's anchor asset, which enjoys stable levels of demand generated by Atlantic City, an established regional gaming destination; the authority's adequate financial cushion, which provides sufficient coverage of operating requirements, debt service, and the cash funding of a number of capital projects; and the experience of authority management. Offsetting credit factors include the authority's dependency on the health of the Atlantic City gaming industry; chronically weak traffic and revenue generation at the ACY; and on-going future authority capital needs.

The economic and financial profile of ACE, characterized by a nearly 40-year history of healthy traffic levels and relatively consistent revenue generation, is a key credit factor. Low toll rates and manageable future capital needs of the expressway are other key considerations. The strong economic profile of the ACE is, however, offset by the financially strapped ACY. Airport revenues are projected to increase in response to the authority's full ownership of the parking operation at ACY and in conjunction with the opening of the new airport parking garage. While this may improve the airport's overall financial contribution to the authority, Fitch cautions that any financial benefit derived from parking is contingent on sustained growth in airport passenger traffic at ACY. To date, enplanement growth has been inconsistent and, in Fitch's view, this may not change significantly going forward. Consequently, elimination of the airport's annual operating deficit and related subsidy from the expressway may not occur through at least the intermediate term. SJTA's other assets and operations, including parking facilities within Atlantic City and economic development projects, have a much smaller impact on authority revenues and are largely breakeven.

The risks associated with increased leveraging of ACE's revenue strength is partially mitigated by the expressway's proven ability to generate adequate surpluses to support current operating expenditures, debt service, and smaller capital needs of the authority. SJTA consistently generates an operating ratio of between 35% and 40%, with debt service coverage historically above 1.5 times (x). Fitch notes coverage will decline following issuance of the 2006 series A bonds, though remain above the 1.2x rate covenant.

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