KBRA Upgrades Bank-Enhanced Ratings to A+/K1 for Pennsylvania Turnpike Commission Variable Rate Turnpike Revenue Bonds Series A of 2020; Outlook Remains Stable

17 Aug 2023   |   New York


KBRA upgrades the bank-enhanced long-term rating for the Pennsylvania Turnpike Commission Variable Rate Turnpike Revenue Bonds, Series A of 2020 to A+, from A, and affirms the bank-enhanced short-term rating for the Bonds at K1. The ratings are based on: (i) an analysis of the structural and legal protections of the transactions and (ii) KBRA’s August 8, 2023 ratings for Barclays Bank PLC (the Bank), the provider of the irrevocable direct pay letter of credit (DPLC) supporting the Bonds. The upgrade of the long-term rating and affirmation of the short-term rating mirror recent KBRA rating actions for the Bank.

Key Credit Considerations

The rating actions reflect the following key credit considerations:

Credit Positives

  • Strong structural and legal provisions of the irrevocable direct pay letter of credit effectuate substitution of credit and liquidity risk of the Bank for that of the Commission.
  • Barclays Bank PLC, the DPLC provider, is a subsidiary of Barclays PLC (the group), a leading UK financial institution with strong franchises in retail, SME and corporate banking. The group has overseas operations in around 40 countries through credit card franchise, payments, and corporate investment banking. The bank’s credit strengths as further enumerated in KBRA’s August 8, 2023 rating action include a diversified business model, sound capitalization, strong liquidity and healthy asset quality.

Credit Challenges

  • The ratings are constrained by a significant portion of Barclays’ earnings coming from investment banking activities which are fundamentally volatile and can pose considerable risk management challenges.
  • Bank asset quality is likely to weaken given the challenging economic environment with high interest rates and inflationary pressures that negatively impact customers’ affordability. That said, KBRA expects the deterioration to be manageable due to the group’s conservative underwriting standards and prudent provisioning level.
  • Reliance on direct pay letter of credit exposes bondholders to systemic risk of the financial institutions sector.

Rating Sensitivities

For Upgrade

  • A rating upgrade is not expected in the near term. However, a sustained improvement in Bank earnings, while maintaining healthy asset quality and strong capital could potentially facilitate additional positive rating momentum over time.

For Downgrade

  • A rating downgrade is unlikely in the near term, though a severe and/or prolonged setback in the economic recovery or material weaknesses in Bank risk management leading to a substantial deterioration in asset quality, earnings, or capital, may result in negative ratings action. The ratings are also sensitive to the economic impact of Brexit.

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