Fitch Ratings has assigned an 'AA' rating to New York City Municipal Water Finance Authority's (NYW) approximately $500 million water and sewer system second general resolution revenue bonds, fiscal 2010 series AA taxable bonds (Build America Bonds) and $200 million water and sewer second general resolution revenue bonds, fiscal 2010 series BB. The second general resolution (SGR) provides for a subordinate lien on gross revenues of NYW. The bonds are scheduled for negotiated sale on Oct. 27, 2009 with proceeds of the fiscal 2010 series AA bonds being used to finance a portion of NYW's capital improvement program (CIP) and proceeds from the series BB bonds being used to refund outstanding debt for savings.
In addition, Fitch affirms the following outstanding NYW bonds:
--Approximately $11 billion first general resolution revenue (FGR) bonds 'AA';
--Approximately $10.7 billion SGR revenue bonds 'AA'.
The Rating Outlook is Stable.
The underlying 'AA' rating on NYW's FGR and SGR water and sewer system revenue bonds primarily reflects the unique structural protections for bondholders, as well as NYW's large and diverse service area, ample, quality water supply, and strong capital planning efforts, prudent financial management, and proven ability to raise rates as demonstrated by consistently solid financial results and timely completion of capital projects. While significant progress has been made with regard to mandated regulatory projects, a sizeable multi-year capital plan still exists, which Fitch expects will compound NYW's already high debt levels and continue to pressure rate payers going forward.
A sizeable 12.9% rate increase adopted by the New York Water Board (the board) for fiscal 2010 marks the third consecutive year that rates have experienced a double-digit increase, and financial projections through fiscal 2011 show rate hikes of a similar size. Concern remains regarding the continuation of below-average collection rates, although NYW has implemented several measures aimed at improving receipt of charges over the last several years. Fitch believes NYW bondholders benefit from strong legal protections that are not common among most U.S. municipal water/sewer bonds.
Structural protections include:
--The bankruptcy-remote, statutorily defined nature of the issuer;
--Ownership of system revenues by the bankruptcy-remote board;
--Annually required adjustment of water rates to a level to provide 1.15 times (x) coverage of FGR bond annual debt service and 1x coverage on SGR bonds and operating expenses;
--A gross lien on revenues provided to bondholders;
--A detailed review of relevant legal precedents and opinions.
Revenues are collected in a lock box controlled by the trustee and are used to pay debt service of FGR and SGR bonds before operations and maintenance (O&M), which differs from the practice for most U.S. water and sewer debt structures. These layers of protection serve to shield bondholders significantly, but not entirely, from the operational risks of the city's massive water and sewer enterprise, as well as other city government operations.
NYW SGR bondholders benefit from similar legal protections afforded FGR bondholders. SGR bondholders' claim on gross revenues is subordinate only to FGR debt service deposits, NYW administrative costs, and the FGR debt service reserve fund (DSRF). Following such deposits, revenues flow from the subordinated indebtedness account of the FGR directly to the SGR revenue account to pay SGR debt service deposits. Only after monthly required deposits under the SGR are satisfied are funds released from the trustee-controlled lock box to pay operations and maintenance.
NYW's strong financial management and conservative budgeting continue to yield solid operating results, despite sizeable growth in annual debt service obligations over the past several years. Favorably, historically below-average collection rates have begun to improve following the 2008 implementation of a payment incentive program for delinquent customers, a reduction in the threshold applicable to accounts eligible for termination of service, and the legislative approval to conduct a lien sale program for property owners independent of the existence of property tax liens. For fiscal 2009, NYW's enforcement mechanisms coupled with a sizeable 14.5% rate increase helped boost operating revenues by about 16% and offset a notable 7% drop in water consumption. Audited financial results show annual coverage of FGR bonded debt service by net revenues improving over the prior year to a strong 2.2x. Coverage of all obligations, including SGR debt service, equaled a more moderate 1.5x. Reflecting the gross lien on revenues provided to bondholders, debt service coverage was higher in fiscal 2009 at 4.7x and 3.1x, respectively, for the FGR and SGR debt service. Financial projections that incorporate sizeable annual debt issuance, notable rate hikes, and a conservatively forecasted 1% annual decline in consumption through fiscal 2014 show annual debt service coverage on all obligations staying within a range of 1.3x-1.5x. However, Fitch notes that actual results are typically positive compared to generally conservative projections. With about 115 days of cash on hand at the close of fiscal 2009, NYW's unrestricted cash position is generally below that of other utility systems rated 'AA' by Fitch.
Similar to most large, urban utility systems, NYW's capital needs are large, primarily the result of state and federally mandated projects. The CIP for fiscal years 2010-2019 includes an estimated $14.2 billion in water and sewer projects, down from a peak of $19.4 projected in the fiscal years 2008-2018 CIP. A planned delay in approximately 20% of capital commitments for fiscal years 2010 through 2012 lowered the size of the CIP from more recent years to its current total. The reduction in capital expenditures was prompted by the city's ongoing fiscal challenges related to the current economic slowdown. However, regulatory-driven capital projects will not be delayed. Officials expect a favorable shift in capital priorities beginning in fiscal 2010; regulatory projects are expected to decline to about one-fourth of total capital spending, down from an average of about 75% over the previous five years. Capital funding is expected to come almost entirely from NYW's extensive commercial paper program and long-term debt issuance. Rate increases are approved by the independent board without approval by the city council. Fitch believes overall debt service coverage levels will remain at an adequate margin given the board's demonstrated commitment to authorizing past rate hikes necessary to cover increased costs.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Christopher Hessenthaler, 212-908-0773, New York
Doug
Scott, 512-215-3725, Austin
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com
