Fitch Rates Kentucky ALCo's $200MM Road Fund Project Notes 'AA-/F1+'.

NEW YORK -- Fitch Ratings has assigned an 'AA-/F1+' rating to the Kentucky Asset/Liability Commission's (ALCo) project notes, 2007 road fund first series A (up to $200 million). An initial $150 million tranche in project notes is expected to price Sept. 24, 2007, through negotiation

The short-term 'F1+' rating is based on the liquidity support provided by Dexia Credit Local (Dexia), acting through its New York branch, in the form of a $200 million standby note purchase agreement (the Standby) supporting the ALCo notes. The Standby provides for payment of the purchase price of tendered bonds, and is sized to cover the principal amount of the notes, plus 195 days of interest at the maximum interest rate of 12% based on a year of 365 days. The Standby will expire on Sept. 24, 2010, unless extended, or upon the occurrence of other events of termination, in accordance with its terms. Fitch's 'F1+' short-term rating on the notes will expire upon any expiration or termination of the Standby. While a total of $350 million of notes has been authorized, an increase in the size of the Standby is a precondition for issuance of notes in an outstanding amount greater than the $200 million covered by the Dexia Standby.

The ALCo notes initially bear interest in the commercial paper rate mode but may be converted to a daily, weekly, or fixed rate mode. While the notes bear interest in the commercial paper rate mode interest is payable at the end of each commercial paper period, except that when a commercial paper period exceeds 182 days, there will be an additional Interest Payment Date 182 days after the first day of such Commercial Paper Period and a regular Interest Payment Date at the end of the Commercial Paper Period. The notes are subject to mandatory tender; (i) on the date the interest rate on the notes is converted to a different interest rate mode; (ii) upon the substitution or expiration of the SPA; and (iii) for notes bearing interest at the Commercial Paper Rate, the end of each Commercial Paper Period. The notes are also subject to optional redemption pursuant to the terms of the trust indenture.

Security for the ALCo notes rests on the credit of the commonwealth of Kentucky (the commonwealth), as financing payments are ultimately derived from legislative appropriations. The commonwealth's 'AA-' lease-secured debt rating recognizes the well-established mechanism for lease financing, highlighted by automatically renewable leases, and a long history of prompt executive actions to address potential financial imbalances, which are countered by successive high debt authorizations and a manufacturing-focused economy that has offset overall economic expansion. The commonwealth appears successful thus far in absorbing the effects of a 2005 tax reform and modernization measure. Prior to this issue, Kentucky's total net tax supported debt approximates $5.4 billion, which equals a moderate 4.3% of 2006 estimated personal income.

Proceeds of these ALCo notes will be used to provide interim financing for certain highway projects in anticipation of bonds to be issued by the turnpike authority of Kentucky, which serves as the commonwealth's vehicle to finance highways. The notes are secured by payments received by ALCo pursuant to a financing/lease agreement between ALCo, the turnpike authority, the transportation cabinet, and the finance and administration cabinet. The financing/lease agreement requires the transportation cabinet to seek legislative appropriations sufficient for debt service as long as the notes are outstanding and is automatically renewable for successive biennial periods through June 30, 2028, the final maturity date of the notes under the indenture.

Lease rentals from the transportation cabinet to the turnpike authority are payable from the state's road fund. Road fund revenues consist principally of fuel, motor vehicle usage, license, and privilege taxes and fees. Unaudited, total revenues available for lease-rentals climbed nearly 7% in fiscal 2007, inclusive of legislative changes to tax and fee rates and to revenue-sharing requirements, and covered lease-rental obligations 6.4 times (x) before and 3.7x after operating and maintenance costs. The motor vehicle usage tax remains the largest contributor to available revenues, at nearly 42% of receipts, and grew 4% in fiscal 2007.

Favorable revenue performance bolstered the commonwealth's general fund in fiscal 2006, bringing the ending undesignated balance to $681 million, or 8.1% of fiscal 2006 revenues; the highest level since fiscal 2002. At the end of fiscal 2007, or midway through the biennium, the general fund enjoyed a budgetary surplus of $138 million, as receipts were 2.4% higher than fiscal 2006. In a planned effort to manage the fiscal effects of the tax reform, the current balanced budget relies on use of the general fund balance, along with other fund transfers and appropriation lapses, and continues to control expenditures, especially in Medicaid. The funding level for the Kentucky Employees Retirement System was 61.5% as of June 30, 2006, down significantly from 2002. The governor has created a Blue Ribbon Task Force to study ways to meet the Commonwealth's pension liabilities and Other Post-Employment Benefits (OPEB) obligations.

The commonwealth's economy continues its gradual expansion, contributing to increasing state revenues. Between 2000 and 2003, employment in the state declined 2.3%, which was more than the national rate of job loss. In 2004, the economy began to recover and posted gains of 1.4% in 2005 and 1.1% in 2006, versus the national expansion of 1.7% and 1.8%, respectively. Through July 2007, employment was up 0.6% over a year ago, about half the U.S. rate of increase. Despite growth, per capita personal income over the last 10 years has consistently been 82% of the U.S. average for this measure and currently ranks 46th among the states.

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.