AUSTIN, Texas--()--Fitch Ratings has affirmed its 'AAA' rating on the following Maryland Water Quality Financing Administration (MWQFA) revenue bonds:
--Approximately $44 million revolving loan fund revenue bonds, series 2008A.
The Rating Outlook is Stable.
The bonds are secured by borrower loan repayments.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Excess cash flow provides enough credit enhancement for the program to withstand 100% borrower defaults over a four-year period and still pay debt service in full. This is in excess of Fitch's 'AAA' liability default hurdle of 31.6% as determined by Fitch's Portfolio Stress Calculator (PSC) for a pool of this size and credit quality.
HIGH-QUALITY LOAN POOL: Approximately 71% of MWQFA's loan portfolio consists of entities with at least investment-grade ratings, with the remaining 29% unrated. Additionally, loan provisions are very strong, with virtually all loan principal secured by general obligation and/or utility revenue pledges.
SOME PORTFOLIO CONCENTRATION: MWQFA's borrower pool is moderate in size and but is concentrated relative to similar municipal loan pools. The pool consists of more than 50 obligors, with the top 10 borrowers comprising 72% of the pool. Concentration concerns are offset by the program's significant default tolerance and high credit quality.
OVERCOLLATERALIZATION: The MWQFA's state revolving fund (SRF) 2008 indenture program's overcollateralization allows the program to withstand significant borrower defaults without causing bond payment interruptions.
STRONG FINANCIAL PROFILE
MWQFA issues bonds to fund loans to local wastewater (and in the future, drinking water) facilities throughout the state. By pledging all loan repayments to debt service, the program's structure significantly overcollateralizes the SRF bonds. The program's outstanding loan par of $546.5 million secures $44 million in outstanding bond principal, resulting in projected cash flow coverage that exceeds 5.3x annually.
The program's legal structure only requires 1.1x debt service coverage, but MWQFA management maintains that it does not anticipate diluting debt service coverage significantly, and has no plans to issue additional bonds in the near term. Cashflow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults of 100% over a four-year period. This is in excess of Fitch's 'AAA' stress (31.6%), which is derived based on the aggregate credit quality of the program's pledged loan pool.
ADDITIONAL RESOURCES AVAILABLE
In addition to the loans pledged to repayment of the bonds, MWQFA also maintains approximately $100 million in outstanding loan principal in its equity fund. While the equity fund itself is not pledged to repayment of the bonds, the direct loan repayments may be pledged to bondholders at MWQFA's discretion at a later date if coverage levels were to significantly decline. The program is also supported by a state aid intercept to cover any potential borrower defaults of general obligation-backed loans. The intercept has never been utilized and is not considered in Fitch's analysis.
POOL CHARACTERISTICS AND BORROWER CONCENTRATION
The pledged loan pool consists of 56 borrowers, of whom approximately 71% are deemed by Fitch (or Moody's or S&P if Fitch does not provide a rating) to exhibit investment-grade credit quality. Underlying loan provisions are strong, with 80% of all loan principal secured by general obligation (GO) and utility revenue pledges. The City of Baltimore (Baltimore) is the only borrower whose loans are secured solely by a sewer revenue pledge.
Baltimore, the largest borrower, makes up approximately 20% of the pool. The Washington Suburban Sanitary District (GO bonds rated 'AAA' by Fitch) is the second largest borrower, representing 12% of the portfolio. The top 10 borrowers account for a relatively concentrated 72% of the pool. Opportunities to diversify remain limited, as MWQFA anticipates no significant pool participation from smaller new borrowers. Nevertheless, the program's significant default tolerance and high credit quality offset concentration concerns.
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:
Counterparty Criteria for Structured Finance Transactions
Rating Guidelines for State Credit Enhancement Programs
Revenue-Supported Rating Criteria