Fitch Rates Oregon DOT's $192.8MM Highway Senior Lien Revs 'AA'.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the Oregon Department of Transportation's (DOT) $192.8 million highway user tax senior lien revenue bonds, series 2006A bonds. Additionally, Fitch affirms the 'AA' rating on $529.6 million outstanding senior lien bonds. The series 2006A are expected for negotiation the week of May 21 through a syndicate led by Bear, Stearns & Co. Inc. and Morgan Stanley. Later this month, Fitch expects to assign ratings to approximately $100.2 million Oregon DOT highway user tax revenue subordinated lien bonds series 2006B-1 and 2006B-2 variable rate bonds.

The 'AA' rating on the senior lien bonds reflects the constitutionally dedicated revenues for highway purposes, a strong 3 times (x) additional bonds test, the statutory and contractual requirement to ensure sufficient funds for debt service on both senior and subordinated bonds, as well as the departments integration in the state's capital and financial planning process. Credit concerns reflect pledged revenues and apportionments subject to legislative changes, continued exposure to revenue restraining initiatives, litigation over the weight-mile tax, and narrowing coverage. Coverage in 2012 of maximum annual debt service (MADS) on senior lien bonds is now 4.1x on full issuance of the enlarged program which has experienced rising costs.

Security for the bonds is various liens on specific highway use taxes and fees deposited in the state highway fund, net of administration and collection costs, and statutorily determined city/county apportionments to fund local transportation projects. Additionally, some $136 million of collected revenues is statutorily set aside for the Oregon Transportation Investment Act (OTIA), about $35.6 million per year for OTIA I and II with the expected range of $98 million to $102 million per year for OTIA III. The OTIA I and II amounts are not credited to the state highway fund or localities for distribution under apportionment formulas until debt service is met. Any excess not required for debt service on OTIA bonds is distributed by formula to the state, counties and cities.

Total highway fund revenues in fiscal 2005 were $870 million derived 47% motor fuels, 29% motor carrier (including weight-mile taxes) and 24% from motor vehicles license, registration and other fees. After all statutory reductions, set asides and adjustments, fiscal 2005 pledged revenues were 57% of total highway fund revenues, equal to $359.9 million. Fiscal 2005 pledged revenues cover senior lien annual debt service close to 12x with coverage of projected senior lien MADS upon full issuance 3.7x and 2.9x MADS on both senior and subordinate bonds.

Litigation over the constitutionality of the flat fee component of the weight mile tax was resolved in favor of the state on appeal to the state supreme court. Trucking companies have appealed to the U.S. Supreme Court. A decision to hear the case is expected by the end of year. An adverse ruling may require a combination of ODOT and legislative actions to ensure sufficient funds for debt service.

Oregon's highway improvement program has expanded from the initial $500 million program begun in 2001 with OTIA I and OTIA II, constructed through DOT and local government partnerships. A total of $275 million remain under these authorizations. In 2003, the state expanded the breadth of this program with the $1.9 billion OTIA III authorization for bridge improvement with the state and a private vendor contract. The master bond declaration was modernized providing for issuance of subordinated debt with a 2x additional bonds test and inclusion of federal funds. The remaining $1.6 billion bond program is expected to be issued by fiscal 2011, with $600 million variable-rate debt (approximately $100 million per year) planned.

As the program grew, certain fees and revenues were increased to support the new authorizations with fee increases contributing 7.1% to fiscal 2004 revenues from the prior year. However, coverage ratios fell from the once stellar levels in excess of 70x with the initial issue in 2000 to 5x-7x after the first OTIA III issue in June 2004. Coverage of projected MADS on the full issuance of senior lien bonds in 2012 is now 4.1x and 3.2x combined MADS on senior and subordinate bonds.

The bonds now offered are for bridge improvements under OTIA III with $1.3 billion of the OTIA III authorization remaining. The senior lien fixed-rate bonds will be due Nov. 15, 2007-2031 with term bonds subject to mandatory sinking fund redemption with other details to be determined.

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