January 19, 2012

Summary:

Puerto Rico Highway and Transportation Authority; Federal or state grant programs
Primary Credit Analyst: Adam Torres, New York (1) 212-438-2481; adam_torres@standardandpoors.com Secondary Contact: Georgina Rovirosa, New York (1) 212-438-7983; georgina_rovirosa@standardandpoors.com

Table Of Contents
Rationale Outlook Related Criteria And Research

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Summary:

Puerto Rico Highway and Transportation Authority; Federal or state grant programs
Credit Profile
Puerto Rico Hwy & Transp Auth grant antic Unenhanced Rating
Many issues are enhanced by bond insurance.

A+(SPUR)/Stable

Affirmed, Removed from CreditWatch

Rationale
Standard & Poor's Rating Services has affirmed its 'A+' rating on Puerto Rico Highway and Transportation Authority's (PRHTA) grant anticipation revenue (GARVEE) bonds outstanding. The outlook is stable. At the same time, Standard & Poor's removed the rating from CreditWatch with negative implications, where it was placed Dec. 30, 2011, following our repeated attempts to obtain timely information of satisfactory quality to maintain our ratings on the securities in accordance with our applicable criteria and policies. The rating incorporates our opinion of the following credit strengths: Structural provisions that allow funds to flow directly from the Federal Highway Authority (FHWA) to trustee-held debt service accounts--upon semiannual funding authorization requests by the authority--before flowing to other purposes; A significant historical precedent that demonstrates a federal commitment and congressional approval for federal aid for highway programs and specific funding mechanisms to U.S. territories dating back to 1970, although modifications have been made; Very strong maximum annual debt service (MADS) coverage of 10.6x based on actual federal fiscal 2011 obligation authority in fiscal 2011; A restrictive historical 4.0x MADS additional bonds test, looking to the lowest historical receipts received during the three years before the proposed bond issuance; and A fully funded debt service reserve fund. We believe credit weaknesses include the narrow pledge of FHWA reimbursements to the commonwealth, and the possibility of a decrease in pledged revenues resulting from a decline in revenues available for distribution to states and the commonwealth from the Highway Trust Fund or in the amounts appropriated by Congress; changes to the federal aid highway program; delays to congressional reauthorization; or the failure of Puerto Rico to prudently manage the reimbursement process. In addition, while there is a long history of federal funding of the Territorial Highway Program, there have been programmatic changes and modification to apportionments that could hurt the level of funding that the commonwealth receives. As with other GARVEE programs, Puerto Rico's bonds could be negatively affected by declines in federal revenues available for distribution from the HTF, amounts appropriated by Congress, changes to the federal aid highway program, or delays in Congressional reauthorization.

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Summary: Puerto Rico Highway and Transportation Authority; Federal or state grant programs

The bonds are special limited obligations of the authority payable solely from and secured by a first-lien pledge of the trust estate, which primarily consists of federal aid revenues to PRHTA or the trustee. This is the authority's only GARVEE bond issue, of which $93.6 million is outstanding. It matures in 2021. As a GARVEE issuance not through one of the 50 states, this program encompasses risk characteristics unlike most GARVEE-secured transactions. The lack of any backup pledge of revenues by the territory or other federal unobligated balances from previous years exposes the authority to very long delays in the annual distribution of federal money from the highway account of the federal highway trust fund for reimbursement to states and, in this instance, U.S. territories. Distribution of money under the formula in federal law (called apportionments) to Puerto Rico can be made only after the annual obligation amount is set by the FHWA, which occurs upon establishment of overall annual spending limits by congress and passage of the federal budget. As a territory, Puerto Rico lacks the same legislative influence as U.S. states and may collectively be on the losing end of any changes in apportionment formulae or overall funding levels under a program that has demonstrated a long, if variable, history in funding. Structural aspects to the financing that build in coverage and cushions in payment and deposit dates have mitigated these risks, in our view. Funds are directed to the trustee before flowing to PRHTA for other projects. The FHWA has sanctioned in its project approvals and a memorandum of agreement (MOA) the use of the federal highway reimbursement revenues to pay the debt service on the series 2004 bonds as reimbursement for the eligible construction costs of the 2004 projects and eligible ongoing bond-related costs and expenses, including the cost of replenishing any debt service reserve fund. The authority covenants that it will obligate or commit federal aid highway funds in a sufficient amount to pay debt service in the year before it obligates or commits such funds for other transportation projects. Also, time cushions for payment dates and the requisition process give PRHTA an ability to correct lags or delays in the process to ensure timeliness. In our view, potential delays in authorizations, changes in law, declining HTF balances, or Congressional or administrative modifications to grant programs will not end the long-standing practice of federal aid for transportation on which we base our GARVEE ratings. However, program rule changes, constrained funding sources, and federal budget pressures could lead to lower authorization and appropriation levels and diminish coverage, which we view as very strong for most GARVEE issues we rate. Weaker or varying levels of appropriations could reduce the overall level of support and predictability associated with the grant programs, which, in turn, could affect our ratings. Finally, until passing a new reauthorization program, we expect that Congress will continue to provide extensions as needed to allow uninterrupted construction programs and debt service payments; the current federal aid highway program expired Sept. 30, 2009, and has been extended several times, most recently to March 31, 2012.

Outlook
The stable outlook reflects Standard & Poor's expectation that the long-standing federal aid highway program will continue to receive significant funding, and that Puerto Rico will receive its historical share of annual Title 23 distributions. The outlook further reflects our expectation that Congress will pass legislation that ensures the continuing authorization of surface transportation programs. A significant decline in coverage, based on MADS or the commonwealth's failure to manage the reimbursement process prudently would be a rating concern.

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Summary: Puerto Rico Highway and Transportation Authority; Federal or state grant programs

Related Criteria And Research

USPF Criteria: Methodology And Assumptions: Rating U.S. Federal Transportation Grant-Secured Obligations, May 29, 2009 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

Standard & Poors | RatingsDirect on the Global Credit Portal | January 19, 2012

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