Fitch Rates N.J. Transit Corp Capital GAN's 'BBB+'
3 November 2000
Fitch Rates N.J. Transit Corp Capital GAN's 'BBB+'
NEW YORK--Nov. 3, 2000--Fitch assigns a 'BBB+' rating to the New Jersey Transit Corporation's (NJT) $450,000,000 capital grant anticipation notes, series 2000B, which are secured by a full funding grant agreement (FFGA) between the Federal Transit Administration (FTA) and NJT to provide federal financial assistance for the Hudson-Bergen Light Rail Transit System Minimum Operable Segment Two (Hudson-Bergen MOS-II).Fitch also assigns a 'BBB+' rating to NJT's $110,000,000 capital grant anticipation notes, series 2000C, which are separately secured by another FFGA between the FTA and NJT to provide federal financial assistance for the Newark-Elizabeth Rail Link Minimum Operable Segment One (Newark MOS-I). The notes are scheduled to price through negotiation the week of Nov. 13, 2000, through a syndicate headed by PaineWebber Inc.
These two series of notes represent NJT's second and third securitization of federal transportation assistance for transit purposes under Chapter 49 of the U.S. Code, Section 5309, which provides grant funding through the FTA for new start projects. Qualified projects include rail systems, and dedicated bus and high occupancy vehicle facilities.
Strengths of the FFGA program include the contractual nature of the FTA's funding obligation, a comprehensive screening process for transit projects (which includes project approvals at both the local and federal level, and completed environmental reviews) and a local financial commitment. The efficiency of the FTA's electronic reimbursement system is another positive factor. Weaknesses of the program are largely political in nature.
The FTA's contractual obligation is subject to Congressional appropriation, and Congressional intervention at the project level can significantly affect the timeliness of grant payments. In addition, all federal surface transportation funding is subject to reauthorization cycles; the Transportation Efficiency Act for the 21st Century (TEA-21), the current transportation funding cycle, runs through 2003. Finally, there has been a slight timing discrepancy historically between committed and received grant funds.
Other credit considerations for FFGA-backed debt include the experience and track record of the local transit authority to manage new projects, including the ability to meet the critical revenue operation date and the quality of the local revenue pledge. This is important since FFGAs have performance criteria that allow for the withholding, withdrawal or reimbursement of federal funds. In some cases, the issuer actually cancelled a FFGA project, terminating the FTA's responsibility to make further payments.
The series 2000B notes will finance a portion of construction for the extension of the existing Hudson-Bergen system taking it 5.1 miles north from NJT's Hoboken Terminal to Tonnelle Avenue in North Bergen, N.J.; and 1.0 mile south from 34th Street to 22nd Street in Bayonne, N.J. Of the $1.2 billion in total project cost for this phase, $500 million is to be financed under the Hudson-Bergen MOS-II FFGA between 2003 and 2008. The `BBB+' rating on the series 2000B notes is based on the regional importance of the project, the demonstrated ability of NJT to deliver this type of project on time and within budget, the 59% local funding commitment for this phase, including federal formula money, and the authority's favorable working relationship with the FTA.
While the long lead-time before receipt of grant funds is a concern, the financing structure largely mitigates annual appropriation risk as it assumes a three-year lag in final receipt of grants. Construction risk is a factor, but it is largely mitigated by the fixed-price, design-build contract, the $250 million payment and performance bond, the parent performance guarantee, the advanced stage of planning and design, NJT's ownership of 95% of the right-of-way, minimal construction on city streets and NJT's successful track record with the first phase of the project. Finally, refinancing is an option available to NJT with the series 2000B notes.
The series 2000C notes will finance a portion of construction for a one-mile light rail alignment between two major commuter stations in Newark, N.J. -- Penn and Broad Street. Of the $208 million in total project cost, $142 million is to be financed under the Newark MOS-I FFGA. Approximately $30 million has already been received with the remaining amounts scheduled between 2001 and 2004.
The `BBB+' rating on the series 2000C notes is based on the regional importance of the project, the near-term nature of the grant schedule, the 12-month early segregation of grant payments with a trustee, the demonstrated ability of NJT to deliver projects on time and within budget, and the authority's favorable working relationship with the FTA. Construction risk is a factor given the need for cut and cover tunnel construction, realignment of State Route 21 and construction on city streets. The advanced stage of planning and design and NJT's successful track record partially mitigate this concern. Finally, refinancing is also an option available to NJT with the series 2000C notes.
Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance markets worldwide.