(Editor's Note: This article supersedes "Credit FAQ: Criteria Considerations For Mass Transit Agency Ratings," published Nov. 14, 2018.)
Key Takeaways
- The implementation of S&P Global Ratings' updated not-for-profit transportation infrastructure enterprise (TIE) criteria resulted in 22 rating actions (15 upgrades and seven downgrades) where the TIE criteria were the primary criteria applied; and four priority-lien rating upgrades where the updated TIE criteria were used to determine the obligor's creditworthiness for 32 priority-lien ratings of 21 different mass transit obligors that issued sales tax-backed obligations.
- For operating revenue-backed ratings on TIEs, positive rating changes were due to the added financial stability and flexibility from receiving significant tax revenues (like property or sales taxes) that do not fluctuate with transportation activity levels; for sales tax-backed ratings on TIEs where our priority-lien tax revenue debt criteria are applied, positive rating changes were generally due to an improvement in the linked obligor's creditworthiness, which incorporates pledged tax revenues that were generally resilient, as further evidenced during the COVID-19 pandemic; and for property tax-backed ratings on TIEs, negative rating changes were largely attributed to our incorporation of operating risk exposure for debt issued by TIE entities as well as weakened market positions for those issuers sensitive to changes in transit ridership or air travel volumes.
- Twenty-nine TIE entities benefiting from tax support received one to three notches of rating uplift; 14 received one notch of uplift, 13 receiving two notches of uplift, and two received three notches of uplift. Key considerations behind the amount of uplift were the significance of the tax revenue relative to total revenues, the type of tax (for example, sales versus property taxes), tax base characteristics as measured by diversity and stability, and a demonstrated willingness and ability to increase the tax levy.
On Nov. 2, 2020, S&P Global Ratings published its updated criteria, "Global Not-For-Profit Transportation Infrastructure Enterprises: Methodologies and Assumptions" (the TIE criteria). Upon its application, the updated TIE criteria had three primary outcomes:
- An expanded scope to include all global not-for-profit TIEs--including mass transit operators--while providing up to four notches of rating uplift for transportation obligors that can levy or benefit from a tax or taxes;
- Enhanced transparency of both revenue-backed debt and property tax-backed debt ratings from updating the issuer credit ratings (ICRs) assigned to each TIE, reflecting its exposure to operating risk; and
- Updated priority-lien debt ratings (such as sales tax-backed and other similar non-ad valorem obligations) of TIE entities using their ICRs--which equates to the obligor's creditworthiness (OC)--in our application of priority-lien criteria.
For a summary of TIE criteria changes and how the TIE's OC is factored into priority-lien ratings, see "Credit FAQ: How We Apply Our Global Not-For-Profit Transportation Infrastructure Enterprise Criteria," published Nov. 2, 2020, on RatingsDirect, and "Quick Start Guide for S&P Global Ratings’ Priority-Lien Criteria," Oct. 22, 2018.
Since Nov. 2, 2020, we have based all new ratings on the application of the updated TIE criteria. We also identified at that time 36 existing issue ratings of 30 different airport, port, transit, and parking obligors that benefit from some form of tax levy or taxes. Most of the issue ratings were scoped in under the updated TIE criteria. See table 5 for a full list of those issuer and issue ratings reviewed where the updated TIE criteria were the primary criteria applied.
As a result of the expanded scope of the updated TIE criteria, we also completed a review of 32 priority-lien ratings related to 21 different entities using their OC determined by the TIE criteria as an input to determine their final priority-lien issue rating. As noted below, these are often sales tax-backed debt obligations issued by mass transit operators. For a consolidated list of mass transit issue and issuers and their TIE and priority-lien ratings, see "Global Mass Transit Ratings and Outlooks As Of Aug. 16, 2021."
This article answers frequently asked questions related to the final effects on our ratings from applying the updated TIE criteria and the application of our priority-lien criteria and general obligation (GO) criteria to tax-secured debt issued by transportation-related entities.
Frequently Asked Questions
What criteria does S&P Global Ratings use when assigning ratings to debt issued by transportation infrastructure enterprises?
