TEXT-Fitch rates NYS Environmental Facilities Corp SRF bonds
Oct 4 - Fitch Ratings has assigned an 'AAA' rating to the following state revolving funds (SRF) revenue bonds issued by the New York State Environmental Facilities Corporation's (EFC) under the 2010 master financing indenture (MFI): --Approximately $110 million SRF revenue bonds, series 2012E; --Approximately $34 million SRF revenue bonds, series 2012F (taxable). The bonds are expected to price via negotiation during the week of October 15. Bond proceeds will be used to finance clean water and drinking water projects and to refund portions of certain series of bonds that were originally issued under the 1991 MFI. The original proceeds were used to finance water pollution control and drinking water projects throughout New York. In addition, Fitch has affirmed its ratings on the following bonds: --$520.4 million outstanding 2010 MFI SRF revenue bonds, at 'AAA'. The Rating Outlook is Stable. SECURITY The 2010 MFI revenue bonds are secured by pledged borrower loan repayments and excess available de-allocated reserve account release payments from the 1991 MFI senior and subordinate lien bonds (rated 'AAA' with a Stable Outlook by Fitch) and EFC's New York City Municipal Water Finance Authority (NYCMWFA) program bonds (senior and subordinate bonds rated 'AAA' and 'AA+', respectively, with a Stable Outlook by Fitch). The 2010 MFI senior lien revenue bonds and future 2010 MFI subordinate bonds are further secured by a parity commitment to use any available amounts in the clean water and drinking water SRF equity funds to meet shortfalls. KEY RATING DRIVERS STRONG PROGRAM ENHANCEMENT: Loan repayments are pledged and long-term equity is available to provide significant overcollateralization. This enables obligations issued under the 2010 MFI program to perform even if there is a high level of loan defaults. SOLID LOAN SECURITY: All loans are secured by the obligors' general obligation (GO) or net system revenue pledges. CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The clean water SRF (CWSRF) and drinking water SRF (DWSRF) are cross-collateralized with one another. This allows shortfalls in one fund to be covered by surpluses in the other, further enhancing bondholder security. RELATIVELY WEAK LEGAL COVENANTS: Certain legal covenants are weaker than in some other SRF programs, including the 1.15 times (x) additional release test. This serves as the program's coverage requirement, along with the lack of a required debt service reserve at the 2010 MFI level. However, Fitch expects the EFC to maintain high coverage levels and loan quality. CREDIT PROFILE POOL FUNDS WATER AND WASTEWATER PROJECTS The 2010 MFI is an open indenture with bonds issued under separate supplemental series indentures. The program bonds are structured using a traditional cash flow model. The bonds are secured by borrower loan repayments, de-allocated reserve amounts and available equity. Bond proceeds are typically used to fund loans to local governments and other public entities throughout the state for water pollution control and drinking water projects. SIGNIFICANT ABILITY TO WITHSTAND RATING STRESS HURDLE The program achieves significant excess coverage for the 2010 MFI bonds by pledging repayments from loans funded from both bond proceeds and equity totaling approximately $1.5 billion. Excess coverage is also derived from more than $590 million in available long-term equity investments, derived primarily from recycled funds. Program resources exceed Fitch's portfolio stress calculator (PSC) stress hurdle of 25% at the current rating level. The overcollateralization from pledged loan repayments alone would allow the bonds to perform, even given loan defaults of 83.4%, 100%, 100% over the first, middle and last four years of the bonds life, respectively. This is well in excess of the Fitch's PSC stress hurdle of 25%. The clean water and drinking water SRF programs are cross-collateralized, with excess moneys of the clean water account securing debt of the drinking water account and vice versa. RELEASES FROM OTHER EFC PROGRAMS BENEFIT BONDS In addition, bondholders benefit from de-allocated reserves from the senior and subordinate liens of the 1991 MFI and EFC's NYCMWFA bonds (ranging between $72 million and $85 million annually over the next several years). Fitch considers in its analysis that the releases from the 1991 MFI will be reduced to $0 by fiscal year 2037, the final maturity of bonds issued under the 1991 MFI; 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's NYCMWFA senior lien releases will also decline to $0 by fiscal 2037 if no additional bonds are issued under this lien. The 2010 MFI bonds that will be outstanding following this issuance are scheduled to fully mature in 2042. MODERATE BORROWER CONCENTRATION The portfolio's concentration risk is moderate with the largest borrower - Westchester County (GO bonds rated 'AAA' by Fitch) - representing 10% of the total portfolio. However, the program should continue to diversify as the 2010 MFI is expected to replace the existing 1991 MFI, which will have 172 borrowers after certain bonds are refunded with this issuance. UNDERLYING BORROWER CREDIT QUALITY FAVORABLE The 2010 MFI pool's loan credit quality is strong. Fitch estimates that at least 92% of all loan principal is of investment-grade quality. Furthermore, underlying loan security is solid, with loan repayments primarily secured by each entity's GO pledge or, if the entity is a public authority, by the net revenues of the system's utility. BELOW-AVERAGE LEGAL STRUCTURE The program's legal structure contains certain covenants that are relatively weaker than some other similarly rated SRF programs. No debt service reserve will be funded for the series 2012 bonds (or outstanding bonds). Further, the additional release test, established under the supplemental indentures, requires 1.15x coverage on senior and subordinate lien debt. Despite the legal structure, Fitch believes program management will continue to keep coverage at levels that insure the program's high credit quality given historical performance and management policies.