MuniCREDIT Insights: Tracking Dedicated Tax/Revenue Obligors

Our proprietary MuniCREDIT Mapping methodology, a MuniCREDIT Solutions add-on, specifically identifies Dedicated Tax/Revenue issues across all major sectors. We show how you can use it to identify and review data on the exact pledged revenues, and more.

One of the unique aspects of the municipal market is an issuer’s ability to carve out a set of revenue streams and pledge only those revenues as security for a bond issue. Since there is no legal recourse to the issuer’s other revenues, it’s important for bondholders to be able to track the pledged revenues and related debt service coverage ratios.

DPC Data’s proprietary MuniCREDIT Mapping methodology, a component of our MuniCREDIT Solutions, specifically identifies Dedicated Tax/Revenue issues across all major sectors. It allows users to identify and review data on the exact pledged revenues, along with the related debt service requirements and debt service coverage ratios.

Example: Dedicated Tax/Revenue Structure

To illustrate, let’s look at the Bi-State Development Agency of the Missouri-Illinois Metropolitan District, Combined Lien Mass Transit Sales Tax Appropriation Refunding Bonds Appropriation Refunding Bonds, Series 2020A.

While it may not be obvious from its very lengthy name, the District operates a joint regional public transit system serving the following areas: (1) the City and County of St. Louis, MO; (2) the Counties of St. Charles and Jefferson, MO; and (3) the Counties of Madison, St. Clair and Monroe in Illinois.

Based on the District’s function and the potential use of bond proceeds, one would be tempted to classify the Series 2020A under the “Transportation” sector. That would be incorrect, however, since the security pledged to the bonds really has nothing to do with the District’s transportation activities.

The Series 2020 bonds are actually payable only from amounts appropriated annually by the City of St. Louis and the County of St. Louis from a dedicated Transit Sales Tax levied by both the City and the County. The Official Statement states in no uncertain terms that: “the Bonds are not secured by a mortgage or other lien on any portion of the Transit System or any other property. In addition, the Bonds are not secured by revenues of the Transit System or any state or federal grants awarded to support the operation, maintenance or construction of the Transit System.”

Based on credit and not use of proceeds, we would define the Direct Obligor for the Series 2020A issue as the “ST LOUIS CITY & COUNTY COMBINED TRANSIT SALES TAX (MO)” and classify it in the “General Government/Local/Dedicated Tax Revenue” sector.

The table below shows the data points we have collected for this obligor, as viewed through our MuniCREDIT Online web-based application:

Note the following:

Both the total amount of dedicated revenue debt and the annual debt service requirements are captured;
We also capture the various lien and asset claim levels, if available in the issuer’s disclosure documents;
Debt service coverage ratios are captured on an “as reported” basis and also computed based on a standardized formula. In this case, the two approaches happen to match, but that may not always be the case, as covenanted coverage ratio formulas may vary significantly from one bond indenture to the next.

“Direct” versus “Base Obligors”

Users who still want to analyze the dedicated revenue structure in the overall context of the “host” issuer (the District in this case) can access the financials for such host through our capital structure linkage. The Dedicated Revenue obligor will be tagged as a “Direct Obligor,” and the host issuer(s) tagged as a “Base Obligor.” In this case, our system will tell you that MISSOURI ILLINOIS METRO DIST (BI STATE DEV AGY) (MO) is tagged as a “Base Obligor” for the ST LOUIS CITY & COUNTY COMBINED TRANSIT SALES TAX (MO), thus allowing you to check the financials for the District with ease.

ESG Considerations for Dedicated Tax/Revenue structures

In our opinion, ESG issues shouldn’t apply directly to Dedicated Tax/Revenue structures. Ideally, this type of credit should be rolled up into the Base Obligor’s ESG profile.

Conclusion

The Dedicated Tax/Revenue structure has been used with increasing frequency in recent years, particularly among lower-rated issuers as a way to obtain better ratings from rating agencies. There is still an ongoing debate among analysts as to whether such dedicated structures are truly divorced from their host’s financial condition.

Throughout the pandemic environment of the past two years, it would have been critical to know whether one has exposure to sales tax credits (which performed well throughout the crisis) or to fuel tax credits (which probably did not fare as well). Thus, for risk identification and management purposes, DPC Data’s Obligor and Sector Mapping system should be a very useful addition to any institutional investor’s security master.

Note: for more details on our MuniCREDIT Solutions, which covers over 24,000 municipal obligors across all major sectors, please contact us at sales@dpcdata.com.

Disclaimer: This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase and sale of any security. Although the information contained in this report has been obtained from sources we deem reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. Investors should obtain and read the official statements related to the securities discussed. All opinions are only valid as of the report date and are subject to change without notice

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