Fitch Rates $400MM Louisiana GOs 'A'.

NEW YORK -- Fitch assigns an underlying rating of 'A' to the following State of Louisiana general obligation (GO) bonds, scheduled to sell the week of July 10, 2006 through negotiation with a syndicate led by Morgan Keegan & Company, Inc.:

-- $200 million gulf tax credit bonds (taxable), series 2006-A

-- $200 million gulf opportunity bonds (tax-exempt), series 2006-B.

The bonds are expected to be sold with credit enhancement. Fitch also affirms the 'A' rating on approximately $2 billion outstanding State of Louisiana GO bonds. The Rating Outlook is Negative.

The bonds are being issued pursuant to federal Gulf Opportunity Zone legislation passed in 2005 and will assist local governmental issuers in Louisiana that were impacted by the hurricanes by supporting the payment of debt service on their bonds. Instead of interest, holders of the 2006-A bonds will receive federal tax credits. The 2006-B bonds fund the state match required by the federal legislation. Participating local governmental issuers will enter into cooperative endeavor agreements with the state requiring that the loan be paid off over 20 years, with no principal or interest payable for the first five years.

The state's rating was downgraded to 'A' from 'A+' in December 2005 following the hurricanes. Despite significant positive developments since that time, including the state's prompt action to ensure balanced operations, substantial financial balances, unexpectedly strong fiscal 2006 revenue collections, and, most recently, federal approval of an additional $4.2 billion in community development block grant funds and $3.6 billion for levees, the Negative Rating Outlook reflects continued uncertainty regarding economic recovery from the hurricanes given the magnitude of the disruptions and extent of the economic losses. Credit improvement will depend on progress in New Orleans and demonstration of a sustainable ongoing state financial situation.

Pre-Hurricane Katrina, the 1.3 million people residing in the New Orleans metropolitan area made up nearly 30% of the state's population and about one-third of state employment. The population of New Orleans is estimated to be about half of pre-hurricane levels, although other areas of the state, particularly Baton Rouge, have experienced employment and population gains. The state's population is estimated to have fallen about 8% from pre-hurricane levels, and state employment for May 2006 was 9.1% below May 2005. Louisiana's personal income declined 8.7% in 2005, compared with 5.6% growth for the U.S. Personal income per capita dropped to 50th among the states, down from 42nd in 2004. Progress in the recovery of New Orleans has been limited, with severe housing and labor shortages, although the release of federal flood map advisories and full funding of the state's 'The Road Home' housing plan should spur development in the remainder of the year.

Federal assistance has been significant. In addition to general Federal Emergency Management Agency (FEMA) relief and recovery spending, specific assistance has been provided for Medicaid and education, among other purposes. The Gulf Opportunity Zone legislation, in addition to authorizing the tax credit bonds, allows for up to $4.5 billion in second advance refundings on outstanding local and state issues and $7.8 billion in additional tax-exempt private activity bond authorization. Hurricane-related repairs to levees damaged by Katrina reportedly were completed by the start of hurricane season on June 1, and last week an additional $3.6 billion in federal spending for levees was approved. The state has set aside about $420 million of general fund monies in a FEMA reimbursement fund for FEMA-related state match requirements.

The final $4.2 billion in federal community development block grant money necessary to fund the state's comprehensive housing program has been secured, and the Department of Housing and Urban Development has approved the plan, which offers up to $150,000 per home to repair, rebuild, or relocate. About 85,000 homeowners have registered for the program to date, and another 38,000 are estimated to be eligible. The legislature has created a nonprofit corporation, with a seven-member board appointed by the governor, to receive property to be purchased by the state under the program. Block grant monies are also expected to fund support of affordable rental properties, as well as infrastructure and economic development.

The state has acted to maintain financial balance following the shock of the hurricanes. In late October 2005, the state's revenue estimating conference severely lowered general fund revenue estimates, by $971 million in fiscal 2006 and $786 million in fiscal 2007, and in November, the state legislature closed the resulting fiscal 2006 budget gap, primarily through deep spending cuts. In January 2006, the conference raised estimates substantially but still projected an overall decline in revenues year-over-year. In May 2006, the forecasts were revised upward again, and the state now estimates that revenues in fiscal 2006 will rise 1.3% over fiscal 2005, with particularly strong sales and oil and gas-related revenues. Revenues are exceeding forecasts through May, and the state expects to end the year in a strong financial position.

The legislature passed a budget for fiscal 2007 that was largely consistent with the governor's proposed budget. It includes substantial salary increases for teachers and no major program cuts. General fund revenues are expected to decline 2.6% compared to fiscal 2006, to $7.3 billion. One-time federal recovery assistance in the total budget rises from $2.3 billion in fiscal 2006 to $7.4 billion in fiscal 2007. The governor has not yet signed the budget.

The state has significant balances in several funds, providing liquidity. A budget stabilization fund is expected to be fully funded on June 30, 2006 at the maximum level (4% of total state revenue). Additionally, the state has about $3.2 billion in nontransportation trust funds, although access to many is constitutionally restricted and would require voter approval.

Current state debt levels are moderate, at about $4.5 billion, or 4.1% of 2005 personal income, including this offering. By policy, debt issuance is well controlled. Funding of the state's two largest pension systems was low at 61.5% (state employees) and 64.6% (teachers) as of June 30, 2005.

The rating recognizes strong legal provisions for GO debt, with all nondedicated revenues flowing into the bond security and redemption fund to provide first for debt service, as well as limits designed to control financial operations, including a revenue limit, an expenditure cap, and restricted usage of nonrecurring revenues. Credit strengths have always been tempered by volatility inherent in the state's energy-reliant economy.

The 2006-A bonds will be due July 1, 2008 and are not callable. The state has approved a July 2008 variable-rate GO bond offering that will fund the take-out of the 2006-A bonds. At the time of the 2006-A bond sale, the state plans to enter into forward starting swaps with Morgan Keegan & Company, Inc. and Goldman, Sachs & Co. that will convert the 2008 bonds into a fixed-rate obligation.

The 2006-B bonds will mature from 2007 to 2026 and are callable, with call provisions yet to be determined.

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.