News Column

Fitch Rates Massachusetts School Building Authority's $300MM Subordinated BANs 'F1+'

June 25, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'F1+' rating to the following Massachusetts School Building Authority (MSBA) bond anticipation notes (BANs):

--$300 million subordinated dedicated sales tax bond anticipation notes 2014 Series A.

The notes, which have a maturity date of July 16, 2015, are scheduled to be sold through competitive bid on July 10, 2014.

In addition, Fitch has affirmed the following ratings:

--$5.3 billion outstanding senior dedicated sales tax bonds at 'AA+';

--$293 million outstanding subordinated dedicated sales tax bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The Authority's bonds are secured by an irrevocable dedication of one cent of Massachusetts's6.25-cent sales tax, with some exclusions. Revenue flows to pay debt service on the subordinated bonds after payments related to the senior bonds.

The 2014 series A BANs will be paid from proceeds of a planned June 2015 bond offering that has already been authorized by the Authority. The Authority covenants to use its best efforts to issue the refunding bonds in time and amount sufficient to pay the BANs on the maturity date. The notes are also secured by a lien on sales tax receipts that is subordinated to that of outstanding senior and subordinated bonds; however, the authority does not plan to set aside sales tax revenue for this purpose.

KEY RATING DRIVERS

SHORT-TERM RATING: The 'F1+' rating on the notes reflects the strong likelihood of market access to redeem the notes by the issuance of long-term dedicated sales tax bonds that already have been authorized for this purpose.

BROAD DEDICATED REVENUE SOURCE: The bonds are secured by an irrevocable dedication of one cent of Massachusetts's6.25-cent sales tax. Although performance in the recession was weak, the sales tax has been a relatively stable revenue source over time and recent results are much improved.

STRONG STRUCTURAL PROTECTIONS: Bondholders benefit from 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.

ADEQUATE COVERAGE: Both current debt service coverage and the additional bonds test are adequate.

STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the third-highest personal income per capita in the nation.

SUBORDINATED BOND RATING LOWER: 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 1.4x maximum annual debt service (MADS) coverage for the senior bonds compared to 1.3x aggregate coverage for the subordinated bonds.

RATING SENSITIVITIES

The ratings are sensitive to the performance of the pledged sales tax revenue and the maintenance of solid debt service coverage levels.

CREDIT PROFILE

The 2014 series A notes will be the first BANs to be issued by the Authority, which has come to market with ten series of bonds to date. Note proceeds will fund grants to school districts for school construction, renovation and repairs.

The BANs will be paid from proceeds of a planned early June 2015 dedicated sales tax bond offering that is preliminarily sized at $475 million. Pursuant to Fitch criteria, BAN short-term ratings reflect the credit quality of the long-term security that will provide for payment of the notes.

The Authority's long-term bond 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 performance in the recession was weak, coverage of MADS remains solid at 1.9x for senior bonds and 1.8x for aggregate debt service, based on fiscal 2014 revenues and without consideration of the federal interest subsidies associated with Build America Bonds and Qualified School Construction Bonds. Sales tax revenue results are much improved since the recession, with a 6.8% year-over-year increase expected for the current fiscal 2014, which ends on June 30, and 5.9% growth forecast for the coming fiscal year with continued economic recovery.

Additional bond issuance under a $10 billion authorization requires 1.4x maximum annual senior debt service coverage for senior bonds and 1.3x coverage of total MADS for subordinated bonds; the rating distinction between the liens reflects the subordinate pledge and the weaker additional bonds test. 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 dedication of the full one-cent sales tax was fully phased in for fiscal 2011, resulting in receipts of $655 million for the year. Average annual sales tax growth has been about 6.5% since the inception of the tax in 1966, with the largest one-year drop of 7.1% occurring in 1990. However, in the recent recession sales tax revenues dropped 6.2% in fiscal 2009 and another 1.7% 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 did not benefit the bonds. After growth of 2.8% in fiscal 2011 and 2.4% in fiscal 2012, the year-over-year increase of 1.7% for fiscal year 2013 is now expected to be followed by the more robust growth discussed above.

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 was authorized to fund up to $500 million in new projects annually starting in fiscal 2008 (with the limit adjusted up or down each year by the lesser of the dedicated sales tax revenue increase/decrease or 4.5%); approval of new projects is contingent upon the availability of funds for this purpose. The Authority does not have a waiting list.

As pledged revenues are segregated from general operations of the Commonwealth, bond security is driven by performance of the sales tax and therefore closely linked to economic performance in the state. Massachusetts has a fundamentally strong and wealthy economy. Institutions of higher education and health care are significant and lend stability, in addition to supporting development and innovation in other areas. At 128% of the U.S. average, personal income per capita is the third highest of the states.

The Commonwealth's economic performance in the recent recession was significantly better than the national experience, in contrast to 2002-2004 when Massachusetts experienced among the steepest employment drops in the country. Employment losses in 2009 were less severe than those of the U.S. (3.2% versus 4.3%), and Commonwealth employment rose 0.4% in 2010 while U.S. employment fell 0.7%. Employment continued to grow in 2011 (1.2%), 2012 (1.6%) and 2013 (1.4%) at a pace generally in line with the national trend. Year-over-year growth of 1.5% in May 2014 compared to 1.8% for the nation. Massachusetts' unemployment rate of 5.6% for May 2014 was 89% of the U.S. rate.

For more information on the Commonwealth, see Fitch's press release 'Fitch Rates $500MM Massachusetts GO Bonds 'AA+'; Outlook Stable ' dated June 24, 2014 and available at 'www.fitchratings.com'.

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

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Rating U.S. Municipal Short-Term Debt' (Dec. 9, 2013);

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

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

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

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=836567

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

Laura Porter

Managing Director

+1-212-908-0575

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Douglas Offerman

Senior Director

+1-212-908-0889

or

Committee Chairperson

Marcy Block

Senior Director

+1-212-908-0239

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com



Source: Fitch Ratings


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