NEW YORK--(BUSINESS WIRE)--Fitch Ratings upgrades the ratings on the following to 'AA':
--Michigan State School Bond Loan Fund (SSBLF) program rating;
--Michigan Municipal Bond Authority (MBA) local government loan program revenue bonds, series 2003C.
The Rating Outlook is Stable.
SECURITY
The program rating reflects the state's obligation to lend monies to school districts that would otherwise be unable to pay principal and interest when due on qualified school bonds.
KEY RATING DRIVERS
UPGRADE LINKED TO STATE CREDIT IMPROVEMENT: The ratings for the SSBLF program and the MBA local government loan program revenue bonds, series 2003C, are based on the credit quality of the state of Michigan, whose GO bonds are rated 'AA' by Fitch. The upgrade on the SSBLF program and the MBA local government loan program revenue bonds, series 2003C, reflects Fitch's recent upgrade of the state of Michigan's GO bonds.
CONSTITUTIONAL AUTHORIZATION: Michigan's constitutional and statutory requirements provide for the state to lend funds to school districts that would otherwise be unable to pay principal and interest when due on their qualified general obligation (GO) unlimited tax bonds for any reason.
RATING SENSITIVITY
CHANGES IN STATE CREDIT QUALITY: The ratings are sensitive to changes in the state of Michigan's GO bond rating, to which the ratings are linked.
CREDIT PROFILE
The 'AA' ratings on the SSBLF program and on the MBA local government loan program revenue bonds, series 2003C, reflect Michigan's constitutional and statutory requirements to lend funds to school districts that would otherwise be unable to pay principal and interest when due on their qualified GO unlimited tax bonds for any reason. Michigan has authority to issue GO bonds and/or notes to provide enhancement under the long-established SSBLF program, and the state constitution prohibits impairment of bondholder rights. The rating is thus linked to the state's credit quality because of the very strong legal obligation for the state to fulfill its obligations under the program.
The qualification process for school district debt is comprehensive, requiring a review by the State Treasurer that covers the scope of the project and its estimated costs, the total bonded debt of the borrowing district, the estimated mill rate required to pay the debt, information regarding enrollment projections in the district, and evidence that the additional debt will not preclude repayment of outstanding qualified loans. Outstanding bonds totaled more than $13.6 billion as of Dec. 31, 2012.
Eligible districts seeking a draw from the state are required to file a draw request with the State Treasurer not less than 30 days before debt service is due, and qualified loans from the state would be made not less than six days before a debt service payment was due. Loans to school districts for debt service are made in cases where the required mill levy to service school district debt exceeds certain predetermined levels. Nearly $1.4 billion in loans was outstanding as of Dec. 31, 2012.
Under multiple reforms to the loan program enacted earlier in 2013 to improve program management, after the loan balance reaches $1.8 billion the state will only qualify new bonds for which no program borrowing is expected to be necessary. The reforms require a fixed maximum repayment date for loans and annual readjustment of local mill rates to ensure sufficient levies to repay loans, among other changes. While the changes are expected to limit school financings that rely on loans and lower state GO bond issuance associated with funding loans, they do not affect the strength of the state's commitment to bonds qualified under the program.
The MBA's local government loan program revenue bonds, series 2003C, are payable from underlying state qualified school bonds placed with the Michigan Finance Authority (into which the MBA was merged in 2010), which are unlimited tax local school district GO bonds qualified for participation in the SSBLF. Such qualified bonds are backed by the constitutional and statutory provisions noted above.
The state's GO bonds were upgraded on April 2, 2013. The upgrade reflected the state's rebounding economic performance, including the improved competitive posture of the state's auto industry after its restructuring. Moreover, the state has made considerable progress in bolstering its finances, with structurally balanced budgeting, growing reserves and an improving cash balance.
For further information on the rating of the state of Michigan, please see Fitch's rating action commentary dated April 2, 2013, 'Fitch Upgrades Michigan GOs to 'AA'; Outlook Stable', at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012;
--'Rating Guidelines for State Credit Enhancement Programs', April 18, 2013.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796782
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