Rating Action: Moody's assigns MIG 2 to Metropolitan Transportation Authority, NY's TRB BANs
Global Credit Research - 31 Jul 2020
New York, July 31, 2020 -- Moody's Investors Service has assigned a MIG 2 rating to the Metropolitan Transportation Authority, NY's (MTA) $450 million Transportation Revenue Bond Anticipation Notes, Subseries 2020B-1 and $500 million Transportation Revenue Bond Anticipation Notes, Subseries 2020B-2S. The notes may be split into additional subseries at the time of the sale, all of which will carry the MIG 2 rating. The Subseries 2020B-1 BANs may be sold to The Municipal Liquidity Facility run by the Federal Reserve Board, depending on market conditions at the time of the pricing.
Moody's also maintains an A2 rating on MTA's long-term Transportation Revenue Bonds (TRB), which will provide the take-out financing for the BANs at maturity on February 1, 2023. The outlook on the TRBs is negative.
The MIG 2 rating on the BANs reflects the expectation that MTA will have adequate market access at BAN maturity given the TRB's satisfactory long-term credit quality (A2 negative) and MTA's status as a sophisticated, frequent issuer of bonds and notes and its strong relationships with a diverse investor base. The MIG 2 rating also considers MTA's large short-term debt load that increases refinancing risks, as well as recently-increased capital market costs that indicate somewhat higher market access constraints. Lastly, the MIG 2 factors MTA's liquidity pressure from coronavirus-related revenue losses, which could reduce the availability of internal liquidity to redeem BANs in the event of a market dislocation at maturity.
The A2 rating on the Transportation Revenue Bonds (TRB) is supported by the system's essential service to a vast and economically robust service area and strong political and financial support from New York State (Aa1 negative) and New York City (Aa1 negative), but is being pressured by the coronavirus crisis and the resulting drop in system utilization and regional economic activity. We expect MTA to have weaker financial and debt metrics after the economic disruption has subsided. The sharp drop in fiscal 2020 fares and tax revenue will create cash flow challenges, increase refinancing risks, and create large structural budget gaps that will be difficult to resolve given the authority's already-narrow financial position and high fixed costs. While MTA can access deficit financing to alleviate it's near-term revenue losses, this solution would be one-time in nature and result in higher debt leverage. Reduced debt capacity would disrupt the timing and implementation of the authority's $55 billion capital program and potentially weaken asset condition and service quality.
Based on year-to-date trends and updated information from MTA's July Financial Plan, we expect that ridership recovery will be slower than our April forecast, resulting in larger budget gaps beginning in fiscal 2021. Our fiscal 2020 budget gap forecast remains largely unchanged, however there is more uncertainty surrounding MTA's dedicated taxes received from New York State and less time remaining in the fiscal year to implement meaningful budget solutions. The credit impact of this downward revision will depend on the availability of additional federal aid, the effectiveness of any structural budget changes, and the amount and structure of any future deficit financing.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. MTA will also be challenged in the longer term by social risks such as growing and relatively inflexible labor costs, and environmental risks (particularly from natural disasters), although the latter is partially mitigated by MTA's significant resiliency investments and the availability of private insurance and federal disaster recovery assistance.
The short-term BAN rating does not carry an outlook.
