Fitch Affs New York State Environmental Facilities Corp's 1991 MFI SRF Bds at 'AAA'; Stable Outlook
Fitch Ratings has affirmed its 'AAA' ratings on the following New York State Environmental Facilities Corporation's (EFC) state clean water and drinking water revolving funds revenue bonds (pooled financing program - 1991 master financing indenture [MFI]):
--$711.2 million senior lien bonds;
--$256.1 million subordinate lien bonds.
The Rating Outlook is Stable.
The bonds are secured by pledged loan repayments, interest earnings and reserve funds
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the state revolving fund (SRF) program can continue to pay bond debt service even with portfolio loan defaults of 100% (the default tolerance rate) over any four-year period. This is in excess of Fitch's 'AAA' liability default hurdle of 29.9% as produced using Fitch's Portfolio Stress Calculator (PSC), which is derived based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
STRONG LOAN QUALITY REFLECTS UNDERWRITING: EFC's solid underwriting guidelines and program policies have resulted in a high quality portfolio with at least 66% of the pool exhibiting 'A+' or higher credit characteristics. Additional protection is afforded through a state-aid intercept mechanism.
MODERATE BORROWER CONCENTRATION: The loan portfolio has a moderate level of concentration risk among highly rated large borrowers. The pool may become more concentrated as existing 1991 MFI debt continues to be refunded into EFC's 2010 MFI and as no new bonds are expected to be issued under the 1991 MFI.
STRONG LOAN SECURITY: Over 90% of the loan portfolio is secured by the borrowers' general obligation (GO) or net system revenue pledges.
SOLID RESERVE INVESTMENTS: EFC maintains sound investment practices as the program's reserves are held primarily in highly rated investments or investment contracts.
WHAT COULD TRIGGER A RATING ACTION
MAINTENANCE OF STRONG PROGRAM ENHANCEMENT: Because no additional bonds are expected to be issued under the 1991 MFI, the current rating relies on EFC's ability to balance the outstanding leveraged bonds with capitalization grants and program resources.
RESERVES PROVIDE SIGNIFICANT ABILITY TO WITHSTAND RATING STRESS HURDLE
The program's reserves, which total approximately $267 million (as of Nov. 15, 2012) or 38% of senior lien bonds, provide significant enhancement that would allow the senior and subordinate lien bonds to perform even if loan defaults were 100% over the first, middle and last four years of the bonds life. This is well in excess of the Fitch's PSC stress hurdle of 29.9%.
Under the 1991 MFI, dedicated reserve accounts are required to equal 33% of aggregate loan par outstanding. Reserves are released as loans amortize so that the original 33% reserve level is maintained. Released reserves flow first to the general reserve fund, which is available to cure deficiencies in any MFI recipient repayments funded from parity senior bonds. De-allocated reserves remaining are then available for deficiencies in MFI recipient repayments associated with projects funded from subordinated MFI bonds.
Excess reserves remaining from the senior lien are then released and made available for deficiencies under EFC's SRF bond indenture that funds loans to the New York City Municipal Water Finance Authority (NYCMWFA) outside the MFI (senior and subordinate bonds rated 'AAA' and 'AA+', Stable Outlook by Fitch, respectively) and EFC's 2010 MFI bonds (rated 'AAA', Stable Outlook by Fitch). The CWSRF and drinking water SRF (DWSRF) 1991 MFI programs are accounted for separately. However, the CWSRF and DWSRF are cross-collateralized, with excess reserves of the CWSRF securing debt of the DWSRF program and vice versa. EFC maintains sound investment practices as the programs' reserves are held primarily in highly rated investments or investment contracts.
POOL EXPECTED TO BECOME MORE CONCENTRATED
The number of 1991 MFI program borrowers has declined to 172, down from over 300 in 2010. The portfolio has moderate concentration risk from its largest two borrowers - the Counties of Onondaga and Westchester (both with GO bonds rated 'AAA', Stable outlook by Fitch) - which represent approximately 11.6% and 10.3% of the portfolio, respectively. The pool is expected to grow increasingly concentrated and eventually be eliminated as the 2010 MFI bond program is expected to fund all new loan originations going forward.
UNDERLYING BORROWER CREDIT QUALITY FAVORABLE
The 1991 MFI pool's loan credit quality is strong. Fitch estimates that at least 85% of all loan principal is of investment-grade quality with at least 66% of the pool exhibiting 'A+' or higher credit characteristics. 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.
STRONG PROGRAM UNDERWRITING
EFC maintains a formal underwriting process involving extensive review of a borrower's loan application financial audits, utility system, and other general information. Applications passing the preliminary reviews may then be reviewed by executive staff, board members, and the state's Public Authorities Control Board before final approval.
Borrower financing payments are scheduled to be paid by pool participants no later than 15 days before the bond debt service is due. The EFC receives daily notification of borrower payments received, and both the MFI trustee and EFC track loan repayments against expected receipts. If a payment is not made on time, borrowers are contacted. To date, there have been no borrower defaults.
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
Adrienne M. Booker
70 W. Madison Street
Chicago, IL 60602