The TIE criteria are the primary criteria applied when we view the operations of the obligor to be essential to our analysis, such as when we evaluate debt secured by the operating revenue and other recurring revenue streams of the enterprise in determining the TIE's ICR. For property tax-backed debt issued by a TIE, we evaluate and incorporate the operating risk of the transportation obligor, including bankruptcy or payment default along with the contribution of tax revenues as part our analysis.
We apply our priority-lien criteria to evaluate sales tax-backed and other similar non-ad valorem debt. When TIE entities issue priority-lien debt, as detailed below, we use the TIE criteria to determine the OC, and this can limit the final priority-lien rating.
What was the asset class distribution of those issues and issuers reviewed under the updated TIE criteria?
We reviewed 30 in-scope obligors, under one of four different transportation infrastructure asset classes: airports, parking, ports, and mass transit (table 1). This total excludes two new obligors that we evaluated as transit providers, which are listed in table 5.
Table 1
| Obligors Reviewed Under Updated TIE Criteria | |
|---|---|
| Airports | 4 |
| Parking | 3 |
| Ports | 7 |
| Transit | 16 |
| Total | 30 |
What was the overall impact on existing ratings from applying the updated TIE criteria in cases where they were the primary criteria applied?
Of the 30 obligors scoped into our review, we reviewed 36 ratings. Of those, 15 (42%) ratings were raised, seven (19%) were lowered, three (8%) outlooks were revised, and the remaining 11 (31%) ratings were affirmed. See table 2 for the distribution of rating actions across the four asset classes. We assigned ratings to two new issuers (listed in table 5) since the updated criteria went into effect on Nov. 2, 2020 that are excluded from table 2.
Table 2
| Rating Outcomes From Applying Updated TIE Criteria | |||||
|---|---|---|---|---|---|
| Total | Airports | Parking | Ports | Transit | |
| Affirmation | 11 | 0 | 3 | 3 | 5 |
| Downgrade | 7 | 3 | 0 | 2 | 2 |
| Outlook revision | 3 | 1 | 0 | 1 | 1 |
| Upgrade | 15 | 1 | 0 | 6 | 8 |
| Total | 36 | 5 | 3 | 12 | 16 |
How many other ratings were indirectly affected by the updated TIE criteria?
We also reviewed the general creditworthiness of 21 different scoped-in issuers of sales tax-backed debt under the updated TIE criteria that relate to 32 priority-lien ratings. Of the 32 priority-lien ratings, four (12.5%) were raised, none were lowered, and the remaining 28 (87.5%) were affirmed. The upgrades were primarily due to an improvement in the linked obligor's general creditworthiness determined by the TIE criteria, which incorporate the pledged tax revenue that were generally resilient during the COVID-19 pandemic.
How are the TIE criteria used to determine an OC for analysis of the priority-lien pledge?
We use the TIE criteria to determine an OC in cases that involve priority-lien analysis for issuers of sales tax-backed and similarly secured debt that we consider a TIE under our TIE criteria. As seen in chart 1, the TIE criteria framework evaluates the enterprise risk and financial risk of a TIE as the starting point for determining its anchor. Next, we establish the TIE's stand-alone credit profile (SACP) after applying positive or negative overriding factors, caps, and holistic analysis to that anchor. To the extent a TIE issuer benefits from tax support, we may consider a positive overriding factor that could result in a final rating up to four notches above the anchor to arrive at the SACP. Next, we determine the ICR after incorporating any external factors such as criteria related to the sovereign or government-related entities. The ICR is our view of the OC, which is an input to the priority-lien criteria used to rate the sales tax-backed debt of the TIE. Finally, the last step in determining issue-level ratings on specific debt instruments is to evaluate the impact of the legal structure and revenue pledge on the ICR.
Chart 1
Under what circumstances would S&P Global Ratings not apply the TIE criteria to debt issued by a transportation-related entity?
If the pledge is property tax, we may apply our GO criteria to rate property tax-secured bonds of transportation-related entities that are primarily recreational in nature, such as a port district operating a recreational marina or an airport authority managing a general aviation airport with no or limited commercial service. If the pledge is a sales tax, but the condition of limited commercial services still exists, we could evaluate the OC through our special district criteria, and then apply our priority-lien assessment using that OC.
