Fitch assigns an 'A' rating to the approximately $80.5 million Alaska Railroad Corporation (ARRC, or the corporation) capital grant receipts bonds, series 2006 (FTA Section 5307 Urbanized Area Formula Funds and Section 5309 Fixed Guideway Modernization Formula Funds). The bonds, which are expected to sell through negotiation by a Citigroup-led syndicate on or about August 9, will pay interest each Feb 1 and Aug 1, and will mature each Aug 1, 2008-2021. Bond proceeds will be used to finance a portion of the ARRC's 2006-2010 capital program eligible for Federal Transit Administration (FTA) funding, pay costs associated with a surety policy to satisfy the debt service reserve fund requirement, provide capitalized interest through Feb 1, 2008 and pay costs of issuance. The Outlook is Stable.
The bonds are ARRC's first issuance of debt secured by grant receipts consisting of FTA Section 5307 and Section 5309 formula funds. Although the corporation's covenants under the trust indenture establish a sum sufficient debt service payment stream, the security pledge is more broadly defined to include all of ARRC's share of Section 5307 and Section 5309 formula funds. The bonds are further secured by a debt service reserve fund equal to one-half maximum annual debt service (MADS).
Fitch's 'A' rating reflects the long established track record of federal transit funding. Although the corporation has only received federal transit funds since 1998 with limited amounts provided until a substantial funding increase beginning this year, the rating also considers the long history of federal involvement in the railroad's development and operations since 1914. Additional strengths include the corporation's covenant that in each federal fiscal year it will request obligation authority for next year's debt service payment on a priority basis, and the transfer of grant receipts sufficient to pay debt service one year in advance of a payment date. This provides a significant time cushion for ARRC to take corrective actions in the unlikely event of delayed or lower than expected grant receipts. Although the 1.50 times (x) MADS additional bonds test (ABT) allows for a greater degree of leveraging than some other debt programs leveraging federal transportation funds, the ABT, in combination with the authority's need to maintain a pay-as-you go capital program to maximize future Section 5307 and Section 5309 formula fund receipts, is expected to moderate future borrowing.
A risk for these bonds is the potential for significant changes in federal transit funding policy with each new authorization period. An interruption in the flow of federal transit funding is highly unlikely given the broad-based political support for the program. However, the most recent multi-year reauthorization of the federal surface transportation program was significantly delayed. The Transportation Equity Act for the 21st Century (TEA-21) expired on Sept. 30, 2003 without a successor multi-year authorization, although 12 short-term extensions were passed. While the Safe, Accountable, Flexible, and Efficient Transportation Equity Act -- A Legacy for Users (SAFETEA-LU) took nearly two years to enact, it included a 46% increase in federal transit funding.
The 15-year maturity for this series exposes bondholders to reauthorization risk. Assuming the continued practice of six year federal transportation authorization periods, the bonds will typically span three such periods, while similar debt programs with shorter maturities generally cover up to two authorization periods. Two subsequent issuances are expected to have a 12 year-15 year maturity profile. Reauthorization risk is partially mitigated by debt service coverage of at least 1.8x against federal fiscal 2006 FTA Section 5307 and Section 5309 formula funds, assuming an expected total issuance of $155.6 million.
Reflecting a 2005 change in the formula funding allocation to ARRC, the corporation's FTA Section 5307 and Section 5309 formula funding levels under SAFTEA-LU represent a more than four fold increase over TEA-21 funding levels. While the significant increase in FTA Section 5307 and Section 5309 formula funds largely reflects a strategy to reduce the corporation's reliance on non-pledged federal discretionary funds and provide a more predictable capital funding source, future funding growth prospects may be limited given continuing federal budget deficits and national security concerns, coupled with the possibility of changing federal priorities and/or federal highway trust fund and mass transit account resource constraints. However, this risk is sufficiently hedged, consistent with Fitch's 'A' rating, given the long term support for the national surface transportation program, ARRC's role serving an important transportation corridor with limited highway alternatives, and expected debt service coverage.
The ARRC is a public corporation created by the Alaska Railroad Corporation Act and is an instrumentality of the State within the department of commerce, community and economic development. The ARRC was created in 1985 as part of the transfer of the Alaska Railroad to the state from the federal government which owned the railroad since 1914. The corporation operates an integrated passenger and freight railroad, annually serving 471,000 passengers and moving 25.1 million tons of freight along 470 route miles extending from Seward, AK north to Fairbanks, AK.