NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-/F1+' to the District of Columbia Water and Sewer Authority's $100 million public utility subordinate lien multimodal revenue bonds series 2014B consisting of the following subseries:
--$50,000,000 subseries 2014B-1,
--$50,000,000 subseries 2014B-2.
The Rating Outlook is Stable for the long-term rating.
SECURITY
The series 2014B bonds are secured by net revenues of DC Water, after provision for the senior lien bonds. A default on the subordinate lien obligations would not trigger a default on the senior lien bonds.
KEY LONG TERM RATING DRIVERS
REGIONAL PROVIDER OF ESSENTIAL SERVICE: DC Water provides an essential service to a large service territory that includes the nation's capital and a highly diverse and mostly affluent customer base.
SOUND FINANCIAL METRICS: The authority continues to generate strong coverage of senior-lien debt service while maintaining satisfactory reserves and adequate coverage of subordinate-lien obligations. DC Water's conservatively projected 1.4x all-in debt service coverage (DSC) through the current forecast period is slightly below Fitch Ratings' 'AA' rating category median but is satisfactory relative to the system's overall risk profile.
LARGE CAPITAL PROGRAM: The authority's sizable capital program will rely significantly on debt issuance over the next several years and increase leverage from an already high level. The exceptionally long life of the series 2014A bonds is a departure from DC Water's historically conservative approach to debt issuance that Fitch views with some concern.
STRONG MANAGEMENT: The authority's operations and large capital program are guided by an effective financial management team that ensures regulatory compliance and consistently healthy financial performance.
LOW RATES: Affordable user charges and management's ability to raise rates independent of outside oversight provides considerable flexibility to contend with planned borrowings and mounting debt service obligations. Manageable annual rate increases included in the authority's financial forecast should keep user charges at an affordable level.
AMPLE CAPACITY: The combined system benefits from an abundant water supply and ample water and sewer treatment capacity.
KEY SHORT-TERM RATING DRIVERS
The short-term ratings are based on the liquidity support in the form of Standby Bond Purchase Agreements (SBPAs) provided by TD Bank, National Association (rated 'AA-/F1+'; Stable Outlook by Fitch) for the bonds.
The SBPAs provide for the payment of the principal component of purchase price plus an amount equal to 34 days of interest calculated at a maximum rate of 12%, based on a year of 365 days for tendered bonds during the daily and weekly rate modes in the event that the proceeds of a remarketing of the bonds are insufficient to pay the purchase price following an optional or mandatory tender. The SBPAs will expire on July 23, 2017, the stated expiration date, unless such date is extended, conversion to a rate mode other than daily or weekly rate; or upon the occurrence of certain events of default which result in a mandatory tender or other termination events related to the credit of the bonds which result in an automatic and immediate termination. The short-term 'F1+' rating will expire on the expiration or prior termination of the SBPA. The remarketing agents for the bonds are Merrill Lynch, Pierce, Fenner and Smith Incorporated (subseries B-1) and Loop Capital Markets LLC (subseries B-2). The bonds are expected to be delivered on or about July 23, 2014.
The subseries B-1 and B-2 bonds will be issued in the weekly rate mode, but may be converted to a daily, index, short-term, long-term, or fixed rate. While bonds bear interest in the daily or weekly rate mode, interest is paid on the first business day of each month, commencing August 1, 2014. Holders of bonds bearing interest in the daily and weekly rate modes may tender their bonds for purchase with the requisite prior notice. The tender agent is obligated to make timely draws on the SBPAs to pay purchase price in the event of insufficient remarketing proceeds, and in connection with the expiration or termination of the SBPAs, except in the case of the credit-related events permitting immediate termination or suspension of the SBPAs.
Funds drawn under the SBPAs are held uninvested, and are free from any lien prior to that of the bondholders. Bonds are subject to a mandatory tender: (1) on each interest rate mode conversion date; (2) on each interest reset date for bonds in the short-term and long-term rate modes; (3) upon the expiration or earlier termination of the SBPAs, and (4) upon any substitution of the SBPAs. Optional and mandatory redemption provisions also apply to the bonds pursuant to the terms of the documents.
Bond proceeds will be used to (i) pay a portion of the costs of certain capital improvements to the System and (ii) pay costs of issuing the Series 2014B Bonds.
RATING SENSITIVITIES
LONG-TERM RATING SENSITIVITIES
GROWTH IN CAPITAL NEEDS: Increases to the size and scope of DC Water's current capital program and debt financing plans beyond what is currently projected would exert downward pressure on the current ratings.
PROLIFERATION OF ELONGATED DEBT: Escalation in the use of long-dated debt, particularly as a means to avoid increasing rates when needed, would likely lead to negative rating action.
DEVIATION FROM FINANCIAL FORECAST: Weaker than currently projected operating results, while not anticipated, would be viewed negatively.
SHORT-TERM RATING SENSITIVITIES
The short-term ratings reflect the short-term rating that Fitch maintains on the bank providing liquidity support and will be adjusted upward or downward in conjunction with the short-term rating of the bank and, in some cases, the long-term rating of the bonds. The long-term rating is exclusively tied to the creditworthiness of the bond obligor and will reflect all changes to that rating.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'U.S. Municipal Structured Finance Criteria' (Feb. 24, 2014);
--'Rating Guidelines for Variable-Rate Demand Obligations and Commercial Paper Issued with External Liquidity Support'(Jan. 27, 2014).
Applicable Criteria and Related Research:
U.S. Municipal Structured Finance Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=736618
Rating Guidelines for Variable-Rate Demand Obligations and Commercial Paper Issued with External Liquidity Support
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=730736
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839354
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