Fitch Rates Louisiana's $1.1B Gasoline & Fuels Tax Revs 'A+'; Affirms Outstanding; Outlook Stable.

NEW YORK -- Fitch assigns an 'A+' rating to the State of Louisiana's (the state) $1,080,885,000 gasoline and fuels tax revenue bonds, 2006 series A, scheduled to sell the week of Oct. 16, 2006 through negotiation with a syndicate led by Citigroup. The bonds are expected to be sold with credit enhancement. Additionally, Fitch affirms the 'A+' rating on the state's $782 million in outstanding gasoline and fuels tax revenue bonds. The Rating Outlook is Stable.

The 'A+' rating reflects the stability of pledged gasoline and fuels taxes, strong debt service coverage even with full program issuance, and the importance of the Transportation Infrastructure Model for Economic Development (TIMED) program to the state's transportation investment strategy. The rating also considers the limited revenue growth potential of pledged gasoline and fuels taxes over the long term, the escalating debt service profile, and the constrained TIMED financial plan.

The bonds are secured by pledged property consisting of gasoline and fuels taxes. Debt service is first paid by revenues from $0.04 of the $0.20 per gallon tax on gasoline, motor fuels and special fuels, known as the Act 16 taxes, dedicated to the TIMED program. The remaining $0.16 per gallon tax deposited into the transportation trust fund is also pledged.

The TIMED program and the pledged revenue stream have performed well since the devastation of hurricanes Katrina and Rita. Forecasts of fiscal 2006 pledged tax receipts were revised down only slightly following the hurricanes, even as the state drastically reduced estimates of other revenues, and actual receipts came in above forecast. Pledged revenues grew 4.3% in fiscal 2006, more than double the historical average, and recovery activity in Louisiana in the coming years is likely to support future growth. The state assumes a growth rate of 1.8% going forward. Notably, the TIMED program, which is privately managed under the direction of the Louisiana Department of Transportation and Development, showed meaningful progress in the last year despite the severe disruption of the hurricanes.

As a result of the national increase in the cost of materials and labor, exacerbated by the hurricane impact on the Gulf Coast region, the TIMED program cost estimate has risen to $4.7 billion (from $3.9 billion in 2005). To enhance financing flexibility, earlier this year the state legislature passed legislation extending the final authorized issuance date for bonds (from Jan. 1, 2010 to Dec. 31, 2012) and the allowable amortization of the bonds (from 30 years to 35 years). The final maturity of the 2006A bonds is in 35 years; however, the state still hopes to issue the final series of program bonds in 2010.

The state expects to issue an additional total of $1 billion in bonds to finance the program, in 2008 and 2010. (A planned 2009 issuance has been rolled into the 2006A issuance to lock-in interest rates.) Increased leveraging and debt service back-loading is permitted under the two-part additional bonds test (ABT) that includes a look-forward test requiring only sum sufficient debt service coverage against projected Act 16 taxes and investment income. The degree of leverage and back-loading is constrained by the ABT requirement that historical revenues from all taxes provide at least 2.0 times (x) coverage against maximum annual debt service (MADS). Additional debt issuance is further subject to the state's net tax supported debt limit whereby state debt service payments cannot exceed 6% of general fund and dedicated fund revenues.

The 2006A offering defers principal payments to maximize capacity. However, all fiscal 2006 pledged revenues provide a comfortable 2.5x coverage of projected MADS at full program issuance. At full issuance, based on ABT limits, annual debt service coverage is projected to be 1.0x against Act 16 taxes and 5.0x against all pledged taxes.

The TIMED program was authorized by state statute in 1989. The program consists of sixteen projects: 539 miles of improved roadways along 11 highway corridors and three bridges throughout the state as well as improvements at the Port of New Orleans and New Orleans International Airport. The TIMED revenues cannot be used for any other purpose except for TIMED bonds and construction.

The bonds will be due May 1, 2016-2041. Call provisions are yet to be determined.

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