Why does S&P Global Ratings criteria permit some priority-lien debt to be rated higher than the obligor's OC or general creditworthiness, but equalize ratings on property tax-secured debt with the obligor's general creditworthiness?
For transportation entities issuing debt secured by sales or other taxes in scope of our priority-lien criteria, we will assign an issue-level rating applying those criteria, which evaluate the obligor's general creditworthiness and the strength and stability of the pledged revenues beyond being incorporated into the operations, resulting in a rating that is sometimes higher than the obligor's OC. Sales and other excise taxes are generally more passive than property taxes, in that they are dependent on economic activity generally outside the control of an obligor's management team.
For a transportation entity issuing property tax-secured debt, we assign an issue rating at the same level as the issuer's general creditworthiness, in accordance with our criteria "Assigning Issue Credit Ratings of Operating Entities," May 20, 2015. We evaluate the property tax through the lens of its reliability, depth, and significance to the entity's overall OC, which could raise the overall ICR, as explained in table 10 "Examples Of Overriding Factors To The Anchor" in our TIE criteria. S&P Global Ratings believes property taxes, including the levying and forecasting thereof, as well as the taxing authority's ability to appropriately assess property values, are fundamental to a governmental entity's general creditworthiness.
Does S&P Global Ratings view transportation obligors differently from other public finance issuers in determining whether an obligor has extraordinary expenditure flexibility as evaluated within its priority-lien criteria?
The extraordinary expenditure flexibility adjustment within our priority-lien criteria is determined on a case-by-case basis. For some transportation issuers, such as many mass transit entities, this adjustment will likely apply because transit agencies that are funded in large part by taxes may have flexibility to adjust services and expenditures without affecting revenues directly. Transit agencies with a large portion of tax revenue that demonstrate the willingness and ability to address expenditure reductions could receive this adjustment. However, there may be cases where, for economic or political reasons, entities may have relatively less flexibility to adjust services or otherwise act to reduce expenditures.
As outlined in "Guidance: Priority-Lien Tax Revenue Debt," we would typically consider the extent to which:
- Legal, political, or practical barriers to limiting or reducing expenditures exist (such as large pension costs or liabilities, significant capital assets, or services that are essential to constituents);
- Management has demonstrated the ability and willingness to scale back expenditures, reduce services, limit routes, adjust wages, delay capital spending, or reduce staff to preserve the priority of debt service payments in the face of revenue declines; and
- A service can be reduced or eliminated without any meaningful impact on revenue collection, which can provide greater flexibility to limit service requirements.
We will evaluate management to determine the extent to which an agency meets these conditions, especially its ability and willingness to scale back expenditures.
The updated TIE criteria allow for rating uplift of up to four notches for transportation obligors that benefit from tax support. How many TIE entities received uplift and by how much?
Table 10 "Examples Of Overriding Factors To The Anchor" in the updated TIE criteria detail circumstances that could influence the anchor, including the tax uplift. A total of 29 TIE entities received some degree of uplift, The final implementation results show that 48% received one notch, 45% received two notches, 7% received three notches, and none received four notches. (table 3)
Table 3
| Distribution Of Notching Uplift For TIEs With Tax Support | ||
|---|---|---|
| Number | Percentage | |
| One notch | 14 | 48% |
| Two notches | 13 | 45% |
| Three notches | 2 | 7% |
| Four notches | 0 | 0% |
| Total | 29 | 100% |
How were key considerations compared to determine the final degree of rating uplift?
We examined the significance of the tax as an important credit factor in our determination of the rating uplift; for example, the share of tax revenues to total revenues. Other factors we considered include the diversity of the taxes (such as property, sales, and other fees), tax base characteristics (size, wealth, relative health, and growth rate), if the taxes were subject to appropriation, if the taxes have been raised or lowered over time, and if the tax levy was limited or unlimited. We examined these characteristics in their entirety and we based the degree of uplift on a preponderance of these considerations.
