NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AA' rating to the following State of Oregon Department of Transportation (ODOT) highway user tax revenue bonds:

--$265.3 million subordinate lien note, series 2011A.

The note will be directly purchased by Citibank, N.A. on Nov. 9, 2011.

In addition, Fitch affirms the following ratings:

--Approximately $1.355 billion in outstanding ODOT senior lien highway user tax revenue bonds at 'AA+';

--Approximately $843.3 million in outstanding ODOT subordinate lien highway user tax revenue bonds at 'AA'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

--Highway user taxes, including the gas tax, are constitutionally dedicated for highway purposes, although pledged revenues and apportionments thereof are subject to legislative changes and voter initiatives.

--The state of Oregon has pledged to bondholders a first lien on dedicated revenues, according to senior or subordinate status.

--Coverage levels, once exceptionally strong, have declined as additional bonds were authorized. Issuance of additional senior and subordinate bonds requires 3 times (x) and 2x coverage, respectively.

--ODOT is closely integrated in the state's central capital and financial planning process.

SECURITY

--Senior lien bonds are secured with a parity first lien on specific highway use taxes and fees deposited in the state highway fund, net of administration and collection costs, and statutorily determined city and county apportionments to fund local transportation projects.

--Subordinate lien bonds are secured by the pledged revenues on a subordinate, junior and inferior basis to the senior lien bonds.

CREDIT PROFILE

Proceeds from this transaction will refinance the department's currently outstanding subordinate lien variable rate demand bonds backed with Dexia liquidity. The series 2011 note will bear interest weekly at a fixed spread to SIFMA. The note maturity schedule will match that of the bonds being refunded, though the note will be subject to mandatory tender on Nov. 7, 2014.

The 'AA+' rating on the senior lien bonds reflects the constitutionally dedicated revenues for highway purposes, a strong 3x additional bonds test (ABT), as well as the department's integration in the state's capital and financial planning process. The 'AA' rating on the subordinate debt reflects the junior pledge to the senior bonds. Further, additional subordinate bond leveraging is limited by a satisfactory 2x ABT. Credit concerns reflect pledged revenues and apportionments being subject to legislative changes, as well as continued exposure to revenue restraining voter initiatives.

Providing security for the bonds are various liens on specific highway use taxes and fees deposited in the state highway fund, net of administration and collection costs, and statutorily determined city/county apportionments to fund local transportation projects. Statutory reductions for administrative costs totaled $309 million in fiscal 2011. Additionally, some $127.7 million of collected revenues was statutorily set aside for the Oregon Transportation Investment Act (OTIA), totaling approximately $35.6 million for OTIA I and II and approximately $92.1 million for OTIA III. The OTIA I and II amounts are not credited to the state highway fund or localities for distribution under apportionment formulas until debt service is met. Any excess not required for debt service on OTIA bonds is distributed by formula to the state, counties and cities. An additional $27 million was set aside under the 2009 Jobs and Transportation Act (JTA) program.

Total highway fund revenues in fiscal 2011 were $1.02 billion, of which 44% was derived from motor fuels taxes, 29% motor carrier (including weight-mile taxes) and 27% from motor vehicles license, registration and other fees. Fiscal 2011 highway fund revenues increased by a significant 13.4% from fiscal 2010 as revenue increases related to JTA have been phased in. After all statutory reductions, set asides and adjustments, fiscal 2011 pledged revenues were 57% of total highway fund revenues, equal to $577.4 million. Fiscal 2011 pledged revenues covered senior lien annual debt service, exclusive of BAB subsidy payments, by 5.1x and aggregate debt service by 3.8x.

Oregon's highway improvement program has expanded from the initial $500 million program begun in 2001 with OTIA I and OTIA II, constructed through ODOT and local government partnerships. In 2003, the state expanded the breadth of this program with the $1.9 billion OTIA III authorization for bridge improvement with the state portion of the program managed through a private vendor contract. The master bond declaration was modernized in 2006, providing for issuance of subordinated debt with a 2x additional bonds test as well as a mechanism permitting the inclusion of federal funds among pledged revenues, although federal funds are not currently pledged for bond repayment. The OTIA III program's bonding capacity was exhausted in 2010. In 2009, Oregon's legislature passed the Jobs and Transportation Act (JTA) with $840 million highway user tax revenue bond capacity supported by increases in currently pledged revenues, though bonds have yet to be sold under this authorization.

To support the additional debt authorizations noted above, certain fees and revenues were increased. However, coverage ratios fell from the once extraordinary levels in excess of 70x with the initial issue in 2000 to 5x - 7x after the first OTIA III issue in June 2004. Estimated debt service coverage by projected fiscal 2015 revenues, assuming the $840 million JTA authorization is issued by the close of fiscal 2015, excluding the BABs subsidy, would be 4.9x for senior bonds and 3.45x for subordinate bonds. Including the BABs subsidy as a revenue increases senior and subordinate coverage slightly, to 5.0x and 3.5x, respectively.

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.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;

--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

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