Fitch Ratings downgraded approximately $800 million of outstanding TRB Series 2020C (transportation revenue bonds, climate bond certified) to be issued by the New York Metropolitan Transportation Authority (MTA) from AA- to A+ and outstanding TRB anticipation notes to F1 from F1+, but removed the agency’s long-term rating from Rating Watch Negative status. The Rating Outlook is Negative.
The TRB bonds will be sold via negotiation, and the sale date and par are both subject to market conditions. Proceeds will be used to retire outstanding Subseries 2018B-1 and Subseries 2019B-2 TRB anticipation notes. The TRBs are backed by a gross lien on the MTA’s operating revenues, which include, among other sources, fares received from the subway and bus systems operated by the MTA New York City Transit and its subsidiary, the Manhattan and Bronx Surface Transit Operating Authority, the commuter railroads operated by MTA Long Island Rail Road and MTA Metro-North Railroad, and buses operated by MTA Bus. TRBs are also backed by a gross lien on operating subsidies from the state of New York and New York City, and surplus from the operation of the Triborough Bridge and Tunnel Authority (TBTA).
Fitch’s Analytical Conclusion: “The downgrade of the TRB rating to A+ from AA- and Rating Outlook Negative reflect the risk to significant deterioration of the MTA’s finances precipitated by the coronavirus outbreak and its unprecedented effect on system utilization and revenue. Fitch believes these pressures compound the challenges the MTA faced prior to the virus outbreak and weaken the agency’s prospects for credit quality improvement through the end of 2021. The TRB note rating at F1 maps to the A+ rating on the TRBs.
“The MTA still faces considerable pressure notwithstanding the expected receipt of approximately $3.8 billion under the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law [March 27]. The current period of stress is significantly greater than the rating case stresses factored into Fitch’s transit ratings and a more extreme stress than transit agencies routinely plan for. Fitch expects a sharp contraction in various dedicated tax revenues and subsidies over the next several months that are not factored into the MTA’s current revenue loss estimates from fares on its transit system and TBTA surplus. The MTA’s various non-operating revenues account for roughly 46% of its $17.1 billion 2020 budget.
“The MTA has reported acute declines in system utilization and operating revenue from fares and tolls. Ridership was down 87% on the subway system, 94% on Metro-North and 71% on Long Island Rail Road. Crossings on TBTA facilities was lower by 60% measured from March 20-21 and March 23 compared to similar dates in 2019. The revenue impact from lower system utilization is significant: The MTA estimates its weekly fare revenue loss at $125 million compared to the February Financial Plan, annualized to $6.5 billion if the ridership losses were sustained for an entire year, or $4.9 billion if current ridership levels were sustained for a six-month period following by a gradual recovery to pre-coronavirus outbreak levels. Fare and toll revenues were estimated at $8.6 billion for 2020 as of the February Financial Plan. The estimated TBTA revenue decline of nearly $1.3 billion annualized would eliminate the surplus that is legally required to be transferred to the MTA for the operation of its transit and commuter rail system
“These acute revenue pressures represent a near-term risk to the MTA’s liquidity profile. MTA reported current liquidity resources of $3.75 billion as of March 25, which includes a cash balance of $1.24 billion, internal available flexible funds of $1.2 billion, commercial bank lines of credit of $1 billion (which were fully drawn on March 20), and $320 million of reserves set aside for other post-employment benefits. The MTA has been authorized to secure an additional $2 billion in bank liquidity, pending market conditions.
“Fitch continues to expect the MTA will take whatever measures are possible and necessary to continue to meet its financial obligations in a full and timely manner during this challenging period. This may require cash flow conservation measures not typically deployed through normal economic cycles, including capital market solutions and workforce reduction given the significance of this spending area to the total budget—an estimated $11.9 billion in 2020 or roughly $230 million per week (on a cash basis including benefits). The MTA has not enacted employee layoffs or furloughs to date, although it recently instituted service reductions that primarily target off-peak hours to ensure the continuity of service of essential travel. The unprecedented nature of the MTA’s revenue stress exacerbates its pre-outbreak fiscal condition, which was characterized by operating margins equal to or slightly weaker than sum-sufficiency, and estimated annual deficits ranging from $415 million in 2021 to $901 million in 2023.
“The A+ rating on the TRBs reflects the benefit of statutory provisions that explicitly prevent the MTA or any of its subsidiary corporations from filing a voluntary petition for bankruptcy protection so long as the MTA has TRBs outstanding. Fitch believes this statutory framework combined with bondholders’ gross lien on TRB pledged revenues tempers risk to the MTA’s otherwise high leverage position and capital needs. Fitch’s public transit ratings assume a degree of higher-level government support to maintain system solvency due to the strategic importance of transit to local economies and other public policy goals, including the mobility of public health and safety workers in the current health crisis. Furthermore, Fitch continues to believe that the MTA benefits from greater support from its sponsoring governments than typical U.S. transit agencies and has the highest strategic and economic importance among its peer group.”
Fitch assigned a “Stronger” Revenue Defensibility assessment to the MTA based on the “strategic importance of the MTA transit system, bridges and tunnels to the economy of the New York region. It supports an expectation for ongoing financial support from the state and the city, including periodic authorization of new recurring revenue sources, to fund the MTA’s operating and capital budget.”