Fitch Rates Kentucky Asset Liability Commission's Standalone GARVEES 'A+'

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A+' rating to approximately $106 million of Kentucky Asset Liability Commission (ALCo) grant and revenue anticipation bonds (GARVEEs), series 2015A. The commission plans to price the series 2015A bonds the week of Sept. 30, 2015.

The Rating Outlook is Stable.

RATING RATIONALE

The rating is supported in large part by the relative strength of the federal transportation funding program. Although no longer funded on a multiyear basis, which does provide a level of long-term uncertainty, the program has proven to be an essential investment for the federal government, with funding disseminated by formula across all 50 states. The rating further reflects the broad revenue pledge of federal receipts and leverage covenants that help to mitigate the risk of diminished federal transportation receipts. In addition, the rating also incorporates the flexibility in liquidity offered by the other resources available to ALCo which provides financial cushion to the extent there is a delay in federal funding.

KEY RATING DRIVERS

Strength of the Federal Program: Midrange

Continued Dependence on General Fund Transfers: In Fitch's view, what was once a formula-driven program funded on a multiyear basis has now morphed into a program where future policy is less certain, funding levels are less predictable, and the program is more dependent on frequent action to extend authorization. It must also depend on continued transfers from the general fund that will likely need to be continued indefinitely barring an increase in the federal gas-tax or a significant reduction in spending. The essential nature of the investment in addition to the reliable formulaic distribution of funds underpins the ratings on GARVEE bonds backed by future federal receipts from the Highway Trust Fund (HTF).

Structural Features: Stronger (Highway GARVEEs)

Highway GARVEEs Maintain Significant Flexibility: The standalone GARVEE bonds in Fitch's portfolio benefit from a first lien on all legally available federal transportation funding. In the case of reimbursement, GARVEE bonds carry a pledge of all legally available federal transportation funds set aside on a monthly basis. Alternatively, in the case of direct-pay GARVEEs the broad pledge is accomplished through a covenant to de-obligate and redirect federal funds. In addition, ALCo GARVEE bonds benefit from leverage limitations of 4x, which provides the ability to retain sufficient flexibility at the 'A+' level even with a decline in federal revenues.

Resources of DOT Provide Liquidity:

In the event of a funding shortfall or a delay in federal funding due to a lapse in authorization, ALCo's financial resources can provide financial cushion to meet GARVEE payment obligations. The Kentucky Transportation Cabinet (KYTC) is able to de-obligate such funds that are available for debt service from existing federally-funded projects in order to service debt.

Peers: Fitch's standalone highway GARVEE bonds, all of which are rated 'A+', tend to have strong additional leverage limitations of at least 3x current receipts to pay debt service. ALCo's additional bonds test (ABT) of 4x is in line with its peers.

RATING SENSITIVITIES

Negative/Positive - A material change in Fitch's view of the strength of the Federal program to weak or strong from midrange.

SECURITY

The bonds are secured by all federal payments received by the note payment fund, including but not limited to direct GARVEE debt service reimbursements to be made under a Memorandum of Agreement between KYTC and the Federal Highway Administration (FHWA).

TRANSACTION SUMMARY

The ALCo is expected to issue $106 million of series 2015A GARVEE bonds under the existing GARVEE program authorized in 2005. The new monies will be used toward continued construction of the western Kentucky bridge projects.

For more information regarding GARVEEs and the HTF, please see Fitch's press release 'Fitch Affirms Standalone GARVEE Ratings' dated Aug. 11, 2015 and available at 'www.fitchratings.com'.

Additional information available on www.fitchratings.com

Applicable Criteria

Leveraging Federal Transportation Grants: Rating Criteria for GARVEE Bonds (pub. 15 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685504

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990966

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150917006553/en/

Fitch Ratings
Contacts:
Primary Analyst
Matthew Chou
Analyst
+1-415-732-7576
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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