Fitch Rates Massachusetts School Building Authority's $151MM Sub Bonds 'AA'; Outlook Stable.
-- $151 million subordinated dedicated sales tax bonds 2010 series A (federally taxable-direct pay to issuer-qualified school construction bonds).
In addition, Fitch affirms the following rating:
-- $4.3 billion in outstanding dedicated sales tax bonds (senior lien) at 'AA+'.
The Rating Outlook is Stable.
The bonds are expected to sell via negotiation the week of June 14, 2010. This is the first issuance of subordinated bonds by the authority.
-- The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax. Although recent performance has been weak due to the economic downturn, the sales tax has been a relatively stable revenue source over time. -- Bondholders benefit from structural protections, including the statutory dedication of the tax for school capital purposes. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the tax rate, although the base can be changed. -- Debt service coverage and the additional bonds test are adequate. -- Massachusetts has a diverse economy and high wealth levels. -- The lower rating on the subordinated bonds reflects the junior pledge to the senior bonds and the difference in the additional bonds test protections on the two liens; additional issuance requires 1.4 times (x) maximum annual debt service coverage for the senior bonds as compared to 1.3x aggregate coverage for the subordinated bonds.
KEY RATING DRIVER:
-- Performance of the pledged revenue stream and resulting debt service coverage levels.
The bonds are secured by an irrevocable dedication of one cent of Massachusetts's 6.25-cent sales tax, with some exclusions, phased-in through fiscal 2011. Revenue flows to pay debt service on the subordinated bonds after payments related to the senior bonds.
The ratings are based on the historical reliability of sales tax revenue, the adequacy of debt service coverage and the additional bonds test, and structural protections afforded, including the statutory dedication of the tax for school capital purposes. The commonwealth has imposed a sales tax since 1966, and although recent performance in the economic downturn has been weak coverage of maximum annual debt service remains about 2x. Additional bond issuance under a $10 billion authorization requires 1.40x maximum annual senior debt service coverage for senior bonds and 1.3x coverage of total maximum annual debt service for subordinated bonds; the rating distinction between the liens reflects the subordinate pledge and the comparatively stronger requirement for the senior lien bonds. Dedicated revenues are segregated from the commonwealth general fund, and the authority has no role in funding school operations. Strong legal covenants protect against diversion of revenues or lowering of the dedicated tax rate, although the base can be changed.
Dedicated sales tax revenues are credited to the School Modernization and Reconstruction Trust (SMART) fund, which is held by the commonwealth treasurer exclusively for the purposes of the authority, and disbursed to the bond trustee on a monthly basis. The revenues in the fund are not commingled with commonwealth funds and are not subject to appropriation. Bondholders have first claim on the dedicated sales tax. The dedicated one-cent sales tax would generate about $622 million in annual revenue at full phase-in, assuming no growth from fiscal 2010 estimates. Average annual sales tax growth has been about 6.5% since the inception of the tax in 1966, with 7.1% in 1990 the largest one-year drop. However, revenues dropped 6.2% in fiscal 2009 and are projected to drop another 4% in fiscal 2010, not considering the increase in the commonwealth sales tax rate from 5% to 6.25% that became effective on Aug. 1, 2009 but does not benefit the bonds.
The authority can choose to transfer excess dedicated sales tax revenues to the commonwealth, but the commonwealth has relinquished all claims to the revenue. The authority consists of seven members, the Commonwealth Treasurer (chair), four treasurer appointments, and two ex officio members. The authorizing legislation specifies that the treasurer shall act as trustee as it relates to the SMART fund and not on account of the commonwealth.
The authority was created in 2004 to address a substantial backlog of programs funded under the commonwealth's prior school building assistance program and create a sustainable system for school capital funding going forward. Prior contract assistance commitments to localities, a declining obligation through 2023, are paid annually from dedicated revenues after payment of debt service. The authority is authorized to fund up to $500 million in new projects annually (adjusted upwards each year by the lesser of dedicated sales tax revenue growth or 4.5%), and has developed revised program regulations to this end. In a significant change from the commonwealth's prior practice, approval of new projects is contingent upon the availability of funds for this purpose. The authority does not have a waiting list.
Massachusetts has a fundamentally strong and wealthy economy, with the third highest personal income per capita in the nation (127% of the U.S.). The economy has always been diverse, with a large service industry component. Fitch rates general obligation debt of the Commonwealth of Massachusetts 'AA+' with a Stable Outlook. For more information on the commonwealth, see Fitch's press release dated April 29, 2010.
The 2010 series A bonds are being issued to fund grants to local governments for school construction and renovation. The federal subsidy for interest payments on the qualified school construction bonds is pledged, as is the subsidy associated with $450 million in Build America Bonds issued in 2009. Both will be paid directly to the trustee and, pursuant to the established flow of funds, available first to the senior bonds and then to the subordinated bonds. Debt service is gross funded on a monthly basis without consideration of expected federal subsidies. The authority will fund principal on the 2010 series A bonds, which mature on June 15, 2027, in 17 equal annual installments starting this year.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' includes:
-- 'Tax-Supported Rating Criteria', dated Dec. 21, 2009; -- 'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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|Comment:||Fitch Rates Massachusetts School Building Authority's $151MM Sub Bonds 'AA'; Outlook Stable.|
|Date:||Jun 9, 2010|
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