AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the Massachusetts Water Pollution Abatement Trust (MWPAT):
--Approximately $198.2 million Massachusetts Water Pollution Abatement Trust State Revolving Fund (SRF) bonds, Subseries 17A
--Approximately $16.7 million Massachusetts Water Pollution Abatement Trust SRF bonds, Subseries 17B (Federally Taxable).
The bonds are scheduled to sell competitively the week of May 6th. Proceeds will be used to finance or refinance certain eligible water pollution abatement and drinking water projects.
In addition, Fitch affirms the 'AAA' rating for the following bonds:
--Approximately $3.4 billion in outstanding pooled loan program and state revolving fund bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured primarily by pledged borrower loan repayments, Commonwealth of Massachusetts (the commonwealth) contract assistance payments (CAP), debt service reserve funds, interest earnings from the reserve funds, and de-allocated reserves deposited into the deficiency fund. In addition, the outstanding series 15A, 15B and 2010A bonds are secured by Build America Bond (BAB) federal subsidy payments.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults equal to Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGHLY RATED LOAN POOL: More than 96% of MWPAT's loan pool consists of borrowers exhibiting investment grade ratings. Loan security is also strong as borrowers are secured by general obligation pledges of city and towns, local utility revenue pledges or a combination of both.
HIGH SINGLE-BORROWER CONCENTRATION: The loan portfolio has high borrower concentration, with the Massachusetts Water Resources Authority (MWRA) comprising 28% of total outstanding loan principal. Additionally, the top ten borrowers represent about 50% of the total loan principal. Programs with higher concentration are assessed at higher stress levels in Fitch's PSC.
CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The clean water SRF (CWSRF) and drinking water (DWSRF) are cross-collateralized with one another, which allow shortfalls in one fund to be covered by surpluses in the other, further enhancing bondholder security.
RATING SENSITIVITIES
REDUCTION OF STRUCTURAL ENHANCEMENT: A measurable decline in program enhancement such as a significant reduction in reserves or other pledged resources could pressure the rating. The Stable Outlook reflects Fitch's view that structural enhancement and program credit quality will be sufficiently maintained.
CREDIT PROFILE
MWPAT issues bonds to provide subsidized financing to municipalities throughout Massachusetts for water pollution abatement and drinking water projects. The bonds are issued pursuant to a master program resolution and separate series resolutions. MWPAT has historically used a bond series-based reserve fund model but, like many other SRFs, has since transferred to a hybrid-style model due to the current interest rate environment.
FINANCIAL STRUCTURE EXHIBITS SUFFICIENT DEFAULT TOLERANCE
Program-level semi-annual debt service coverage, which excludes amounts held in the reserve funds, is projected to be 1.0x. However, all-in coverage, which includes aggregate scheduled loan repayments, CAP amounts, debt service reserve funds, interest earnings, and de-allocated reserves divided by debt service, is approximately 1.2x. Due to this enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100.0% over any four year period (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability default hurdle (24%) 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. Fitch notes that it conservatively did not consider BAB subsidy amounts in its cash flow analysis.
BORROWER POOL LARGE, SOMEWHAT CONCENTRATED
The loan pool consists of approximately 290 borrowers. MWRA (senior and subordinate lien revenue bonds rated 'AA+' and 'AA', respectively, with a Stable Outlook by Fitch) remains the largest borrower in the pool program's portfolio, making up approximately 28% of outstanding loan principal, up from 22% during Fitch's last review in November 2012. The top 10 borrowers comprise over 50% of outstanding obligations. Concentration risk is largely mitigated by the high ratings of the portfolio. Additionally, programs with higher concentration are assessed at higher stress levels in Fitch's PSC.
Pledged revenue sources exhibit strong credit quality. Fitch estimates that at least 96% of program participants exhibit investment-grade credit quality, with the large majority rated 'A' or higher. Loan security is also strong as the loan portfolio is secured by general obligation pledges of city and towns, local utility revenue pledges or a combination of both.
Underlying loans are also subject to a state intercept mechanism in the event of delinquent repayments. Fitch conservatively does not consider the use of the intercept in its analysis, as evidence of each borrower's interceptable aid was not provided.
SOLID MIX OF RESOURCES SUPPORT PROGRAM
Loan repayments, combined with reserve fund investment earnings and the CAP, are used to pay SRF bond debt service. Use of the reserve earnings, the interest portion of direct loan repayments and contract assistance makes possible a below-market interest rate loan subsidy that is set by commonwealth statute.
CAPs, which are used to cover a portion of debt service on behalf of certain borrowers, constitute a general obligation of the commonwealth (GOs rated 'AA+' by Fitch), for which its full faith and credit are pledged. The assistance payments are pledged under the program resolution to the program trustee for the benefit of all holders of the MWPAT SRF bonds.
RESERVES AND DEFICIENCY FUND SIGNIFICANTLY ENHANCE BONDS
The program's reserves, which equal approximately $966 million or 29% of outstanding bonds, provide additional bond enhancement. As a series of bonds amortize, series reserves will be released to the program reserve, so that the original reserve level is maintained relative to outstanding bond principal. Released reserves for each series of bonds become available for deficiencies in payments of other statewide loan pool borrowers, as well as for deficiencies on pool program refunding bonds. Any excess funds are then transferred to the deficiency fund.
Amounts in the deficiency fund may be used to prevent bond defaults resulting from loan repayment interruptions in the other MWPAT SRF programs, including standalone programs for MWRA, South Essex Sewer District, and the City of New Bedford (each program rated 'AAA' by Fitch). The MWPAT financed large loans to these borrowers historically through separately secured programs to reduce concentration risk in the statewide pool. If not needed by the statewide loan pool or the standalone programs, all released reserves are eventually recycled and used to secure additional SRF loans.
PROVEN PROGRAM MANAGEMENT
As a result of strong loan underwriting and monitoring, the program has never experienced a default. Borrowers considered to comprise a material portion (1.5% of loan pool and rated lower than 'AA-') of the loan portfolio are monitored and reviewed on an annual basis.
SOLID INVESTMENT PRACTICES
Assets are invested in U.S. Treasury and Agency securities and in investment agreements, with providers that are highly rated and/or fully collateralized by direct U.S. Treasury or Agency securities with third-party custodians. The sustained credit quality of the reserve investments is important to maintaining the current 'AAA' rating.
RECENT TRANSITION TO HYBRID MODEL
With the series 16 bond issuance in May 2012, MWPAT transitioned to a hybrid model, where program equity was used to fund approximately 30 direct loans, which were pledged to bondholders. Under this structure, the interest portion of pledged direct loan repayments subsidize portions of bond debt service, while the principal portion of the direct loan repayments are pledged as further security to the related SRF bonds. Previous issuances under the reserve fund model utilized enhancement provided by reserves which were initially funded with federal capitalization grants.
The series 17 bonds are being issued under the hybrid model, with debt service coverage provided by both direct loans, made from program equity, and leveraged loans, which are funded using bond proceeds.
Additional information is available at 'www.fitchratings.com'.
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=704880
Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789205
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