NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following State of Texas general obligation (GO) bonds issued by the Texas Water Development Board (TWDB):
--$43,115,000 water financial assistance bonds, series 2016A (economically distressed areas program).
The bonds are expected to sell via negotiated sale on or about March 23, 2016.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations to which the state pledges its full faith and credit.
KEY RATING DRIVERS
LOW DEBT: The state's debt burden remains low despite significant growth-related capital needs, especially for transportation. Amounts for debt service are constitutionally dedicated.
ECONOMIC GAINS CONTINUE: The state's economy is large and diverse. Growth continues despite the recent energy industry weakness which to date has been concentrated in specific sectors and regions. The state's oil and gas sector remains a significant source of economic activity and is subject to volatility.
SIGNIFICANT RESERVE BALANCES: Financial operations are generally conservative. The state maintains a sizable budget reserve, with a portion of natural resource receipts dedicated to funding it.
SALES TAX DEPENDENCE: Finances are dependent on consumption-based (primarily sales) taxes; volatile energy taxes are also important.
GROWTH-RELATED SPENDING PRESSURES: Longer term fiscal pressures stem from having to adequately fund the state's rapid growth. This includes expanded transportation, school funding, and water needs.
RATING SENSITIVITIES
ECONOMIC GROWTH AND AMPLE FLEXIBILITY: Texas' 'AAA' GO rating and Stable Outlook assume continued economic gains and the maintenance of ample fiscal flexibility both in its conservative approach to budget management and its high reserve balances. The rating could be pressured in the event of the state's unwillingness to address potential fiscal challenges in an effective and timely manner.
CREDIT PROFILE
Texas' long-term 'AAA' GO rating reflects its low debt burden, conservative financial operations and an economy that continues to grow despite the severe contraction in the state's globally important energy sector. Although the oil price plunge that began in late 2014 has interrupted a long period of economic and revenue momentum, the state's diversification in recent decades has left it better positioned to weather the current energy sector uncertainty relative to past cycles.
Fitch believes that the state has ample flexibility to absorb near-term economic and revenue volatility, both in the form of its very large reserve balances and a tradition of taking budgetary actions to maintain balance. Liquidity remains ample, and the state is not undertaking cash flow borrowing in fiscal 2016 to meet intra-year cash needs for the first time in decades. The state has been an economic growth leader for decades, diversifying well beyond the resource sectors that were dominant during the last severe oil price shock, in the 1980s. However, rapid growth and the concomitant demand for public services, including for transportation, education and water, continue to pose long-term fiscal pressures.
Texas' GO bonds are payable from a constitutional appropriation out of the first moneys coming into the state treasury not otherwise appropriated. This unrestricted balance equaled $49.4 billion as of Aug. 31, 2015, the fiscal year-end.
GO bonds are issued by various state agencies. The TWDB issues GO water financial assistance bonds under various constitutional provisions including a 1997 constitutional amendment that consolidated the board's various authorizations, with proceeds supporting water conservation and infrastructure projects throughout the state. As of Nov. 30, 2015, the board has over $6 billion in unissued GO bond authorization available for various board programs. The current bonds are being issued to provide loans and grants to political subdivisions in economically distressed areas for water supply and water quality enhancement.
By policy, most GO water financial assistance bonds are self-supporting from repayments of loans made to local entities for water development projects and income received from investments. Certain GO water financial assistance bonds, including for the economically distressed areas program, receive general fund support.
Water infrastructure remains a perennial need in the state given its high growth and scarce water resources. The board's resources and responsibilities for managing water projects were expanded under a constitutional provision approved by voters in November 2013 which included the transfer of $2 billion from the state's rainy day fund to establish the State Water Implementation Fund for Texas (SWIFT), which supports water-related projects. Fitch rated the first bond offering of the associated State Water Implementation Revenue Fund for Texas loan pool 'AAA', Rating Outlook Stable on Sept. 9, 2015.
For additional information on the GO rating of the State of Texas, please see Fitch's press release dated Feb. 26, 2016, 'Fitch Rates Texas Transportation $624 Million Highway GO Bonds 'AAA'; Outlook Stable,' which is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and IHS.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000919
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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