Senior Municipal Credit Consultant
The first half of the year ends up with a raft of transportation financings as local agencies continue to move forward while federal infrastructure remains mired in the politics of investigations, taxes, and healthcare legislation.
METROPOLITAN TRANSPORTATION AUTHORITY
Transportation Revenue Green Bonds
In the midst of a rash of bad publicity about day to day operating problems and the huge capital needs facing the subways, the MTA saw its Moody’s rating maintained at A1. According to Moody’s, “the A1 rating reflects MTA’s strong operating environment, including the healthy service area economic growth and sound financial condition of supporting governments New York State (Aa1 stable) and New York City (Aa2 stable). The A1 also reflects MTA’s satisfactory finances, supported by sound budget management, governance, and planning, as well as bondholder protections provided by the gross pledge of a highly diversified revenue stream. The A1 also acknowledges the high fixed costs, substantial capital program, and the financial and operational challenges posed by strong collective bargaining units and a massive, aging transportation infrastructure.”
In addition,” the outlook for the Transportation Revenue Bond (TRB) rating is stable, reflecting Moody’s expectation that the MTA and its supporting governments will take actions, as they have in the past, to continue to balance the system’s fiscal operations and capital program while maintaining adequate infrastructure quality and reasonable leverage ratios.”
COMMONWEALTH TRANSPORTATION BOARD
Commonwealth of Virginia
Transportation Capital Projects Revenue Bonds
Moody’s: Aa1 Standard & Poor’s: AA+ Fitch: AA+
Primary bondholder security rests with the commonwealth’s continued willingness to appropriate sufficient funds to meet debt service requirements. The state legislature must appropriate revenues into the Priority Transportation Fund (PTF)-a special non-reverting fund within the Transportation Trust Fund (TTF)-to facilitate debt service taxes, a portion of motor fuel taxes, and excess revenues from the highway maintenance and operating fund. The state also has flexibility to transfer or allocate from other appropriate funds, as necessary, including monies from the General Fund. All monies deposited into the PTF must be used for debt service first before any other expense. Remaining PTF funds stay in the fund after designated expenditures are paid.
The Commonwealth has long been known for its strong financial results and its ability to address budget balancing needs as required.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY
Gross Revenue Transit Refunding Bonds
Moody’s: A2 S&P: AA- Fitch: AA-
WMATA’s Moody’s rating was downgraded in May to A2 due to ongoing restrictions that limit WMATA’s timely access to federal capital grants; declining ridership the result of weakened public confidence in the system; the expectation that WMATA’s large capital plan will increase as it addresses system safety and performance challenges; the magnitude of system’s deferred maintenance needs; and large unfunded pension and OPEB liabilities that add to WMATA’s financial challenges.
WMATA’s gross transit revenue bonds are secured by a pledge of gross revenues, including farebox revenues and operating subsidies from participating jurisdictions. WMATA is confronting daunting maintenance requirements and substantial capital improvement needs. It needs to establish a consistent regionwide funding source to support expected substantial bond issuance.
Service issues including regular delays and service outages as well as extended maintenance related interruptions have contributed to real pressure on passenger levels. This increases the pressure to find a new source of funding for operating subsidies. A new audit report from Metro’s Office of Inspector General found $68 million in bus, paratransit or rail car vehicle and parts purchases did not meet federal contracting requirements, and $517 million of the $1.4 billion in contracts reviewed did not follow the Federal Transit Administration’s nonbinding suggested best practices.
WMATA is taking steps to address the issues raised by the audit so we see no credit issue stemming from it. But the issue does highlight the frustration with the volume of hollow comments from the current administration as it struggles to articulate and implement an infrastructure plan.
It appears that the Financial Oversight and Management Board may be wavering Financial Oversight and Management Board in its position regarding government employment levels. According to what the board approved in its March 13 meeting, a furlough program was scheduled go into effect July 1, unless the government secures a $200 million cash reserve and demonstrates government spending cuts as established under its fiscal plan. Were the government to convince the board that it is not necessary to implement the measures starting July 1, these would be postponed until Sept. 1, by which time the board would reevaluate the situation.
Now the board has espoused the view that the governing body would seek to implement the public employee working hour reduction measure starting Sept. 1, and not July 1 as originally scheduled. The board has said that replied “if the government doesn’t want to comply after we analyze the budget and decide that we indeed need to implement a limited reduction in working hours, then that will be an issue for lawyers and we will have to clarify the issue in court.”
The governor has threatened court action to uphold the other side of this argument. So the uncertainty and delay continues as Puerto Rico continues to resist the hard decisions which must be made for it to recover a sound financial position.
