Fitch Rates Chicago Transit Authority, IL Capital Grant Rev Bonds 'A'

Business Wire, Oct 15, 2004

NEW YORK -- Fitch Ratings assigns an 'A' rating to the $250 million Chicago Transit Authority, IL (CTA, or the authority) capital grant receipts revenue bonds (Federal Transit Administration Section 5307 formula funds), consisting of $150 million, series 2004A, bonds and $100 million, series 2004B, bonds. The bonds are expected to sell through negotiation by a Loop Capital Markets, LLC-led syndicate on or about Oct. 19. The bonds will pay interest each June 1 and Dec. 1, beginning June 1, 2005 and will mature each June 1, 2006-2016. Bond proceeds will be used to finance a portion of the CTA's 2004-2008 capital program, provide capitalized interest through June 1, 2005 and pay costs of issuance. A portion of the series 2004B bonds will also be available to fund a variable-rate stabilization account. The bonds are expected to be insured by Ambac Assurance Corporation, whose insurer financial strength is rated 'AAA' by Fitch. The Rating Outlook on the bonds is Stable.

The bonds are CTA's first issuance of debt secured by grant receipts solely consisting of Federal Transit Administration (FTA) Section 5307 formula funds. Although the authority's covenants under the trust indenture establish a sum sufficient debt service payment stream, the security pledge is more broadly defined to include all of the CTA's share of Section 5307 formula funds, except for specific amounts subject to a prior pledge through 2006 as security for the authority's Douglas Branch Project bonds. The bonds are also secured by all funds created under the indenture to the extent there is a debt service payment deficiency.

Fitch's 'A' rating reflects the long established track record of federal transit funding, CTA's covenant that in each fiscal year it will request obligation authority for next year's debt service payment on a priority basis, and the bonds' 12-year limited maturity that helps to limit future federal surface transportation program reauthorization risk. Although the 1.50 times (x) maximum annual debt service (MADS) additional bonds test (ABT) allows for a greater degree of leveraging than some other debt programs leveraging federal transportation funds, the ABT, in combination with the authority's need to maintain a pay-as-you go capital program to maximize future Section 5307 formula fund receipts, is expected to moderate future borrowing. Similar to other debt programs leveraging federal transportation funds, a debt service reserve fund does not further secure the bonds. However, CTA covenants to reprogram Section 5307 formula funds from its available balances, which have been at least $198 million since 2002, in the event sufficient funds have not been obligated for debt service at least two months prior to a debt service payment date.

A key risk is the potential for significant changes in federal transportation funding policy with each new authorization period that could result in reduced funding levels for transit and/or the elimination of budgetary firewalls that could reduce protection to the bonds. Based on indications to date, major programmatic changes, which would adversely affect these bonds seem unlikely in the immediate successor federal surface transportation program to the Transportation Equity Act for the 21st Century (TEA-21). Nevertheless, this remains a risk for subsequent reauthorizations.

Although TEA-21 expired on Sept. 30, 2003 without a successor multiyear authorization, Fitch assigns a low probability of an interruption in the flow of federal transportation funds. Since TEA-21's expiration, several short-term extensions of the program have been put in place, with the latest running through May 31, 2005 as contents of the multiyear bill are debated by Congress. If there is a continuing gap in a multiyear reauthorization, a number of measures will likely be taken to provide for the continued flow of federal transportation funds. They include passage of additional short-term authorizations, draw down of unobligated balances, and extension of federal motor fuel taxes beyond federal fiscal 2005.

To secure a more favorable interest rate, the CTA may enter into a fixed- to floating-rate swap on an initial notional amount equaling the series 2004B bonds. The timing for this transaction is subject to market conditions. Although the authority is expected to benefit from a lower effective interest rate, the swap transaction does introduce variable rate and termination payment risk. Structural features adequately protect bondholders from these risks. Although synthetic variable-rate exposure may equal 40% of the total series 2004A and 2004B bonds, debt service coverage on this transaction is comfortable at more than 3.00x. Variable-rate risk is further mitigated by the authority's expected next year's issuance of $275 million that would be issued as fixed-rate debt and that overall variable-rate exposure under this security would be limited to 20% of debt outstanding. However, variable-rate exposure limitations will be based on authority practices and policies, rather than legal limitations. A variable-rate stabilization fund equal to 3.5% of series 2004B proceeds would be available to help offset short-term rate spikes, while the 12-year level amortization further limits interest rate risk. Regular swap payments would be on parity with debt service, while termination payments, if made by the authority, would be subordinate to debt service.