Table 4 summarizes the credit uplift provided to TIEs. Of note, the categories of TIEs that received rating uplift of one, two, or three notches benefit from a tax levy and also share certain credit characteristics. In general, TIEs that receive higher credit uplift (two-to-three notches) demonstrate a preponderance of:
- Taxes that account for a higher share of total revenues;
- A tax base that is broad and diverse; and
- A higher proportion of property taxes that we view as more stable, along with a demonstrated willingness and ability to increase tax levies.
Because we view sales and other excise taxes as generally more passive than generally more stable property taxes, in that they are dependent on economic activity generally outside the control of an obligor's management team, some TIEs with a lower share of property tax revenues to total revenues experienced the same level of uplift as TIEs with a higher share of sales tax revenues to total revenues.
Table 4
| Role Of Tax Support In Credit Uplift To TIE Anchor | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| --Tax significance(*)-- | ||||||||||||||||
| Notch uplift | Type of tax or taxes | Minimum | Maximum | Mean | Median | Number of obligors | Credit characteristics | |||||||||
| 1 | Only property tax | 8% | 22% | 14% | 12% | 9 | Diverse, stable, or growing tax base but smaller share of taxes to operating revenues | |||||||||
| 1 | Only sales tax | 12% | 42% | 26% | 26% | 4 | Diverse and stable tax base but with some taxes subject to appropriation | |||||||||
| 1 | Parking tax | 38% | 38% | 38% | 38% | 1 | Stable,city-wide but narrow parking tax | |||||||||
| 2 | Only property tax | 28% | 69% | 49% | 49% | 4 | Growing tax base and higher share of taxes to operating revenues but moderate taxpayer concentration or limited service area | |||||||||
| 2 | Only sales tax | 42% | 87% | 65% | 65% | 7 | Diverse with higher share of taxes to operating revenues but weaker service area economy | |||||||||
| 2 | Mix of several taxes | 37% | 37% | 37% | 37% | 1 | Large relatively stable tax base with diverse taxes | |||||||||
| 2 | More sales and other taxes than property tax | 52% | 52% | 52% | 52% | 1 | Broad, diverse, tax base with more sales taxes than property taxes | |||||||||
| 3 | More property than sales and other taxes | 60% | 60% | 60% | 60% | 1 | Broad, diverse tax base with more property taxes than sales taxes and high share of taxes to operating revenues | |||||||||
| 3 | Sales tax | 77% | 77% | 77% | 77% | 1 | Growing, historically stable tax base with a very large share of taxes to operating revenues | |||||||||
| * Tax revenues as percentage of TIE's total revenues. | ||||||||||||||||
Table 5
| Issuers/Issues Reviewed Under Updated Global TIE Criteria | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Sector | U.S. Issuers/Issues | Final rating | Final outlook | Outcome | ||||||
| Transit | Alameda Contra Costa Transit District, CA | AA | Stable | Upgrade | ||||||
| Transit | Bald Head Island Transportation Authority, NC | BBB- | Stable | New* | ||||||
| Parking | Baltimore Mayor & City Council parking revenue bonds, MD | AA- | Stable | Affirmation | ||||||
| Transit | Capital Metropolitan Transportation Authority, TX | AA | Stable | Upgrade | ||||||
| Transit | Chicago Transit Authority, IL | A+ | Stable | Affirmation | ||||||
| Transit | Corpus Christi Regional Transporation Authority, TX | AA- | Stable | Upgrade | ||||||
| Ports | Lake Charles Harbor & Term Dist revenue bonds, LA | AA- | Stable | Upgrade | ||||||
| Transit | Metropolitan Transportation Authority, NY | BBB+ | Stable | Affirmation | ||||||
| Transit | Minneapolis-St. Paul Metropolitan Council GO bonds, MN | AAA | Stable | Affirmation | ||||||
