Fitch Ratings this week assigned a ‘AA’ rating to up to $874 million of dedicated capital revenue bonds, series 2021A (green bonds – climate bond certified), to be issued by the Washington Metropolitan Area Transit Authority, DC (WMATA). The rating outlook is negative.
WMATA provides transit services (Metrobus, Metrorail, and MetroAccess paratransit) in Montgomery and Prince George’s Counties, the District of Columbia, and several cities and counties in northern Virginia. WMATA was created in 1967 by an interstate compact between the State of Maryland, the Commonwealth of Virginia, and the District of Columbia.
The negative outlook reflects the risk associated with the uncertain path to recovery from steep declines in system ridership amidst the pandemic. Rating stability is predicated on the authority’s ability to draw riders back to the system and realign its operating and debt service spending against lower expected passenger revenue and the spend-down of federal stimulus funds.
Proceeds from the bonds, which are expected to price via negotiated offering next week, will fund various sustainable and energy-efficient safety and state of good repair capital projects.
The dedicated revenue bonds are backed by a lien on the dedicated capital funding authorized under the 2020 bond resolution. The dedicated capital revenues are payable to the authority pursuant to statutes enacted by Washington, D.C., the Commonwealth of Virginia, and the State of Maryland, subject to annual appropriation.
The statutory dedicated capital funding revenue allocation is as follows: $178.5 million from DC payable from its general sales tax revenue, $167 million from Maryland payable from the Maryland Transportation Trust Fund (TTF), and $154.5 million from Virginia (approximately $30 million of which is not available for debt service) payable from various regional taxes on transient accommodations, wholesale fuel purchases, real property transfers, and sales and use taxes.
According to the Fitch Ratings analysis:
The ‘AA’ rating on the authority’s dedicated revenue bonds is based on a dedicated tax bond (DTB) analysis of the underlying revenue streams that support each state’s capital funding commitment, and the general credit quality of the authority, as expressed through its IDR. Each state is allowed, but not required, to proportionally reduce its dedicated capital funding contribution if another does not pay its full amount.
As such, the rating reflects a weak link approach to the dedicated tax analysis. Furthermore, each state’s dedicated capital funding contribution is subject to appropriation establishing a cap at one notch below the lowest of the district and the states’ IDRs. Fitch’s IDRs are ‘AA+’/Stable on DC and ‘AAA’ Stable on both Maryland and Virginia.