Fitch Rates Chicago Transit Authority, Illinois' $250MM Sec. 5307 Bonds & Sec. 5309 Bonds 'A'

Business Wire, March 19, 2008

NEW YORK & CHICAGO -- Fitch Ratings assigns an 'A' rating to the $100 million Chicago Transit Authority, Illinois (CTA, or the authority) capital grant receipts revenue bonds, series 2008A (Federal Transit Administration Section 5307 urbanized area formula funds). Fitch also assigns an 'A' rating to $150 million CTA capital grant receipts revenue bonds, series 2008 (Federal Transit Administration Section 5309 fixed guideway modernization formula funds). The bonds are expected to sell on or about March 25th. The bonds will pay interest each June 1 and Dec. 1, beginning June 1, 2008. The 5307 bonds will mature each June 1, 2022-2026 and the 5309 bonds will mature each June 1, 2010-2026. Bond proceeds will be used to finance a portion of the CTA's capital program, provide capitalized interest through June 1, 2009 and pay costs of issuance. In addition, Fitch affirms the 'A' rating on $484.9 million in outstanding capital grant receipts revenue bonds (Federal Transit Administration Section 5307 urbanized area formula funds). The Rating Outlook on the 5307 bonds and the 5309 bonds is Stable.

The 5307 bonds are secured by grant receipts (reimbursements) solely consisting of Federal Transit Administration (FTA) Section 5307 formula funds and the 5309 bonds are similarly secured by grant receipts solely consisting of FTA Section 5309 funds. The authority's covenants under the 5307 and 5309 trust indentures establish sum sufficient debt service payment streams. However, the security pledges are more broadly defined to include all of CTA's 5307 and 5309 funds, respectively. The structure and covenants of the 5309 indenture are identical to those in the 5307 indenture. The CTA has received letters of no prejudice (LONP) from the FTA for the outstanding 5307 bonds that include an acknowledgement by the FTA of the issuance of the bonds and the use of 5307 funds to pay debt service. The CTA is expecting to receive LONP's covering the 2008 5307 and 5309 bonds shortly and it has been represented to Fitch that the bonds will not be sold until the LONP's are received.

Fitch's 'A' rating reflects the long established track record of federal transit funding for the 5307 and 5309 funds and CTA's covenants that in each fiscal year it will request obligation authority for next year's debt service payment on a priority basis. Although the 1.50 times (x) maximum annual debt service (MADS) additional bonds test (ABT) in both indentures 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 5307 and 5309 grant receipts, is expected to moderate future borrowing. Similar to other issuers' debt programs leveraging federal transportation funds, the 5307 and 5309 bonds are not further secured by debt service reserve funds. However, CTA covenants that at least two months prior to a debt service payment date it will reprogram 5307 or 5309 funds, as applicable from its available balances, which have equaled at least $68 million and $24 million since 2002, respectively, in the event sufficient funds have not been obligated for debt service.

A risk for these bonds is the potential for significant changes in federal transit funding policy with each new authorization period. An interruption in the flow of federal transit funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. While the Safe, Accountable, Flexible, and Efficient Transportation Equity Act - A Legacy for Users (SAFETEA-LU) took nearly two years to enact, it included a 46% increase in federal transit funding.

The 18-year maturity for both the 5307 and 5309 bonds exposes bondholders to additional reauthorization risk relative to other programs that leverage federal highway or transit funds. Assuming the continued practice of six year federal transportation authorization periods, the bonds will typically span three such periods. However, this risk is consistent with Fitch's 'A' rating. For the 5307 bonds reauthorization is partially mitigated by debt service coverage of at least 1.94x against the average of federal fiscal 2006-2008 FTA 5307 formula funds, assuming additional issuance in 2011 and the advance obligation of the following year's debt service. For the 5309 bonds, projected coverage is lower at just above 1.52x against the average of federal fiscal 2006-2008 FTA 5309 funds, assuming additional issuances in 2009-2011. Similar to the 5307 bonds, the obligation for debt service on the 5309 bonds is made one year in advance.

Similar to other transit agencies the CTA faces periodic financial challenges, and in 2007 the CTA was facing fare increases and service level reductions of between 30-50% given growth in salaries and health benefits, operating and capital expenses and the requirement to fund the actuarially required contribution (ARC) for pension and other post employment benefits (OPEB) provided by CTA. The CTA's pension and OPEB funds are woefully underfunded at a combined 30% of pension and OPEB liabilities.