Fitch Rates Bay Area Toll Authority's $1B 2006 A-1-E2 Revs 'AA-'.

NEW YORK -- Fitch Ratings has assigned an 'AA-' long-term rating on the $1 billion Bay Area Toll Authority, CA (BATA) San Francisco Bay Area toll bridge revenue bonds 2006 series A through E variable-rate demand bonds (VRDBs) and auction-rate bonds. In addition, Fitch affirms the 'AA-' rating on $100 million in series 2001 parity revenue bonds, as well as the 'AA-' underlying rating on BATA's outstanding $900 million variable-rate demand and auction rate parity revenue bond debt. Approximately $900 million of BATA's $1 billion in outstanding debt is rated 'AAA' based on a guarantee of scheduled debt service payments under a financial guaranty insurance policy provided by Ambac Assurance Corporation, whose insurer financial strength is rated 'AAA' by Fitch. The series 2006 bonds are also expected to carry bond insurance. BATA's Rating Outlook is Stable.

BATA's outstanding VRDBs carry an 'F1+' short-term rating based on liquidity support from a number of banks in the form of standby bond purchase agreements. The 2006 series A-1, A2, B-1, B-2, C, and D-1 bonds are also expected to carry liquidity support in the form of a standby bond purchase agreement. The series 2006 bonds are expected to be sold through negotiation via a syndicate led by Stone & Youngberg, LLC during the week of Feb. 1. Bond proceeds are expected to be used to finance and reimburse the costs of design and construction related to eligible projects, including capital improvements for the BATA bridges, provide for surety bond policies to meet the debt service reserve fund requirement, and pay costs of issuance.

The 'AA-' rating reflects the economic strength and near monopoly position of the seven bridge system that provides critical transportation links in the San Francisco Bay Area, a mature traffic base which was relatively flat during the economic downturn, improved legal ratemaking flexibility, and demonstrated low to moderate elasticity of demand. The rating also incorporates BATA's strong debt service coverage, substantial liquidity position, and the ability of this system of bridges to sustain the loss of one or more of its assets from catastrophic seismic activity. The rating also reflects the continued construction risk for the Seismic Retrofit Program (SRP) and Regional Measure One (RM1) programs, the possibility of further leveraging of toll revenue beyond the nearly $3 billion in new money issuance expected over the next four years, and expense growth of newly acquired operations and maintenance and rehabilitation responsibilities exceeding forecast.

Prior to the enactment of AB 144 and SB 66 in July 2005, the bridge system had three capital programs, RM1, RM2, and the SRP, each of which were funded from separate $1 tolls collected by BATA, which was solely responsible for funding the RM1 and RM2 programs. Funding for RM1 and RM2 capital costs was through a combination of toll revenues and toll revenue bonds secured by the RM1/RM2 tolls. The California Department of Transportation (Caltrans) was responsible for the funding of the SRP through a combination of state funding and the third dollar of the $3 toll.

After significant cost overruns in the SRP in 2003, the state legislature enacted caps on the cost of the program, and on the funding derived from state sources and from bond proceeds backed by the $1 toll. In 2004, receipt of only one bid for the signature east span of the SFOBB that was significantly over budget and helped put the overall program outside of the legislative caps. Caltrans, MTC and the legislature began working on a funding solution, and in July of 2005 AB 144, and then SB 66 were passed and signed by the governor.

With the enactment of AB 144 and SB 66, BATA was given sole responsibility for the RM1, RM2, and Seismic Retrofit programs, including the responsibility to fund any additional cost overruns from toll revenue. The legislation specified that existing overruns would be covered by a $1 increase in the existing seismic toll in January of 2007, and through increased state contributions. Overruns in the SRP beyond the current plan can be funded from further toll increases which do not require legislative approval. AB 144/SB 66 also placed sole responsibility for all operating and maintenance and rehabilitation expenses associated with the bridge system with BATA once the SRP is complete.

In return for these additional responsibilities, AB 144/SB66 finalized the debate over the final design of the SFOBB's east span, provided $630 million in additional state resources, and required the California Transportation Board to develop a schedule detailing the disbursement of state funds to BATA -- a significant development since previous state contributions had been delayed. The legislation also provides BATA with the authority to refund approximately $1.2 billion in outstanding debt backed by the $1 seismic toll, allowing BATA to consolidate and retain control of all of the toll revenue collected on the bridges and providing significant flexibility in managing the costs of the RM1, RM2, and SRP programs.

Despite the dramatic cost increases of the seismic program, the critical nature of this seven-bridge system and long-term economic strength and viability of the San Francisco Bay Area continue to provide a basis for very strong investment grade credit quality. BATA manages seven of the eight major crossings in the Bay Area -- the eighth being the Golden Gate Bridge, which is managed by a separate entity. These bridges provide the only viable vehicular links within the Bay Area. Given the limited ability of rail and ferry systems to serve the diverse destinations within the area, these facilities are essential to sustained economic success. These fundamentals, together with the continued retention of economic rate-setting flexibility to deal with unexpected events that materially impact financial performance make for very strong credit quality. Seismic activity remains a key risk, particularly now with the expected 2012 completion of the east span of the San Francisco Oakland Bay Bridge.

Coverage of debt services as calculated by Fitch, which incorporates all maintenance expenses, is expected to be low at around 1.6 times (x) - 1.8x for an 'AA-' rated facility. However, the economic strength and monopoly position and management's proactive stance at solving problems largely mitigates this risk. To the extent that the securitization of state funds does not materialize and additional parity bonds are issued, coverage could fall below acceptable 'AA-' levels.

BATA is expected to issue approximately $4.2 billion in additional toll revenue debt over the next four years to cover capital costs associated with the three programs and to refund outstanding seismic bonds issued for Caltrans, approximately 80% of which is likely to be issued by 2008. Upon completion of issuance, BATA estimates that approximately 23% of total debt will be traditional fixed-rate, 64% will be synthetically fixed, and $13% will be pure variable rate debt. To hedge the Series 2006 bonds, on November 15, 2005, BATA entered into forward interest rate swaps with Ambac Financial Services LLC, JPMorgan, Citibank, and Banc of America, whereby BATA will receive variable rate payments expressed as a function of LIBOR (between 54% of LIBOR +74 basis points to 75% of LIBOR) and make fixed rate payments ranging between 3.63% - 4.0%. Upon issuance of the series 2006 bonds approximately 90% of BATA's revenue debt will be covered under similar swap agreements (mostly with Ambac), while 5% each will exist as natural fixed and as natural variable rate debt.

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