NEW YORK--()--Fitch Ratings has downgraded the rating on the following bonds of the NH Municipal Bond Bank's to 'AA-'from 'AA':
-- $649.65 outstanding 1978 Resolution Bond Program bonds.
The Rating Outlook is Stable.
Bonds issued under the 1978 resolution are general obligations of the bond bank, payable from loan repayments of participating local governments. The loans are GO ULT bonds of the participating local governments. A moral obligation (MO) pledge of the state of New Hampshire to restore draws on the debt service reserve fund provides additional security and is the basis for the rating.
KEY RATING DRIVERS
RATING BASED ON STATE MORAL OBLIGATION: The rating downgrade reflects the transition from using revolving fund criteria to focusing on the security provided by the state's moral obligation to replenish the debt service reserve fund. Under the moral obligation criteria, the rating is limited to two notches below that of the State GO, rated 'AA+' by Fitch Ratings.
RATING LINKED TO STATE: The rating is two notches below that of the State GO. The direct linkage reflects that the bond bank is an entity of the state, services a broad state purpose of providing lower cost financing for local governments through the state, and finances basic infrastructure. The provision to intercept state aid indicates the further commitment of the MO provider, the state of NH, to the bond bank.
SOUND MO MECHANISM AND TIMING: The moral obligation mechanism and timing meet Fitch's criteria with all requirements related to the moral obligation spelled out in the authorizing legislation for the Bond Bank. The timing of the mechanism is satisfactory and the processes of notification and appropriation request are specifically spelled out and mandatory for the various parties.
The rating downgrade reflects the application of Fitch's moral obligation criteria rather than the pool criteria that had been used to rate the bonds. The change reflects the publication of a new quantitative approach to rating state revolving funds and leveraged municipal loan pools (criteria dated May 21, 2012). The 1978 resolution bonds do not satisfy the revised criteria to be analyzed as a pool; however, the presence of a sound moral obligation from the state of New Hampshire provides significant credit strength.
According to Fitch's criteria, 'Rating Guidelines for Moral Obligations', dated April 20, 2012, a rating may be linked to that of the moral obligation provider, notching down from its rating rather than up from the primary security's rating, in certain limited circumstances. The 1978 resolution bonds display characteristics that permit such linking to the MO provider.
The bond bank is an independent political subdivision of the state whose board includes the State Treasurer and both gubernatorial and legislative appointees. It serves a broad state purpose of providing lower cost financing to all municipalities in the state - most local issuers utilize the bond bank rather than issuing bonds independently. The projects financed are for basic infrastructure of the participating local governments. There is provision to intercept state aid, indicating the further commitment of the MO provider, the state of NH, to the program.
The MO mechanism, which is spelled out in the authorizing legislation for the bond bank and is triggered by a draw upon the debt service reserve fund, requires the Chair of the bond bank to submit a request to the Chair of the House Appropriations Committee, by the 20th day of each legislative session, for an appropriation to restore the debt service reserve. The debt service reserve is fully cash funded, the timing of the mechanism is satisfactory and the processes of notification and appropriation request are specifically spelled out and mandatory for the various parties. Bond counsel opines at issuance that all provisions are constitutional and any funds appropriated pursuant to the moral obligation would be appropriated for proper public purposes and are valid.
State support of the bond bank includes a provision to intercept state aid to participating municipalities in the event of a payment default to the bond bank. If any governmental unit fails to make a scheduled payment of principal or interest to the bond bank, the Chair must notify the State Treasurer who is required to intercept any funds due to that governmental unit for the remainder of the fiscal year, to the extent such funds are appropriated from the general fund or education trust fund of the state. If interceptable funds are insufficient, the obligation to intercept is carried over into the succeeding fiscal year. 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.
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:
-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);
-- 'U.S. State Government Tax-Supported Rating Criteria'(Aug. 14, 2012);
-- 'Rating Obligations for Moral Obligations' (April 20, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Rating Guidelines for Moral Obligations