DART’s credit score took a hit this week, as Fitch downgraded the transit agency’s bond rating in a move that critics of various debt-heavy proposals to fund the expensive Cotton Belt light rail extension will likely see as validation.
The credit ratings agency lowered its score, on a little less than $128 million in outstanding bonds from 2007 and 2008, by one iteration, from “AA to AA-.” DART asked Fitch for a rating on those decade-old bonds before they were sold, and, as is practice, the ratings agency issues periodic updates on outstanding bonds. The latest “surveillance analysis” was issued this week. (DART actually has closer to $3 billion in outstanding debt, but Fitch has only rated the bond issuances from 2007 and 2008.)
As DART CFO David Leininger noted in an email to DART board members, Fitch’s outlook on the transit agency “remains stable,” while Standard & Poor’s and Moody’s ratings for DART remain the same.
In lowering its rating, Fitch cited, among other things, DART taking on more debt as part of its future capital plan, naming the Cotton Belt as the most expensive project. The Cotton Belt itself, and plans to pay for it (and a D2 downtown subway alignment) with extensive borrowing, have drawn flack for their potential to derail DART’s ability to make much-needed improvements elsewhere. Sirens about using capital appreciation bonds to pay for either the Cotton Belt or D2—or, in an attempt to pacify both sides of a battle between Dallas and DART’s suburban board members, both—were sounding at least as early as September, as DART tried to account for the possibility of disappearing federal grants.
Fitch does say that “management anticipates increased system-wide ridership after completing this major capital project (the Cotton Belt), which Fitch believes is a reasonable assumption that could boost associated operating revenues in the intermediate term.”
In a letter to Fitch’s director, Leininger, the DART CFO, disputed the lowered rating and critiqued Fitch’s methodology:
We disagree with your report statement that “bondholders’ claim on pledged revenues would not be protected in the event of a bankruptcy filing by the authority.” Bankruptcy is a highly unlikely event and should not be the basis for a rating adjustment. The holders of DART’s bonds are well protected…
The rating adjustment is apparently premised largely on a concern about future actions of the agency and a change in rating methodology since the last rating two years ago. The change is associated with a Fitch Ratings report published in June of 2017, “Rating Criteria for Public/Sector Revenue-Supported Debt.” Since nearly all of the future capital projects were clearly defined in the Twenty-Year Financial Plan approved at the time of Fitch’s last review in 2016, the rating agency’s methodology change is clearly what triggered the recent action.