Fitch Rts MTA, NY Trans Rev Ref Bonds, 2002F and 2002G 'A'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 1, 2002

Fitch Ratings assigns an underlying 'A' rating to the approximately $450 million Metropolitan Transportation Authority, NY (MTA, or the authority) transportation revenue refunding bonds, series 2002F, which are scheduled to sell via negotiation by a Merrill Lynch and Co. led syndicate on or about Nov. 13. Fitch also assigns an underlying 'A' rating to approximately $400 million MTA transportation revenue variable rate refunding bonds series 2002G, which includes $200 million each of subseries 2002G-1 and 2002G-2 bonds and are expected to sell through negotiation by Merrill Lynch & Co. on or about Nov. 19. The series 2002F bonds are expected to be insured by MBIA Insurance Corp. whose insurer financial strength is rated 'AAA' by Fitch, while the series 2002G bonds are expected to be insured by Ambac Assurance Corp. whose insurer financial strength is rated 'AAA' by Fitch. Liquidity support through standby bond purchase agreements are expected to be provided by the Bank of Nova Scotia for the sub-series 2002G-1 bonds and by Landesbank Hessen-Thueringen Girozentrale for the sub-series 2002G-1 bonds. Fitch affirms the underlying 'A' rating on approximately $3.3 billion in outstanding MTA transportation revenue refunding bonds series 2002A and 2002E.

Key credit strengths leading to the assignment of an 'A' rating on the transportation revenue bonds include the gross lien on consolidated pledged revenues, continuing improvements to the performance, efficiency, and demand of MTA's services, the importance of the authority's transit and commuter rail networks to the economy of the New York region, and its proven track record in managing financial challenges. In the past, the MTA closed expected gaps through a combination of cost-reduction measures, fare adjustments, and increased subsidies from its funding partners. Key credit risks include periodic financial challenges during economic downturns and a continuing reliance on debt to finance the bulk of its enormous and unending capital needs.

The transportation revenue bonds are secured by a trust estate consisting of all operating receipts and operating subsidies, including transit and commuter rail fares and other operating revenues, surplus toll revenues and certain dedicated tax receipts, state and local operating subsidies, and reimbursements. Pledged revenues are deposited into the revenue fund as soon as practicable, and then transferred to the debt service fund on a monthly basis (a gross lien on pledged revenue). Surplus revenues are available for any subordinated debt service, and then to the authority for capital and operating purposes of the transit and commuter rail systems.

Issued under a new resolution as part of the MTA's debt restructuring to consolidate 13 of its debt resolutions into four primary resolutions, the transportation revenues bonds replace the authority's prior, separately-secured transit facilities revenue bonds, commuter facilities revenue bonds, subordinated transit facilities revenue bonds and subordinated commuter facilities revenue bonds. The issuance of these series 2002F and 2002G transportation revenue refunding bonds as well as this month's expected issuance of TBTA general revenue variable rate refunding bonds series 2002F and subordinate revenue variable rate refunding bonds series 2002G will mark the completion of the MTA's refunding of its outstanding debt as part of the debt restructuring.

While some bondholder covenants under the new resolution are legally weakened (no debt service reserve fund, lower additional bonds test), the pledge of the trust estate; ample debt service coverage; the essentiality and performance of the transit services supported by pledged revenues; and a strong track record of prudent financial management are expected to provide bondholder protection consistent with this rating. Fitch expects the MTA to issue additional debt secured by pledged revenues under the transportation revenue bond resolution to finance a portion of the authority's 2000-2004 $17.2 billion transit and commuter capital program. However, debt service coverage is expected to remain ample given the significant demand on pledged revenues to fund the operating needs of the transit and commuter rail network, which are paid after debt service. Given the benefits of the debt restructuring are limited to the near term, the highly leveraged nature of the current capital program, and a projected increased debt burden, Fitch expects the MTA will need to seek additional resources from its governmental funding partners to fund its capital plans beyond 2004.

On a consolidated basis, pledged transit and commuter revenues equaled $5.4 billion in 2001 with operating receipts representing 54.6% of total, while operating subsidies were 45.4%. If the consolidation had taken place in 2001, debt service coverage would have equaled 14.2 times (x). Last year, coverage on a separately secured basis was 16.8x for the transit bonds and 9.5x for the commuter bonds. Coverage for the consolidated transportation revenue bonds is expected to be 16.7x in 2002, primarily due to near term debt service savings associated with the restructuring. Nevertheless, the combined debt service and operating needs of the MTA thoroughly consume the authority's vast annual resources, as surpluses generated in one year are typically used to cover deficits in succeeding years, a common practice among transit systems.

For fiscal 2002, a budgeted 5.5% increase in operating expenses and debt service, a slight decline in operating revenues and a fall off in operating subsidies is expected to be covered primarily by New York State's advancement to the MTA of certain first quarter 2003 dedicated tax fund receipts to the fourth quarter of 2002 as well as insurance proceeds covering Sept. 11, 2001 related expenses. Year-to-date results through August 2002 were slightly better than budget.

However, the MTA is facing the prospect of closing a $663.3 million deficit in fiscal 2003, representing about 13% of total operating receipts and revenues. The authority has faced gaps of comparable magnitudes in prior years and has closed them through a combination of expense reduction measures, increased fares and additional subsidies. It is likely that the MTA's strategy for closing this gap will not be determined until the authority's budget is adopted in December. Fitch expects that a portion of the deficit will be addressed through service and non-service related expense reduction measures. The authority's recent proposal to restructure the organization of its subway, bus, commuter rail, and capital program functions may yield cost savings through the consolidation and streamlining of certain overhead activities, though the magnitude of the expected savings are unknown at this point and it is likely the full benefits from the initiative will not be realized until 2004. Given the constrained budget environment facing the MTA and its funding partners, financial remediation may also need to include a fare increase.

The MTA is responsible for North America's largest transit network, serving 2.3 billion annual riders, or one in four transit riders in the U.S. The authority's network is essential to the economic well being of the region, handling 80% of all daily trips to Manhattan's business district.