Fitch Rates $187.5MM Rhode Island Econ Dev Corp Grant Antic Bonds 'AA-'.

NEW YORK -- Fitch Ratings assigns an 'AA-' rating to approximately $187.5 million Rhode Island Economic Development Corporation (RIEDC) grant anticipation bonds (Rhode Island Department of Transportation (RIDOT)), series 2006A. The series 2006A bonds are expected to sell through negotiation by a UBS Investment Bank-led syndicate on or about Jan. 30. Bond proceeds will finance a portion of the construction costs for certain high priority transportation projects pursuant to a statutory plan of finance and pay the cost of issuance. The bonds mature serially June 15, 2007-2018. Fitch affirms its 'AA-' rating on $216.8 million in outstanding grant anticipation bonds. The Rating Outlook is Stable.

This is the second of a series of $584.8 million grant anticipation bonds authorized by a program act passed in 2003 to finance five priority transportation projects. Debt service on the bonds is payable from federal transportation funds, subject to annual appropriation by the state. A memorandum of agreement between the Federal Highway Administration (FHWA) and RIDOT and a payment agreement among the governor, the general treasurer, RIEDC, RIDOT, and the Rhode Island Department of Administration establish a sum sufficient debt service payment stream. However, the pledge of the trust estate is more broadly defined to include all legally available federal transportation funds to provide coverage in the unlikely event these payments result in a deficiency. Similar to some other state transportation grant anticipation programs leveraging federal transportation funds, advance segregation for debt service payments is not on a cash basis but through a set aside of obligation authority for federal transportation funds.

Key credit strengths include the long established track record of federal transportation funding, RIDOT's covenant that in each federal fiscal year it will request obligation of federal transportation funds for debt service due that year prior to obligating federal transportation funds for any other purpose, and a 12-year debt maturity profile for the existing bonds and subsequent issuance, which helps limit future federal surface transportation program reauthorization risk. Bondholder security is sufficiently protected by well defined statutory debt and debt service limits and the additional bonds test requirement that current or historical federal transportation funds be at least 1.50 times (x) maximum annual debt service (MADS) through federal fiscal 2009 and 3.00x MADS thereafter. A debt service reserve fund does not secure these bonds further. However, this is offset by RIDOT's covenant to obligate sufficient amounts to pay annual debt service well in advance of the debt service payment date.

A risk for these bonds, similar to other bonds secured by federal transportation funds, is the potential for significant changes in federal transportation funding policy with each new authorization period. Interruption in the flow of federal transportation funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. The Safe, Accountable, Flexible, and Efficient Transportation Equity Act -- A Legacy for Users (SAFETEA-LU) took nearly two years to enact.

RIDOT's SAFETEA-LU federal transportation funding level represents an approximately 23% increase over TEA-21 for the federal fiscal 2004-2009 period. However, given continuing federal budget deficits and national security concerns, coupled with the possibility of changing federal priorities and/or highway trust fund resource constraints, there is no guarantee that such federal transportation funding growth will continue during subsequent reauthorization periods. Rhode Island may be more susceptible to changes in federal transportation funding policy given its status as a donee state, where it receives more than $2.00 in federal transportation funds for each $1.00 the state contributes in federal motor fuel tax revenues. However, this risk is adequately hedged by the debt's 12 year maturity profile, debt service coverage of at least 3.0x, and the state's location within a strategic national transportation corridor.

The five projects are critical to the state transportation program and are part of RIDOT's multi-year transportation improvement program. About 80% of the $695.7 million in program act financed project costs is provided by the grant anticipation bonds with approximately 20% from motor fuel tax revenue bonds that are subject to a $124.8 million debt limit under the program act. The second series of such bonds are being issued concurrent with the series 2006A bonds.

RIEDC, which was established by the general assembly with a distinct legal existence from the state, is empowered to issue bonds and make proceeds available to various borrowers in the state, including RIDOT. The program act and RIEDC's enabling legislation authorize it to issue the grant anticipation bonds and motor fuel tax revenue bonds. RIDOT is responsible for the construction and maintenance of nearly all state roads, bridges, and transportation facilities and administers the state and federal highway construction assistance programs.

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