| Transit | Napa Valley Transportation Authority, CA | A- | Stable | Affirmation | ||||||
| Transit | Peninsula Corridor Jt Pwrs Brd, CA | A+ | Stable | Upgrade | ||||||
| Ports | Port Freeport revenue bonds, TX | A+ | Stable | Upgrade | ||||||
| Ports | Port of Beaumont Navig Dist GO bonds, TX | AA | Stable | Upgrade | ||||||
| Ports | Port of Houston Authority GO bonds, TX | AA+ | Stable | Downgrade | ||||||
| Airports | Port of Pasco GO bonds, WA | A- | Stable | Downgrade | ||||||
| Airports | Port of Pasco revenue bonds, WA | A- | Stable | Upgrade | ||||||
| Ports | Port of Seattle 1st lien revenue bonds, WA | AA- | Stable | Affirmation | ||||||
| Ports | Port of Seattle 2nd lien revenue bonds, WA | A+ | Stable | Affirmation | ||||||
| Ports | Port of Seattle 3rd lien revenue bonds, WA | A+ | Stable | Affirmation | ||||||
| Ports | Port of Seattle GO bonds, WA | AA- | Stable | Downgrade | ||||||
| Ports | Port of Tacoma 1st lien revenue bonds, WA | AA | Stable | Upgrade | ||||||
| Ports | Port of Tacoma 2st lien revenue bonds, WA | AA- | Stable | Upgrade | ||||||
| Ports | Port of Tacoma GO bonds, WA | AA | Stable | Outlook revision | ||||||
| Ports | Port of Vancouver revenue bonds, WA | A+ | Stable | Upgrade | ||||||
| Transit | Regional Transportation District, CO | AA | Stable | Upgrade | ||||||
| Transit | Roaring Fork Transportation Authority property tax bonds, CO | AA- | Stable | New* | ||||||
| Airports | Rock Island County Metropolitan Airport Authority GO bonds, IL | A | Stable | Downgrade | ||||||
| Transit | Sacramento Regional Transit District, CA | A- | Stable | Outlook revision | ||||||
| Transit | Saint Cloud Metropolitan Transit Commission, MN | AA | Stable | Upgrade | ||||||
| Transit | San Diego Metropolitan Transit System, CA | AA | Stable | Upgrade | ||||||
| Transit | San Francisco Bay Area Rapid Transit District GO bonds, CA | AA | Stable | Downgrade | ||||||
| Transit | San Francisco Municipal Transportation Agency, CA | AA- | Stable | Downgrade | ||||||
| Airports | St Joseph County Airport Authority GO bonds, IN | A | Stable | Downgrade | ||||||
| Parking | Stockton Parking Authority revenue bonds, CA | BBB- | Negative | Affirmation | ||||||
| Parking | Tacoma revenue bonds, WA | A+ | Negative | Affirmation | ||||||
| Transit | VIA Metropolitan Transit Authority, TX | AA- | Stable | Upgrade | ||||||
| Transit | Washington Metropolitan Area Transit Authority, DC | AA- | Stable | Affirmation | ||||||
| Airports | Williamson County Airport Authority GO bonds, IL | A+ | Stable | Outlook revision | ||||||
| *New ratings assigned after Nov. 2, 2020. Ratings are as of Aug. 16, 2021. | ||||||||||
Related Research
- Global Not-For-Profit Transportation Infrastructure Enterprises: Methodologies And Assumptions, Nov. 2, 2020
- Credit FAQ: How We Apply Our Global Not-For-Profit Transportation Infrastructure Enterprise Criteria, Nov. 2, 2020
- Quick Start Guide For S&P Global Ratings' Priority-Lien Criteria, Oct. 22, 2018
- Criteria | Governments | U.S. Public Finance: Priority-Lien Tax Revenue Debt, Oct. 22, 2018
- Guidance | Criteria | Governments | U.S. Public Finance: Priority-Lien Tax Revenue Debt, Oct. 22, 2018
- Assigning Issue Credit Ratings of Operating Entities, May 20, 2015
This report does not constitute a rating action.
| Primary Credit Analyst: | Joseph J Pezzimenti, New York + 1 (212) 438 2038; joseph.pezzimenti@spglobal.com |
| Secondary Contacts: | Kurt E Forsgren, Boston + 1 (617) 530 8308; kurt.forsgren@spglobal.com |
| Andrew Bredeson, Centennial + 1 (303) 721 4825; andrew.bredeson@spglobal.com | |
| Kayla Smith, Centennial + 1 (303) 721 4450; kayla.smith@spglobal.com |
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