Analyses of GARVEE Bonding Capacity 2008

V. Summary of Alternative Assumptions

For the 2008 bonding capacity analyses, we used the MMD “AA” interest rate scale, which corresponds with the actual underlying ratings received for the first issue of GARVEE bonds.  The two alternative scenarios for market conditions used in these analyses are as follows:

1. Base Case: Based on the February 29, 2008 MMD AA interest rate scale.
2. Market Sensitivity Case: Base Case plus 100 basis points.

Many observers believe long-term interest rates will increase from the current levels.  For this reason, and based on the expected short-term maturity structure of the State’s current and future GARVEE obligations, a 100 basis point increase in interest rates is used for the market sensitivity analyses.

Two alternatives for the final maturity of the bonds were analyzed for each case.  The table below summarizes the range of assumptions for the sensitivity analyses.  The different scenarios for each factor combine for a total of four different analyses.

See Attachment B for the detailed assumptions used in each sensitivity analysis.

It also should be noted that the current analyses, by necessity, requires significant simplification as compared to the myriad of structuring nuances that would be involved in actual bond sales.  As a result, certain ambiguities or alternative interpretations could lead to somewhat differing results in practice.  One example of a simplification, common to all scenarios, is the assumption that all GARVEE bonds within the capacity of a given scenario would be issued in a single, initial year and not staggered over multiple years, as typically would be expected in a bonding program of significant magnitude.

If, instead, such bonds were staggered and this financing structure was assumed to have a fixed “end date” represented by the assumed final maturity used in each scenario, each resulting measure of maximum bonding capacity would have to be adjusted downward.  This would be necessary because the GARVEE bonds issued in subsequent years would have a shorter period during which to amortize principal before the fixed end date.  This would increase the annual debt service necessary for a given par amount of bonds, causing a reduction in total bonding capacity, assuming a fixed amount of annual revenues for each scenario.

Alternatively, this simplification would not have this constraint on capacity if future financings were assumed to be structured on a “rolling maturity” basis. That is, with each GARVEE bond issued in subsequent years within each scenario having exactly the same underlying terms, such as total years to maturity and interest rate, regardless of the timing of any future bond issuance.  This latter simplification would also assume a fixed amount of annual revenues for each scenario.

This discussion is offered as an example, which is by no means exhaustive, of the implications of the necessary simplifications involved in any analysis of bonding capacity given current uncertainty about the “real life” conditions that will exist at the time of any future issuance of GARVEE bonds or obligations.  Therefore, care should be exercised in using these analyses to avoid erroneous interpretations or conclusions.