The negative outlook on the TRBs is based on the expectation that steep coronavirus related revenue losses will recover gradually over at least several years, creating large budget gaps through a gradual and incomplete recovery period. The gaps will be challenging to resolve without further weakening financial and debt metrics, or negatively affecting MTA's service delivery and capital plans. Continued support from state, local or federal governments is highly likely given MTA's essentiality to the regional and national economy. However, the depth and duration of our forecasted MTA budget gaps will test the timing and strength of support from parent governments who will also be experiencing economic and financial strain as a result of the coronavirus crisis.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
For the short-term BAN rating:
- An upgrade of MTA's Transportation Revenue Bond rating (the expected takeout bond), combined with improved internal liquidity position
For the long-term TRB rating:
- Implementation of sustainable, structural budget solutions, that increase debt service coverage and liquidity above the historic 3-year average
- Sustained recovery of ridership and revenues to historic levels
- Reduced short-term debt risk and evidence that projected debt leverage metrics will stabilize at or below 3.5x
- Reduced labor-related financial and operating constraints and related fixed costs
- Continued progress with capital projects that supports improved asset condition and satisfactory service performance
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
For the short-term BAN rating:
- Significant decline in available liquidity to levels
- Evidence of constrained market access for long-term bonds
- Downgrade of the long-term TRB rating below Baa1 stable
For the long-term TRB rating:
- Longer-than-expected economic and ridership disruption that leads to larger revenue losses and budget gaps
- Inability to structurally balance the budget after the crisis subsides that leads to significant reduction in liquidity and/or debt service coverage by net revenues that averages less than 1x
- Greater than expected rise in leverage position and associated fixed costs, or increased short-term debt risk
- Declines in service performance that reduce public and/or political support for MTA, its subsidies and future fare increases
- Significant capital project delays or cost overruns that increase debt or destabilize public support for the enterprise
The BANs are secured by the proceeds of other Transportation Revenue Bond anticipation notes, the proceeds of Transportation Revenue Bonds and, with respect to interest payable on the notes, amounts available for payment of subordinated indebtedness.
BANs are not secured by available cash and investments, however MTA could use these resources to redeem the notes in the event of a market dislocation that impedes timely long-term debt issuance to redeem the BANs. Based on cash and unrestricted investments available on July 17, 2020, MTA's current resources cover all maturing BANs plus other BANs and FRNs being remarketed in the two prior months. However, these liquidity levels are under stress given the current sharp drop in revenues related to the coronavirus pandemic, therefore it is likely that MTA will rely entirely on market access to redeem these BANS when they mature on February 1, 2023.
The transportation revenue bonds (TRBs) are one of four primary credits that the MTA uses to finance its capital programs. The TRB bonds are special obligations of the MTA, payable on a gross basis from transit and commuter system revenues, certain state and local operating subsidies, dedicated taxes, and operating surpluses of the Triborough Bridge and Tunnel Authority, NY (TBTA) (Sr lien Aa3 negative) after operating and maintenance requirements and debt service payments on the TBTA's own debt. TRB financed projects must be approved by the state's Capital Program Review Board (CPRB).
The TRB rate covenant requires sum sufficient coverage by fares and subsidies of debt service and O&M. Only board approval is required to raise fares for the rate covenant. Unlike most other rated transit systems, there is no debt service reserve fund and no explicit additional bonds test for the TRBs, although the balanced budget requirement and CPRB approval provide solid leverage controls. Pledged revenues flow to a trustee held account and are set-aside monthly for debt service before being released for operations. The BANs are payable from proceeds of previously-authorized TRB notes and/or long-term TRB bonds, and the interest portion is further secured by a subordinate pledge of the transportation revenue bond pledged revenues.
USE OF PROCEEDS
Subseries 2020B-1 and Subseries 2020B-2S BAN proceeds will finance various transit and commuter rail capital projects. The Subseries 2020B-2S BANs will finance transit and commuter rail projects that have been approved by NYS as part of its $7.3 billion funding commitment to MTA's 2015-2019 capital program.
The MTA is a public benefit corporation of New York State, created by the New York State legislature in 1965. The MTA's governing board is appointed by the governor with advice and consent of the state Senate. The MTA is responsible for developing and implementing a unified mass transportation policy for the Metropolitan Transportation District which includes New York City and the surrounding Duchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester counties. In addition to these counties, MTA's service area also includes Fairfield and New Haven counties in CT. MTA operations are performed through nine different agencies, including the Triborough Bridge and Tunnel Authority, NY (Sr lien Aa3 negative). TBTA profits, after paying its own O&M and debt service, are transferred to MTA to subsidize transit, bus and commuter rail operations.
The principal methodology used in these ratings was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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