Fitch Affirms Missouri Environmental Improv & Energy Resources Auth's SRF Bonds at 'AAA'
Fitch Ratings has affirmed its 'AAA' rating on the following Missouri Environmental Improvement and Energy Resources Authority's (EIERA) state revolving fund (SRF) program bonds:
--$214.6 million water pollution control and drinking water revenue bonds (State Revolving Funds Programs) (2010 Master Trust Agreement [MTA]);
--$676.4 million water pollution control and drinking water revenue bonds (2004 MTA);
--$329.3 million water pollution control and drinking water refunding revenue bonds, subordinate (2004 MTA), series 2001B, 2004A and 2010A.
The Rating Outlook is Stable.
--The 2010 MTA bonds are secured primarily by pledged loan repayments and deallocated reserves released from the 2004 MTA.
--The 2004 MTA bonds, with the exception of the series 2001B, 2004A and 2010A bonds (the refunding bonds), are secured by borrower loan repayments, debt service reserve funds and interest earnings from the debt service reserve funds and excess loan repayments from the 2010 MTA.
--The refunding bonds are secured by excess loan repayments and deallocated reserves released from the 2004 MTA.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
QUALITY LOAN POOL: Approximately 51% of EIERA's combined loan portfolio consists of entities with at least investment grade ratings, with the remaining amount unrated. Additionally, loan provisions are very strong, with the majority secured by water and/or wastewater revenue pledges.
MODERATE POOL DIVERSITY: EIERA's combined borrower pool is large and moderately diverse in comparison to similar municipal loan pools. The pool consists of more than 240 borrowers, the largest of which represents approximately 19% of the combined pledged loan pool. The remaining borrowers represent less than 7% of the pool.
CROSS-COLLATERALIZATION ABILITY STRENGTHENS PROGRAM: The cross-collateralization feature of the separate clean water SRF (CWSRF) and drinking water SRF (DWSRF) accounts within the 2004 and 2010 MTAs enhance bondholder security by allowing reserves and excess loan repayments within and between each program to be available for use by the other.
WEAK LEGAL COVERAGE PROVISIONS: While the additional bonds test under the new 2010 MTA cash flow structured is weak (requiring only 1.0x coverage), Fitch Ratings anticipates that a higher level of coverage will be maintained due to the overcollateralization required to generate the 70% interest subsidy that is provided to program participants.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Annual cash flow coverage from repayments of pledged loans combined with scheduled reserve deallocations remains strong. Cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over any four-year period. This is in excess of Fitch's 'AAA' liability stress hurdle (36.8%) as produced by the PSC. Liability default hurdles, derived by the PSC, are calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
ABOVE AVERAGE CREDIT QUALITY LOAN POOL; MODERATELY CONCENTRATED
The combined pledged obligation portfolios have over 240 borrowers. The Metropolitan St. Louis Sewer District (MSD; senior wastewater system revenue bonds rated 'AA+', Stable Outlook by Fitch) is the largest combined pool participant, representing $234 million in junior and subordinate lien clean water obligations, or approximately 19% of the combined borrower pool. Because MSD accounts for more than 10% of the total amount of outstanding MTA bonds, it is considered a Material Master Trust Participant and therefore subject to additional reporting information.
Little Blue Valley Sewer District is the portfolio's second largest pool participant, representing over 6% of outstanding loans. The pool's 10 largest borrowers make up over 54% of the portfolio, leading to some concentration concerns. However, underlying obligation security provisions are strong, with most obligations secured by water and/or sewer net revenue pledges. Concentration concerns are also somewhat mitigated by the strong overall credit quality of the pool, with over 50% of loans issued to investment grade borrowers.
STRONG PROGRAM UNDERWRITING
Loan projects are reviewed extensively by the state Department of Natural Resources (DNR), which prepares an intended use plan to identify water and sewer projects that are eligible for the SRF program. In addition, every borrower must complete a due diligence questionnaire, which contains detailed information regarding the project and scope, loan security and ability to repay the debt. EIERA and DNR also assess each participant before loans are underwritten and may stipulate certain parameters prior to loan approval.
Each borrower's audited financials is monitored on an annual basis. The trustee would notify the EIERA immediately if a borrower paid late. EIERA and DNR report that they maintain good relationships with participants and financial advisors to stay current on borrower events or issues that may arise. There has not been a default within the program to date.
The 2010 MTA was established as a cash flow structure, which benefits from cross-collateralization with the existing reserve fund-structured 2004 MTA. The available excess deallocations from one MTA to another effectively combine the two structures into one SRF program. While the 2004 MTA remains open, EIERA does not anticipate issuing additional 2004 MTA bonds in the foreseeable future.
Under the 2010 MTA, pledged borrower obligations are deposited into the applicable drinking water/clean water account of the repayment fund held by the trustee and are used to make debt service payments on 2010 MTA bonds. The interest portion of borrower obligation payments and interest earnings on other designated funds are used first to pay debt service on the state match portion of the bonds. Payments in this manner are intended to satisfy conditions for EIERA to receive federal capitalization grants. Pledged loan repayments are then used to pay all other 2010 MTA bonds.
In the event of borrower defaults, excess moneys in the repayment fund under the 2010 MTA and reserve releases from bonds secured under the 2004 MTA are available for any series of outstanding master trust bonds (both 2004 and 2010 MTAs) to cover debt service shortfalls, and replenish required reserve balances prior to their release to non-pledged program equity.
RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT
Under the 2004 MTA, as revenue bonds secured by the master trust series reserves are retired, excess reserves above program requirements are released to the unallocated fund and are available to cover shortfalls within the 2010 MTA's program. The 2004 MTA required a reserve account with each new issue. Reserves were funded at levels equal to 33%, 50%, or 70% of the participant's principal obligation. Currently, the program's pledged reserves total approximately $795 million, or approximately 72% of the outstanding par amount issued under the 2004 MTA, providing significant enhancement.
WEAK ADDITIONAL BONDS TEST
The 2010 MTA's additional bonds test is weak at 1.0x. However, the cash flows for the current issue are sized for a minimum coverage of 1.3x state match debt service and provide at least 2.5x coverage on leveraged bonds. Because the SRF program provides a 70% interest rate subsidy to borrowers, Fitch expects that the program's cash flows will remain overcollateralized by participant obligations, offsetting concerns of over-leveraging to some extent.
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 12, 2012);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012);
--'Rating Guidelines for State Credit Enhancement Programs' (June 19, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Rating Guidelines for State Credit Enhancement Programs
Counterparty Criteria for Structured Finance Transactions
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