SOLID WASTE CREDITS IMPACTED BY CORPORATE DOWNGRADE
At week’s end, Moody’s announced the downgrading of the corporate family rating (CFR) of Covanta Holding Corporation (Covanta) to Ba3 from Ba2 and senior unsecured rating to B1 from Ba3. The action had a direct impact on four issues of solid waste disposal bonds for waste to energy plants operated by Covanta. These credits are secured under performance guarantees from Covanta which are seen as being negatively impacted by Covanta’s financial profile.
The four municipal deals were issued by the Delaware County Industrial Dev. Auth., PA, the Essex County Improvement Authority, NJ, the Massachusetts Development Authority, and the Niagara Area Development Corporation, NY. The issues are now rated Ba3. “Covanta continues to face pressures from the weakened power prices and unpredictable metals prices, resulting in lower earnings and cash flows. These results in key credit metrics that are more appropriate for the Ba3 rating, including cash flow from operations before changes in working capital (CFO pre-WC) to debt in the high single digits”.
Covanta will be more exposed to market power prices with significant PPA contract expirations in 2017. At the same time, generally stable cash flows from the waste disposal and service revenues which represents approximately 70% of Covanta’s consolidated revenue in 2017.
RUTGERS OUTLOOK IMPROVEMENT
One credit which provides a ray of hope in New Jersey’s generally declining credit environment is Rutgers, the State University of New jersey. Moody’s has raised the outlook on Rutgers Aa3 rating to stable. The revision reflects stabilizing operations at slightly better than break-even levels, resulting in modest operating cash flow growth. It also incorporates a view that the university will be able to absorb some reductions in state and federal funding, that it will limit any additional debt to current levels, and that liquidity will not deteriorate further.
Moody’s reiterated its rating which “positively incorporates the university’s large scale of operations and critical role in the State of New Jersey’s (A3 stable) educational framework as the flagship and land grant university and member of the Big Ten Conference. Favorably, university leadership continues to demonstrate the ability to plan and execute complex strategic change and to increase the university’s already sizeable financial resources through fundraising, providing a growing cushion to adjust to moderate revenue volatility. Offsetting characteristics include high leverage and the increasingly pressured state environment, including shifting of the pension burden from the state to the university. In addition, Rutgers’ ambitious capital plan and aging facilities require significant capital investment.”
OSF Healthcare System (OSF)
This IL based hospital system benefitted when the Seventh Circuit affirmed a federal appeals court refusal to revive a $300 million lawsuit accusing St. Francis Medical Center of violating antitrust laws by carving other Peoria, Ill., providers out of its exclusive contracts with commercial insurers. The Court affirmed OSF Saint Francis Medical Center’s summary judgment win in the US$300 million antitrust suit brought by a smaller competitor alleging unlawful exclusive dealing and attempted monopolization. The opinion found that “competition for the contract is a form of competition that antitrust laws protect rather than proscribe.”
The decision is seen as a notable precedent for hospital and provider networks—particularly those with substantial market shares—that wish to negotiate narrow and exclusive network agreements.
STATE BUDGET UPDATE
Alaska and New Hampshire recently ended extended budget standoffs with the adoption of budgets which represented compromises and/or delayed consideration of the primary issues driving budget imbalance. Connecticut, Pennsylvania, and Illinois remain at the forefront of continuing budget dysfunction. We expect that deliberations will extend right up to if not past the deadline for budget adoption of June 30.
OHIO HOSPITAL CREDIT UNDER PRESSURE
Summa Health entered 2017 expecting its finances to show a surplus of $30 million to $35 million by year end – about the same as it did in 2016. Now Summa Health, Akron’s largest employer, is cutting hundreds of jobs in the face of an expected fiscal 2017 loss of $60 million – a nearly $100 million turnaround for the local health care organization that has annual revenue of about $1.45 billion.
Under these circumstances, one would express the ratings reaffirmed in November, 2016 would be under pressure. Hospital leadership certainly seems besieged. Summa’s interim President and Chief Executive Officer said this week that “unless things improve, he wrote, “I can assure you the name on our badges will no longer say Summa Health, our employees at all levels of the organization and our community will see unprecedented change, and our independent physicians will be faced with the reality of what it means to practice in a community that no longer has an independent, local option for them.”
Summa Health plans to eliminate about 300 positions and will discontinue and consolidate some services to reduce current expenses by about $12 million. The projected year-end losses on a variety of factors, including the changing health care industry, some large doctor groups not referring patients to Summa claiming concerns over the quality of care.
Since Jan. 1, patient admissions are down 7 percent from a year ago and outpatient visits are down 5 percent, while surgeries are up 1 percent from a year ago and baby deliveries about the same. In recent months, a growing portion of Summa’s revenues has been coming from lower-paying government programs while payments from higher-paying private insurance contracts are declining.
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