Fitch Ratings assigns an 'AA' rating the following New Hampshire Municipal Bond Bank's (NHMBB) non-guaranteed bonds, issued under the 1978 General Bond Resolution:
--$24 million 2011, series B.
The bonds are expected to sell via competitive bid on June 8, 2011. Bond proceeds will be used to fund capital projects to local entities in New Hampshire.
In addition, Fitch downgrades $667 million in outstanding general resolution bonds to 'AA' from 'AAA'.
The program bonds have been placed on Rating Watch Negative.
RATING RATIONALE:
--The downgrade to 'AA' is due to the program cash flows failure to pass Fitch's 'AAA' and 'AA' stress test during the first four year stress period by $21 million and $3.9 million, respectively. The weakened stress test results are due to the portfolio's lower credit quality estimate than in previous years, increased leveraging, a decrease in available but unpledged revenues, and a higher level of pass-through savings to borrowers from a prior refunding than originally anticipated;
--The Rating Watch Negative indicates that a further downgrade is likely absent the receipt and analysis of additional borrower information from bond bank management that would demonstrate the program's ability to pass Fitch's 'AA' stress test;
--The program, which consists of 152 borrowers, is moderately diverse although single largest borrower concentration accounts for 10% of the portfolio;
--The program's loan security is strong, with virtually all loans backed by a general obligation pledge and additional protection from borrower defaults through a state-aid intercept mechanism;
--Cash funded debt service reserve fund (DSRF) totaling $100 million that are invested in US treasury and agency securities provide security in the event of any missed loan repayments. Fitch also considers NHMBB's non-pledged amount of $7.3 million in the general fund that would be available to cure loan defaults;
--There is a moral obligation of the state (GO rating of 'AA+', with a Stable Outlook by Fitch) to replenish the reserve fund if it falls below its required level.
What Could Trigger a Downgrade:
--Lack of receipt of documentation related to certain credits subject to state aid intercept or failure by the portfolio to pass Fitch's 'AA' stress test upon receipt and review of such documentation would lead to negative rating action.
Security:
--Bonds are primarily secured by loan repayments and a cash funded DSRF. The DSRF is required to be maintained at maximum annual debt service (MADS) on the loans. Loan repayments equal approximately 69% to 98% of annual debt service, with the exception of the final year;
--A state-aid intercept and a state moral obligation on the reserve fund provide additional credit enhancement.
CREDIT SUMMARY:
Fitch analyzed the default tolerance of the NHMBB loan pool using a stress test it also applies to state revolving funds and other municipal loan pools. The stress test considers loan quality, single risk concentration, reserve fund size, and debt service requirements. The program's cash flows (including $7.3 million in available non-pledged cash) fail to pass Fitch's 'AAA' stress test during the first four year period by $21 million (or 27.9% of scheduled debt service in 2014). The program's cash flows also fail to pass the 'AA' stress test during the first four years by $3.8 million (5% of scheduled debt service in 2014). This failure is primarily due to the large number of small unrated school district borrowers in the portfolio, which comprise over 70% of total loan par. Fitch has previously estimated that the credit quality of these districts in the pool was at least in the 'A' category, due to New Hampshire's historically strong financial support to local school districts, the NHMBB's state aid intercept provision, and the state's 'AA+' GO rating.
In June 2010, Fitch requested and the bond bank indicated that it planned to provide additional borrower information that would demonstrate the actual amount by which each school district's historical state aid revenues cover MADS by at least 1.25 times (x), allowing Fitch to treat the loans as 'AA' category credits for purposes of its stress test. NHMBB has provided a sampling of information regarding the school districts of which a large majority did meet Fitch's state aid coverage requirement. Consequently, Fitch believes that it is likely that with more complete information the program would be able to pass the 'AA' stress test. However, the program is placed on Rating Watch Negative indicating that a further downgrade is likely without the receipt and analysis of additional borrower information sufficient to allow the program to pass Fitch's 'AA' stress test.
The bond bank is an independent political subdivision of the state, established in 1977. It is administered by a five-member board consisting of the state treasurer and four directors appointed by the governor and council. The bond bank issues bonds and uses the proceeds to make loans to local government borrowers throughout the state. Most of New Hampshire's eligible municipalities use the bond bank as their primary borrowing vehicle because it offers local government borrowers the lowest cost of capital.
The loan pool consists of 152 borrowers from cities, towns, counties, school districts and other local governments throughout the state. Virtually all loans are backed by the borrowers' general obligation pledges. Governor Wenthworth School District is the largest borrower accounting for approximately 10% of the total outstanding loan balance. The top 10 borrowers comprise 49% of the total outstanding loan balance.
The debt service reserve fund, which is sized at 100% of maximum annual loan debt service, is funded with bond proceeds and invested in U.S. treasury and agency securities. As of June 6, 2011 pledged reserves totaled $100 million, or 15% of bonds outstanding. Fitch also considers $7.3 million in moneys in the general fund designated for the 1978 Resolution program. While the moneys are not pledged to program bondholders, it is likely that the funds would be available to cure loan defaults, if necessary, given these moneys can only be used for purposes related to the 1978 Resolution program.
The bonds are also supported by a state moral obligation to replenish the program's debt service reserve fund if it falls below its minimum specified level. Neither the intercept nor the moral obligation has ever been utilized, because no borrower has defaulted on a loan repayment since the bond bank began operations in 1977. Historically, the moral obligation pledge has only provided modest credit enhancement to the bonds, but could become a more significant rating factor in the future.
Loan payments are due five days before the bond payment dates. The bond bank charges borrowers 12% interest if a payment is late. Under New Hampshire's state intercept provision, if a borrower fails to make its scheduled loan repayment, the bond bank will certify the failure of that payment with the state treasurer. Within three days after the certification, the state treasurer would then pay the defaulted loan amount to the bank's trustee from amounts appropriated and payable by the state to the defaulted borrower, if available. If sufficient state aid is unavailable, it will be paid from subsequent interceptable state aid payments, with bond bank reserves covering the temporary shortfall. To date, this mechanism has not been tested as there have not been any loan defaults in the history of the program.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008);
--'State Credit Enhancement Program Criteria,' (Dec. 16, 2009).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
State Revolving Fund and Municipal Loan Pool Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150
State Credit Enhancement Program Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=491794
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