AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Michigan Finance Authority (MFA) state revolving fund (SRF) bonds:
--Approximately $141.9 million clean water revolving fund subordinate refunding bonds, series 2013;
--Approximately $34.3 million drinking water revolving fund subordinate refunding bonds, series 2013.
The bonds are scheduled to sell via negotiation during the week of Jan. 22nd.
The series 2013 bonds are being issued to refund certain series of outstanding clean water and drinking water revolving fund revenue bonds, series 2004, and to pay for the cost of issuance. MFA's SRF program was created to provide loans to local governmental entities within the state used for financing eligible water pollution control and drinking water projects.
At this time, Fitch also affirms the 'AAA' ratings on the following MFA bonds:
--$1.8 billion in outstanding clean water and drinking water revolving fund revenue bonds.
The Rating Outlook is Stable.
SECURITY
The primary security for all bonds issued under the master trust indenture is loan repayments from over 245 borrowers. Debt service reserve funds are also available to certain series of bonds. All bonds are secured by excess available monies in the released (de-allocated) accounts from the individual clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) programs. Released monies are available to subordinate bonds only after the senior bonds' scheduled debt service has been paid and any reserve requirements met.
KEY RATING DRIVERS
HIGH DEFAULT TOLERANCE: Fitch's cash flow modeling demonstrates that the programs can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
STRONG POOL CREDIT QUALITY: Pool credit quality is solid. Fitch estimates that more than 85% of MFA's loans are rated at least investment grade by Fitch or one of the other nationally recognized statistical rating organizations (NRSRO). Additionally, underlying loan provisions are strong with virtually all loan principal secured by water and/or wastewater revenue pledges, general obligation pledges, or combination pledges.
MODERATE BORROWER CONCENTRATION: The top 10 obligors in the combined SRFs represent about 54% of the aggregate pool. In addition, approximately 21% of the aggregate pool consists of loans to the city of Detroit (senior/second-lien sewer revenue bonds rated 'A-'/BBB+' respectively by Fitch). Fitch views concentration risk as mitigated given the credit quality of the pool combined with the high default tolerance levels exhibited by the financial structure.
CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The CWSRF and DWSRF are cross-collateralized with one another, which allow shortfalls in one fund to be covered by surpluses from de-allocated reserves and coverage in the other.
CREDIT PROFILE
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch calculates all-in debt service coverage, which includes total scheduled loan repayments plus reserve balances and account earnings divided by debt service on the revenue bonds to be approximately 1.5x. Because of this coverage, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over any four-year period and assumed recoveries per Fitch's criteria. This is in excess of Fitch's 'AAA' liability default hurdle (28%) as produced by the PSC, which is derived based on the overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
BORROWER POOL EXHIBITS MODERATE CONCENTRATION
The combined SRFs are composed of over 245 obligors. Although there are a large number of individual borrowers, concentration is relatively high in comparison to similar municipal loan pools, with the top 10 representing about 54% of the aggregate loan pool. Single obligor concentration is also high, with the wastewater obligations from city of Detroit representing 21% of the total pledged loan pool. While Detroit is expected to remain the largest single program participant, management does not anticipate participation to grow materially in the near term.
EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING
MFA uses conservative underwriting guidelines and sound investment policies. More than 85% of the combined pool participants are of investment grade quality as reflected by public investment-grade ratings from one of the NRSROs. Borrowers that do not have public investment-grade ratings are required to exhibit investment-grade characteristics through state credit support or private credit assessments or must otherwise provide an alternative security pledge or pledges. In addition, borrowers must demonstrate, among other things, rates and charges sufficient to cover all operational expenses of the project including the ability to pay loan principal and interest. Strength in underwriting is demonstrated by the fact that neither pool has ever experienced a default or delinquency.
MFA, the successor to the Michigan Municipal Bond Authority, administers several pooled loan programs. In addition to the CWSRF and DWSRF programs, MFA also facilitates Michigan's local government and school loan programs. MFA is a public corporate body, separate and distinct from Michigan's state government. However, the authority's administrative staff is under the direction and supervision of the State Treasurer.
STRUCTURAL CHARACTERISTICS
Under the indenture, MFA is authorized to issue bonds with various types of designations. All currently outstanding clean water and drinking water bond series under the indenture are designated as either pooled project bonds (PPB-I, SRB-I or PPB-III), or revolving fund revenue bonds (RRB-I or RRB-II).
The SRB-I bonds were established as a new class of subordinated bonds under the PPB-I designation in 2010. Loan repayments are the primary security for the SRB-I bonds. While the SRB-I bonds are subordinate to the PPB-I bonds, abundant released account moneys are available to the SRB-I bonds if there are any loan deficiencies, before they are made available to any other program designations. The 2013 bonds are SRB-I bonds.
STRUCTURAL ENHANCEMENT PROVIDED BY OVERCOLLATERALIZATION AND RESERVES
Additional enhancement to the bonds is provided by overcollateralization, or surplus amounts of loan repayments remaining after paying debt service on the bonds. Also, reserve accounts have been funded for certain series of bonds. As the loans/bonds amortize, these reserves are released from each series' dedicated reserve account to the extent that remaining reserves for each series equal their required minimum. Combined reserves total $713.5 million, or 40% of bonds outstanding.
A revenue account in the revenue fund has also been established for each series of bonds. As of December 2012, the combined revenue fund balance was $157.6 million or 8.7% of bonds outstanding.
CROSS-COLLATERALIZATION PROVIDES TERTIARY PROTECTION
The CWSRF and DWSRF are cross-collateralized, meaning surplus amounts released from each SRF program are available to cure deficiencies in the other. This feature increases the diversity of the loan pool and lessens the risk of any one borrower's default eroding reserve balances and threatening bondholder payments.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012);
--'Rating Guidelines for State Credit Enhancement Programs' (June 19, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677858
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681239
Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938
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