Fitch Rates $900MM Dallas Area Rapid Transit (TX) 2007 Sr Lien Sales Tax Rev Rfdg Bnds 'AA'.

NEW YORK -- Fitch assigns an 'AA' rating to approximately $900 million of Dallas Area Rapid Transit (DART) senior lien sales tax revenue refunding bonds, series 2007. In addition, Fitch also affirms the 'AA' rating on approximately $468 million of outstanding senior lien sales tax revenue bonds and the implied 'AA-' on approximately $475 million of DART's senior subordinate lien sales tax revenue commercial paper notes. After this transaction DART will have approximately $940 million in senior lien sales tax revenue bonds outstanding. Proceeds of the series 2007 bonds will be used to take out the outstanding commercial paper notes and to refund portions of DART's outstanding series 2001 and 2002 senior lien bonds. The bonds are expected to sell on Feb. 6 through a syndicate led by Goldman Sachs, & Co. The Rating Outlook on both the senior lien bonds and senior subordinate lien notes is Stable.

The 'AA' rating on the senior lien bonds reflects the economic strength and diversity of the area served by DART, the gross pledge of sales tax revenues which make up over 80% of total revenue, DART's flexible capital program and proactive management. The rating also reflects strong bondholder protections in the form of a 2 times (x) additional bonds test on senior lien debt, and DART's member unit withdrawal provisions, which require the continued collection of sales and use taxes until an amount equal to that unit's financial obligation to DART, present and future, has been collected and paid to DART. In addition, the rating incorporates the risk associated with rapid debt escalation that is expected over the next five years as a result of DART's $5.3 billion capital plan, the vulnerability of sales tax revenue to economic cycles, and the cyclical nature of public sentiment for transit. The recent economic downturn and management's response to it has validated the strength of the gross pledge. It also confirms Fitch's opinion that the balance struck between operating and capital needs provides adequate insulation to manage through any unexpected volatility in sales tax collections and greater than expected operating expenses. Fitch's implied 'AA-' rating on the senior subordinate lien incorporates these factors and also reflects the subordinate cash position.

In July of 2006, DART was awarded a $700 million full funding grant agreement (FFGA) from the Federal Transit Administration. This is the second largest FFGA awarded by the FTA and is significant because it adds a large degree of certainty to approximately one quarter of DART's $3.3 billion light rail (LRT) extension. This extension makes up roughly two thirds of DART's $5.3 billion 20-year capital plan. The scalability of DART's capital program to allow construction of light rail infrastructure in a segmented approach provides adequate flexibility for build-out plans to correspond with anticipated resources. The primary risk to delayed system expansion is expected to be in the public relations arena given residents' growing anticipation for light rail service. To fund its $5.3 billion plan, DART expects to issue an additional $1.8 billion in senior lien debt over the next decade. The plan estimates that gross debt service coverage will drop from an estimated 9.4x for fiscal 2006 to a low of about 2.5x by 2013, but reach nearly 3.0x by fiscal 2018 and 4.4x at the culmination of the 20-year financial plan. Coverage of total obligations, including pay-as-you-go capital expenses is projected to be somewhat less than 1x over the near term, reflecting a drawdown in cash balances during LRT construction but then remains above 1x for the remainder of the plan. The plan also assumes that DART maintains significant cash balances, which drop to a minimum of approximately $230 million in 2016.

As with many other areas of the country, DART's service area was negatively affected by the national economic downturn that began in 2001. By the end of fiscal 2003, sales tax revenue had dropped for three consecutive years for a cumulative reduction of nearly 17% relative to the fiscal 2000 base. Unemployment in the Dallas-Fort Worth metropolitan statistical area (MSA) hit an annual high of 6.6% in 2003. In 2004, the economy began to rebound, with fiscal 2004 sales tax revenue increasing by 6.6% over 2003, and the annual unemployment rate for the MSA dropping to 5.9%. Management responded proactively to these challenges by increasing fares by an average of 17% in fiscal 2003, and implementing service cutbacks and staff reductions in 2004. DART also delayed portions of its capital plan. In addition, DART now expects to implement fare increases of about 17% every five years, beginning in fiscal 2008, to offset inflation. DART has a large pay-as-you-go capital program, unlike many mature transit systems. As a result, while politically difficult, capital program spending can be adjusted to ease the pressure of reduced sales tax collections and operating expense growth during economic downturns.

Fiscal 2006 sales tax collections increased by 4.3% over 2005, and the November 2006 unemployment rate for the MSA dropped to 4.5%. As the economic picture continued to improve in fiscal 2005, DART reinstated some service. As a result of these factors, combined with higher gasoline prices, fixed-route ridership increased by 9.6% in fiscal 2006. DART has forecast sales tax revenue growth of 5% for fiscal 2007 and throughout the term of the 20-year plan. However, DART maintains the flexibility to delay portions of the capital plan should sales tax revenue grow more slowly than forecast, or operating expense growth exceed the 2.7%-2.4% budgeted.

DART is a subregional transportation authority with a mandate to provide public and general transportation services to 13 municipalities pursuant to the passage of a referendum on Aug. 13, 1983. A 1% sales tax is imposed on certain retail sales within the territories of the participating municipalities which include Dallas, Irving, Plano, Carrollton, Garland, Richardson, University Park, Highland Park, Farmers Branch, Addison, Rowlett, Glenn Heights, and Cockrell Hill. DART's mass transit services include regular route buses, light rail, commuter rail, paratransit for the mobility impaired, HOV lanes, and rideshare matching. DART is governed by a 15-member board. Appointments to the board are made by municipalities based on the ratio of their population to that of the service area. Municipalities with fractions of an appointment may join together and make a full appointment. No municipality may appoint more than 65% of the board. Board members serve staggered two-year terms.

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.