NEW YORK--()--On the effective dates noted below, Fitch Ratings will take various rating actions on the short-term ratings of the following commercial paper (CP) notes of the State of Texas Public Finance Authority (TPFA):
--$8.25 million general obligation CP notes, series 2002A (tax-exempt), confirmed at 'F1+', effective Nov. 16, 2012;
--$24 million general obligation CP notes, series 2002B (tax-exempt), confirmed at 'F1+', effective Nov. 16, 2012;
--$150 million tax-exempt CP revenue notes, series 2003, upgraded to 'F1+', from 'F1', effective Dec. 4, 2012;
--$300 million general obligation CP notes, series 2008 (tax-exempt), upgraded to 'F1+' from 'F1', effective Nov. 26, 2012.
The affirmation of series 2002A and series 2002B and the upgrade of series 2003 and series 2008 are based on the expected substitution of each series' existing external liquidity provider by liquidity provided by the State of Texas under separate series liquidity agreements entered into between TPFA and the Texas Comptroller of Public Accounts.
In addition, Fitch affirms the 'F1+' short-term rating on other outstanding TPFA CP based on liquidity furnished by the state, as follows:
--$171.8 million GO CP notes (Cancer Prevention and Research Institution of Texas Project), series A (taxable) and series B (tax-exempt).
The GO CP notes are general obligations to which the state pledges its full faith and credit. The CP revenues notes are special obligations of TPFA payable from lease payments of the state, subject to biennial appropriation.
KEY RATING DRIVERS
AMPLE LIQUIDITY FOR MATURING CP NOTES: State of Texas treasury fund assets managed by the Comptroller are sizable and more than sufficient to support the liquidity needs of maturing CP notes and other securities that are not remarketed. The treasury fund is invested conservatively, with two-thirds of its portfolio invested in cash, money market or U.S. treasury securities. Coverage of maximum liquidity needs of CP notes and other issues whose liquidity is supported by the state is ample.
STATE GO BONDS RATED 'AAA': The state's long-term credit quality is reflected in its 'AAA' GO bond rating, which is based on its low debt, consistently strong economic and revenue performance, and growing reserve balances, which offset its dependence on sales taxes and the challenge of managing persistent spending pressures.
The 'F1+' short-term rating is based on the liquidity support provided by the State of Texas to certain CP programs and variable-rate bonds of various state agencies. Under separate liquidity agreements between the issuing agency and the Texas Comptroller of Public Accounts, cash resources of the state treasury fund are made available to purchase maturing notes that are not successfully remarketed.
As of Sept. 30, 2012, the state had total liquidity commitments of $603 million, with a maximum daily commitment of $538.6 million; commitments included interest at the maximum rate. A total of $464 million was outstanding under all of the programs. Following the scheduled substitutions noted above on four series of TPFA CP notes, the maximum daily commitment would rise to $1.085 billion, with a maximum daily commitment of $770.3 million.
The market value of the treasury portfolio was $27.3 billion as of Sept. 30, 2012. Portfolio assets are invested conservatively, with $3.6 billion in cash and money market funds and another $13.9 billion in U.S. treasury securities. The weighted average maturity of the treasury portfolio was 1.4 years.
Coverage of liquidity commitments by treasury fund assets remains ample. As of Sept. 30, 2012, treasury fund assets would cover the maximum liquidity commitment under existing programs and planned substitutions by 25.2x. The maximum daily commitment would be covered 35.5x. When the portfolio is discounted to reflect the immediate availability of funds, coverage of the maximum daily commitment declines only modestly to 28.5x, reflecting the highly liquid nature of the portfolio.
Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and a growth-oriented economy that continues to outpace national averages. Financial pressures arise from the demand that rapid growth places on the state's consumption-based tax system, including longer-term transportation needs and the state's commitment to education. The budget for the fiscal 2012-2013 biennium relied on significant cuts to baseline projected spending to maintain balance, while leaving the balance of the economic stabilization fund (ESF) untouched. Actual revenue collections have consistently over-performed previous assumptions since budget adoption, and the ESF balance has grown to $6.1 billion; the comptroller forecasts that the balance will rise to $8.1 billion by the end of the fiscal 2012-2013 biennium.
For additional information on the GO rating of the State of Texas, please see Fitch's press release, 'Fitch Rates Texas Water Development Board's $250MM State GOs 'AAA'; Outlook Stable', dated Aug. 17, 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Criteria for Assigning Short-Term Ratings Based on Internal Liquidity' (June 15, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Criteria for Assigning Short-Term Ratings Based on Internal Liquidity