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):
--$88,660,000 SRF revenue bonds, series 2012B;
--$14,490,000 SRF revenue bonds, series 2012C (taxable).
The bonds are expected to price via negotiation during the week of May 21. 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 funded 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:
--$456 million outstanding 2010 MFI SRF revenue bonds, at 'AAA'.
The Rating Outlook is Stable.
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).
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 or net system revenue pledges.
MODERATE TO HIGH BORROWER CONCENTRATION: The loan portfolio has a high to moderate level of single borrower concentration risk. However, the portfolio will continue to grow and diversify as the 2010 MFI is used as the primary financing vehicle for EFC's SRF projects outside of New York City.
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 MFI level. However, Fitch expects EFC to maintain high coverage levels and loan quality.
RATING WILL NOT BE NEGATIVELY AFFECTED BY NEW CRITERIA: Fitch expects to implement new criteria as described in its April 18 press release, 'Fitch to Release New Criteria for State Revolving Funds and Leveraged Municipal Loan Pools'. The application of the new criteria will not negatively affect the rating on the 2010 MFI program bonds.
Upon publication, Fitch will establish the date on which the new criteria will become effective for all new ratings related to state revolving funds (SRFs) and leveraged municipal loan pools (MLPs). In addition, within six months of the effective date of the new criteria, Fitch will conduct a review of its entire SRF and MLP rating portfolio.
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.
The portfolio's concentration risk remains moderate to high among the three largest borrowers - Westchester County (GOs rated 'AAA' by Fitch, NYCMWFA (first and second resolution revenue bonds rated 'AA+'), and Onondaga County (GOs rated 'AAA'). Thje borrowers represent approximately 11.7%, 5.8%, and 4.8% of the portfolio, respectively. However, the program should continue to diversify as the 2010 MFI is expected to replace the existing 1991 MFI, which will have 191 borrowers after certain bonds are refunded with this issuance.
The program achieves significant excess coverage for the MFI bonds by pledging repayments from loans funded from both bond proceeds and equity totaling approximately $1.2 billion. Excess coverage is also derived from more than $570 million in available long-term equity investments, derived primarily from recycled funds. The overcollateralization from pledged loan repayments alone would allow the bonds to perform, even given loan defaults of 35%, 100%, 100% over the first, middle and last four years of the bonds life, respectively. This is in excess of what Fitch would expect in an 'AAA' stress scenario for a pool of this size and credit quality (12.08%). 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.
In addition, bondholders benefit from deallocated reserves from the senior and subordinate liens of the 1991 MFI and EFC's NYCMWFA bonds ( ranging between $49 million and $92 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.
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 secured by each entity's GO or, if the entity is a public authority, by the net revenues of the system's utility.
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). The additional release test, established under the supplemental indentures requires 1.15x coverage on senior and subordinate lien debt. 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.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Rating Criteria
Adrienne M. Booker, +1-312-368-5471
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Sandro Scenga, +1-212-908-0278