CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA+' rating to the following New York State Environmental Facilities Corporation's (EFC) state clean water and drinking water revolving fund (New York City Municipal Water Finance Authority [MWFA] Project) bonds:
--$378.4 million second resolution subordinated revenue bonds, series 2013A.
Bond proceeds will be used to refund certain MWFA senior lien bonds previously issued for the authority's water pollution control and drinking water projects.
In addition, Fitch affirms its ratings on the following EFC bonds:
--$2.8 billion in outstanding state clean water and drinking water revolving fund (MWFA Project), second resolution subordinated revenue bonds at 'AA+';
--$90,000 in outstanding NYSEFC state water pollution control revolving fund (NYC Municipal Water Finance Authority Project), first resolution revenue bonds at 'AAA';
--$1.9 billion in outstanding clean water and drinking water revolving funds (MWFA Project), second resolution revenue bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The senior and subordinate bonds are secured by MWFA loan repayments; debt service reserve funds (consisting of separate reserve funds for senior bonds and subordinate bonds); interest earnings from the debt service reserve funds; and deallocated (released) reserves from the EFC's 1991 master financing indenture (MFI) bonds, which are available first to cure deficiencies in the EFC 1991 MFI and MWFA senior bonds and then the MWFA subordinate bonds.
KEY RATING DRIVERS
STRONG LOAN SECURITY FROM MWFA: The high ratings on the bonds primarily reflect the strong credit quality of loan repayments from MWFA, whose first and second lien bonds are rated 'AA+' with a Stable Outlook by Fitch.
SIGNIFICANT SENIOR LIEN RESERVES: The 'AAA' senior lien bond rating considers the strong loan default tolerance derived from aggregate pledged reserves totaling 46% of senior bond par outstanding.
LIMITED RESERVE ENHANCEMENT FOR SUBORDINATE BONDS: Reserves will likely be released during the last several years of maturity of the subordinate bonds. Therefore Fitch does not believe they provide sufficient credit enhancement to rate the bonds higher than the MWFA subordinate lien bonds. A new general reserve also provides limited enhancement as it is funded with MWFA's own revenue.
RATING SENSITIVITY:
Decrease in MWFA's rating: A measurable decline in MWFA's credit quality would negatively impact the rating. The Stable Outlook reflects Fitch's view that credit quality will be sufficiently maintained.
Reduction of Structural Enhancement: A significant decrease in pledged senior lien reserves or program releases (for subordinate bonds) would pressure the rating.
CREDIT PROFILE
The EFC finances most of its state revolving fund (SRF) loans to the MWFA by issuing bonds under a master trust indenture separate from the EFC's 1991 and 2010 MFIs for all other leveraged SRF participants. SRF loans made to the MWFA are typically funded outside the EFC's MFI pooled loan programs (both MFI programs rated 'AAA' with a Stable Outlook by Fitch) to mitigate single-borrower concentration risks resulting from the MWFA's significant debt load.
STRONG MWFA CREDIT QUALITY
EFC MWFA's senior lien bondholders are afforded strong loan security and enhancement from significant reserves. The MWFA's first general resolution bond repayments are on parity with the first resolution water pollution control loan repayments made to EFC, while the MWFA's second general resolution bond repayments are on parity with MWFA's second general resolution loan repayments to EFC.
STRONG RESERVES AND ENHANCMENT FOR SENIOR LIEN
After this issuance combined senior lien reserves are projected to total approximately $862 million, or 46% of outstanding EFC MWFA senior bond principal. Debt service on EFC MWRA senior bonds is paid from MWFA loan repayments and reserve earnings. The reserves themselves are also pledged to pay debt service in the event of deficiencies. The senior bonds can withstand 100% loan repayment deficiencies over the next four years and still meet debt service payments. The senior bonds are further secured by released reserves from the statewide 1991 MFI, after meeting any potential deficiencies for 1991 MFI senior and subordinate bonds. The 1991 MFI reserves as of July 1, 2013, are projected to be $262 million, or approximately 47% of the outstanding senior 1991 MFI bond principal; scheduled reserves releases over the next four years average $18 million, down from $29 million since Fitch's last review.
ENHANCEMENT IN FINAL YEARS LIMITED
EFC MWFA's subordinate lien bonds are secured by loan repayments from the MWFA, enhanced by reserves released after meeting any potential deficiencies for 1991 MFI bonds and EFC MWFA senior bonds, as well as pledged subordinate bond reserves for certain series totaling $147 million or 5% of outstanding subordinated bond principal. The amount of dedicated reserves for the subordinate lien has increased with this issue, as EFC is transferring from its MWFA senior lien a $104 million reserve dedicated to the series 2013A bonds (maturing in 2033).
Fitch considers in its analysis potential reductions in 1991 MFI reserves including releases due to borrower defaults consistent with an 'AAA' stress scenario, given the 1991 MFI pool's size, credit quality and diversification. Fitch also applies a stress to the EFC MWFA senior lien scheduled releases similar to that which would be used for MWFA if it were the largest risk-weighted borrower in a pool. Even with these reductions, Fitch estimates that aggregate reserve releases exclusive of subordinate bonds' reserves would at minimum cover about 23% of the subordinate annual debt service over the next four years (down from 42% last year), providing a lower but still satisfactory level of enhancement to the quality of the MWFA's loan repayments for subordinate debt.
However, the releases from the 1991 MFI will be depleted by fiscal year 2037, the last year in which bonds issued under that MFI mature. The indenture's lien was closed in 2010. Further, the decline in releases may be accelerated by the potential future refunding of bonds into the 2010 MFI for interest rate savings. EFC MWFA senior lien releases will also be eliminated by fiscal 2037 if no additional bonds are issued under the MWFA senior lien, which requires the funding of pledged reserves.
Consequently, the EFC MWFA subordinate bonds, which are scheduled to mature in 2041, will likely not have significant enhancement during the last several years of maturity, which limits their value for credit quality. While the 2010 MFI is allowed to provide enhancement to other EFC indentures (including EFC MWFA subordinate bonds) from its excess cash flows, if needed, Fitch believes the 2010 MFI program's ability to leverage to 1.15 times debt service coverage makes dilution of excess cash flows a possibility.
INCREASED SUBORDINATE RESERVES PROVIDE LIMITED ENHANCEMENT
With the 2013A issue, EFC established a new $213 million general reserve fund for any series of MWFA subordinate lien bonds. Funding for the reserve is currently derived from MWFA annual cashflow payments, ranging between $9 million to $12 million. The payments are a repayment of a separate direct loan from EFC's non-pledged equity. While Fitch recognizes that the payments overcollateralize the subordinate lien's debt and provide increased coverage, they do not affect MWFA's underlying credit risk of 'AA+, on which the subordinate lien rating is based.
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);
--'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=709499
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707257
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794272
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