2008-05-15 01:23:57 -

- Fitch Ratings has assigned an 'AA' rating to the City of Charlotte's approximately $35.9 million refunding certificates of participation (COPs) (Transit Projects/Phase II), series 2008A. The certificates are expected to sell via negotiation on or around May 21. In addition, Fitch affirms the 'AA' long-term rating on the city's $257 million in outstanding parity transit COPs. Certificate proceeds will

be used to refund a portion of the city's outstanding 2005F variable rate certificates which were issued in anticipation of federal grants. The remaining $89 million of the 2005F certificates will be redeemed with federal grant funds by the end of August 2008. The Rating Outlook is Stable.

The 'AA' rating on the certificates of participation reflects the satisfactory legal provisions of this transaction and strong coverage of the city's installment payments by revenues from a sales tax levied for transit projects, as well as the city's credit strengths that have resulted in Charlotte's 'AAA' general obligation bond rating. The rating also incorporates the uncertainties inherent in the early stages of developing a complex regional transportation program, including construction and operating risks; the ultimate timing and amount of funding provided by state, federal, and other partners; potential shifts in population and demand; and cooperation among the system's decision-makers. However, flexibility in the scope and timing of the transit plan helps offset these uncertainties. In November 2007 opponents of the public transportation tax successfully petitioned for a referendum to repeal the tax, but the referendum was defeated by 70% of voters, demonstrating the public's interest in the success of the regional long-term transit plan. Fitch believes that the city may face political and fiscal challenges given the possibility that the anticipated funding sources, including the 1/2-cent sales tax, may not be sufficient to fund other corridors anticipated in the original plan, and that substantial increases in funding from other sources may be needed. In Fitch's view, the city will likely not continue expansion of the system until these issues are resolved.

The transit COPs issued to date represent the city's contribution to the $463 million South Corridor light rail project, the first of five planned light rail lines, which was completed on time in November 2007. Mortgaged assets, required to total at least 50% of all parity certificate principal, provide sound security for certificate holders. The financed projects are part of a regional long-term transit plan that the city considers to be important for the area's economic growth and development. In addition to the $6.7 billion for the program expected to be generated over the next 30 years from the sales tax and other local sources, the city expects significant funding from the federal government and state grants, including operating subsidies.

Fitch views the transit facilities, rolling stock, vehicles, and equipment that secure the city's installment payments to be essential to the city's operations. Installment payments are a general fund obligation subject to annual appropriation. Although not pledged to certificate repayment, city officials expect fixed-rate COP payments to be derived from proceeds of a 1/2-cent sales tax approved by Mecklenburg County voters in 1998, while the variable-rate COP payments are expected to be made from Federal Transit Administration New Starts grant receipts. Sales tax revenue has increased an average of 6.7% annually since fiscal 1995. Collections for the first 8 months of fiscal 2008 are approximately 2.8% higher than the same period in fiscal 2007.

By policy, additional debt can be issued if it is covered at least 3 times (x) on a gross basis by the tax or on a net debt service coverage basis that calls for operating revenues, including the sales tax, less operating costs to cover annual debt service (less 80% of debt service covered by federal formula grants) by 1.15x. Fitch believes that these coverage targets will be maintained because of the need for sales tax revenues to fund system operations.

The transit program is managed by the Charlotte Area Transit System (CATS), which serves Mecklenburg County and several surrounding cities in North and South Carolina. CATS is an enterprise fund of the city. The Metropolitan Transit Commission (MTC), which is composed of mayors and managers of Mecklenburg County, Charlotte and surrounding towns, is the policy board for CATS responsible for reviewing and recommending all long-range transportation plans with input from a citizens transit advisory group and a transit services advisory group. Each member of the MTC has an equal vote, regardless of the size of the community represented.

The city's excellent long-term credit quality is based on Charlotte's broad, diverse economic base and prominence as a major banking and commercial center, above-average wealth levels, sound tax base growth, excellent financial position with policies that ensure ample operating flexibility, and moderate direct debt levels. Overall debt levels have increased recently and are likely to increase further given the capital needs of the city and Mecklenburg County, especially for Charlotte-Mecklenburg Schools, but should remain affordable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Kelly McGary, 813-224-0492 (Tampa)
Michael McDermott, 212-908-0605 (New York)
Cindy Stoller, 212-908-0526 (Media Relations, New York)