Fitch Rates South Carolina Transportation Infrastructure Bank Rev Bonds 'A'.

NEW YORK -- Fitch Ratings assigns an 'A' rating to the approximately $300 million South Carolina Transportation Infrastructure Bank (SCTIB, or the bank) revenue bonds, series 2007A. The bonds are expected to sell competitively on or about Jan 11. The series 2007A bonds are expected to be insured by a monoline insurer whose insurer financial strength is rated 'AAA' by Fitch. Series 2007A bond proceeds will be used to pay a portion of costs and reimburse the SCTIB for bank approved projects, meet the debt service reserve fund requirement and pay the cost of issuance. In addition, Fitch affirms the underlying 'A' rating on $1.8 billion in outstanding SCTIB revenue bonds (senior lien). The underlying rating on the SCTIB's outstanding $115 million series 2001B revenue bonds (junior lien) is affirmed at 'A-'. The Rating Outlook on the senior lien and junior lien bonds is Stable.

In addition to the series 2007A bonds, the bank expects to sell $103.3 million in series 2007B revenue funding bonds later in January that together with legally available sources will refund all of the series 2001B junior lien bonds. While Fitch's analysis considers the refunding bonds and subsequent planned issuances by the bank, a rating will be assigned to the series 2007B bonds only upon receipt and review of relevant documents.

Fitch's 'A' rating on the senior lien bonds and 'A-' rating on the junior lien bonds balances both the relatively stable quality of the revenue streams pledged to the SCTIB and the high level of leveraging. The 'A-' rating on the junior lien bonds further recognizes their subordinate security position.

Importantly, the bank is very heavily leveraged with coverage from its primary revenue streams providing between 1.15 times (x)-1.20x coverage of debt service through the medium term. New revenues pledged by the bank this year are expected to be leveraged to finance additional project commitments. Interest earnings on various funds provide the cushion to absorb revenue volatility and meet the additional bonds tests, the key legal protection to bondholders.

Truck registration fees (TRFs), which are transferred to the bank by the department of motor vehicles, and federal highway reimbursement funds, which are paid to the bank by the South Carolina Department of Transportation (SCDOT or the department) in amounts equivalent to certain taxes and fees or pursuant to terms of intergovernmental agreements, are the bank's primary revenue sources. TRFs currently represent 35% of pledged revenues, while federal highway reimbursement funds equal 44%. As the amount federal highway reimbursement funds increase, they are expected to represent about 50% of pledged revenues, while TRFs are projected to remain around 35% over the medium term.

Since fiscal 1998 TRFs have grown at a 6.0% average biennial rate and have recovered from the adverse impacts of the economic downturn that contributed to an 8.2% decrease in fiscal 2002 compared to the comparable fiscal 2000 biennium. Between fiscal 2002 and 2006, TRFs increased at an average biennial growth rate of 7.4%. Given that the importance of these fees for this credit and moderately escalating debt service requirements in the medium term, continued growth in TRF revenues is a material credit factor for these bonds.

While federal highway reimbursement funds have a long established track record, funding levels are subject to changes in federal transportation policy with each reauthorization of the national surface transportation program. Although the 30 year maturity exposes bondholders to additional reauthorization risk relative to other debt programs leveraging federal highway reimbursements, this risk is sufficiently hedged and is consistent with Fitch's 'A' and 'A-' ratings given the additional pledge of TRFs and other non-federal revenue sources, strong coverage by SCDOT's total federal highway reimbursements of 6.5x compared to its maximum payment obligations to the bank and the department's commitment to make its payments to the bank from other non-tax sources in the event federal highway reimbursements are not sufficient.

The ratings consider the relatively weak additional senior lien and junior lien bonds' tests, which allow for narrow margins of safety. Fitch's ratings on the bank's senior lien and junior lien bonds also recognize the state's commitment to the bank through the periodic dedication of new revenue sources to support the needed large transportation projects it is financing.

Pledged revenues, consisting of system payments, series payments, and transfers and interest earnings from the revenue stabilization fund, provide about 1.40x to 1.50x coverage of net senior debt service under the indenture on the bank's bonds assuming the additional issuance of the series 2007B refunding bonds and an estimated issuance of $350 million-$400 million in 2008. The senior lien additional bonds test requires a minimum of 1.35x coverage, while the junior lien test requires a minimum of 1.20x combined net senior lien and junior lien debt service.

Fitch's gross coverage calculation (which does not net series payments or interest earnings from pledged revenues and debt service, and as such is a more conservative calculation than that defined in the master resolution) indicates that senior debt service coverage at its lowest point will be about 1.20x. Based on Fitch's gross coverage calculation fiscal 2006 pledged revenues covered senior debt service 1.43x, while combined senior and junior coverage was 1.34x.

The SCTIB was created by an Act of the South Carolina general assembly in 1997. The purpose of the Act was to focus greater attention on larger transportation projects in the state, thereby allowing the SCDOT to devote resources to other transportation projects. The SCTIB selects and assists in financing major qualified projects in excess of $100 million by providing loans and other forms of financing assistance.

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.