NEW YORK & 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:
--$345 million second resolution subordinated revenue bonds, series 2014A.
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+';
--$1.8 billion in outstanding clean water and drinking water revolving funds (MWFA Project), second resolution revenue bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
Senior 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 then EFC MWFA senior bonds.
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. Series specific and general reserves also secure the EFC MWFA subordinate lien bonds.
Senior and subordinate EFC MWFA bonds are also secured by excess cash flows from the 2010 MFI.
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 54% of senior bond par outstanding.
LIMITED RESERVE ENHANCEMENT FOR SUBORDINATE BONDS: The reserve and excess cash flow profile for subordinate bonds does not provide enhancement above the 'AA+' underlying subordinate MWRA rating. Fitch expects reserves to be released earlier than scheduled and unavailable for subordinate MWFA bondholders due to refunding activity.
RATING SENSITIVITY:
DECREASE IN MWFA'S RATING: The 'AA+' subordinate rating is sensitive to shifts in MWFA's underlying credit quality.
REDUCTION OF STRUCTURAL ENHANCEMENT: The 'AAA' senior rating is additionally sensitive to a decrease in pledged senior lien reserves and/or program releases from the 2010 MFI.
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. Fitch maintains an underlying 'AA+', Stable Outlook on MWFA's first and second general resolution revenue bonds.
STRONG RESERVES AND ENHANCEMENT FOR SENIOR LIEN
Combined senior lien reserves after this issuance are projected to approximate $776 million, or 54% 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 March 31, 2014, are projected to be $211 million, or approximately 51% of the outstanding senior 1991 MFI bond principal. Scheduled reserve releases over the next four years have declined slightly to an average of $15 million (from $18 million) due to refunding.
INCREASE IN DEDICATED SUBORDINATE RESERVES
The amount of dedicated reserves for the subordinate lien increases with this issue. EFC is transferring from its MWFA senior lien an $85 million reserve pledged to the series 2014A bonds (24% of par; maturing in 2034). Other series specific subordinate lien pledged reserves include $104 million for series 2013A (26% of par) and approximately $45 million for series 2007C (33% of par).
RESERVE RELEASES PROVIDE MINIMUM COVERAGE
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.
Fitch stress tests show aggregate reserve releases (exclusive of subordinate bonds' reserves) provide minimum coverage of about 27% of the subordinate annual debt service over the next four years (down from 42% in 2012).
SUBORDINATE RESERVES ADD LIMITED ENHANCEMENT
Fitch believes that available reserves for subordinate bonds add limited value to credit quality. EFC MWFA subordinate bonds (maturing in 2041) will likely not have significant enhancement during the final four years of maturity as releases from the 1991 MFI will be depleted by fiscal year 2037; the final maturity under the 1991 closed lien. However, several scenarios could change the out-year subordinate lien reserve picture: released reserves could decline at an accelerated rate if bonds are refunded into the 2010 MFI; EFC MWFA senior lien releases could be eliminated by 2037 absent additional bonds; or excess cash flow could be available with the continued growth of the 2010 MFI pooled program.
Excess cash flow released from the 2010 MFI is projected at minimum to cover about 24% of subordinate annual debt service during the last four years of bond maturity compared to a minimum coverage of 16% calculated in Fitch's review last year. While the 2010 MFI is pledged as enhancement to other EFC indentures (including EFC MWFA subordinate bonds) from its excess cash flow, if needed, Fitch believes the 2010 MFI program's ability to leverage to 1.15x debt service coverage makes dilution of excess cash flow a possibility.
EFC MWFA's subordinate lien bonds also benefit from a $213 million general reserve fund (6.8% of outstanding bonds) for any series of MWFA subordinate bonds. Funding for the reserve is currently derived from MWFA annual cashflow payments, ranging between $10 million to $14 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, the risk of nonpayment is linked to MWFA's underlying 'AA+' rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria'
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria'.
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 (2013 Peer Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719991
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823360
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