News Column

Fitch Rates $100MM Nevada Highway Bonds 'AA+'; Outlook Stable

February 11, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA+' rating to the following state of Nevada bonds:

--$100,000,000 highway revenue (motor vehicle fuel tax) bonds, series 2014.

The bonds are expected to sell via competitive bid on Feb. 26, 2014.

In addition, Fitch affirms the 'AA+' rating on $441 million outstanding state highway revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an irrevocable pledge of gross pledged revenues: statewide motor vehicle fuel taxes and federal reimbursements.

KEY RATING DRIVERS

STRONG LEGAL PROVISIONS: Pledged revenues are constitutionally dedicated for highway purposes and the gross lien provides strong security. The bonds are further protected by an additional bonds test of 2x maximum annual debt service (MADS), excluding federal reimbursements.

SOLID DEBT SERVICE COVERAGE: Debt service coverage remains sound at 4.3x from pledged motor fuel taxes despite revenue decline over the past several years. Although revenues stabilized in 2013, improvement in debt service coverage reflects in large part the declining debt service schedule.

REVENUE VOLATILITY MITIGATED: The volatility inherent in a tax based on consumption is mitigated by the strong debt service coverage on the bonds and Nevada's pledge not to impair revenues.

RATING SENSITIVITIES

The rating is sensitive to shifts in the stream of pledged revenue that would affect debt service coverage on the bonds.

CREDIT PROFILE

Strong security is provided by the gross lien on pledged revenues, which are constitutionally dedicated for highway purposes. Pledged revenues include motor fuel taxes (about two-thirds from the gas tax and one-third from special fuels, with diesel the largest component of the latter) and federal reimbursements on eligible projects. The bonds are further protected by the sound additional bonds test requiring 2x coverage of MADS, excluding federal reimbursements. Coverage of debt service from motor fuel taxes is ample.

As with any tax based on consumption, there is exposure to reduced use due to price increases, use restrictions, or, as has been the case since the recession, economic weakness. However, these risks are mitigated by the relatively broad nature of the statewide motor fuel tax, demonstrated sound debt service coverage, and the state's pledge not to impair revenues. Specific pledged motor fuel taxes to repay the bonds are the state's 17.65 cents per-gallon gas tax and 27 cents per-gallon tax on special fuels, as well as federal highway funds received on eligible projects.

Motor fuel tax receipts amounted to $266.6 million in fiscal 2013, the first year of modest growth after five straight years of decline. Revenues are more than 10% below the $297.1 million generated in 2007. Coverage has remained satisfactory despite the drop in revenues, and a declining debt service schedule will bolster coverage in the coming years even when the current offering is included.

FY 2013 motor fuel revenue provides 3.9x coverage of MADS (in 2016), including the current issue. As debt service declines to $39 million in 2021, coverage should increase as the economy rebounds, although additional borrowing is planned, as described below. Federal reimbursements, a pledged revenue source, have supported large portions of debt service for prior bond programs, but conservatively are not included in the additional bonds test or coverage calculations. Coverage increases significantly when pledged federal revenues are included.

The state's population growth has led to increased infrastructure needs. The state Department of Transportation prepares capital improvement programs and an annual work plan. The current offering will finance right-of-way acquisition and utility relocation related to Project Neon, a high priority state road project. This project is expected to largely be financed utilizing a public-private partnership (P3) approach with the state anticipating issuance of an additional $200 million in bonds under this indenture to make a final acceptance payment in 2020. The current offering is structured within the current amortization schedule and will be fully amortized in fiscal 2026.

The state continues work on maximizing current revenues in addition to considering alternative approaches, such as public-private partnerships, for funding the state's transportation needs. The 2007 legislature provided for new sources of funding by redirecting a portion of a currently imposed property tax in counties with populations of 100,000 or more (effectively Clark and Washoe Counties), a car rental recovery surcharge, and proceeds from bonds issued by the Las Vegas Convention and Visitors Authority. These revenue sources are not pledged to motor vehicle fuel tax bonds.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820270

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Karen Krop, +1-212-908-0661

Senior Director

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Marcy Block, +1-212-908-0239

Senior Director

or

Committee Chairperson

Douglas Offerman, +1-212-908-0889

Senior Director

or

Media Relations, New York

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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