CHICAGO--()--Fitch Ratings today published an updated Asset-Backed sector specific criteria report for rating U.S. Utility Tariff Bonds. This report updates and replaces the prior criteria report with the same name, dated Jan. 6, 2012. There have been no material changes to the previous version, therefore, Fitch expects no impact on existing ratings.
The report presents Fitch's analytical approach to rating U.S. utility tariff bonds. It outlines the unique features and key risks of a tariff bond relative to a traditional asset-backed security (ABS), notably, the bond's characteristics as an intangible, future-flow regulatory asset and the special protections available to holders of tariff bonds that qualify achievement of 'AAAsf' ratings. Additionally, the report details key rating drivers associated with utility tariff ABS as detailed below.
Key Rating Drivers
Regulatory Framework: Unlike that of other ABS transactions, the cash flow stream supporting tariff bonds is a special tariff established under legislative or regulatory authority. Thus, the first and most significant component in Fitch's rating analysis is a thorough understanding of the statute and order.
Legal Analysis: Fitch's legal analysis of tariff transactions includes a review of the legal structure and the opinions furnished to confirm that the cash flow derived from the special tariff will not be impaired (whether as a result of counterparty risk or the trustee's lack of a perfected first-priority security interest in the assets) or diminished (as a result of taxation).
Credit Analysis: The cash flow supporting tariff bonds is generated by payments from all or designated categories of customers in the utility's service territory. As such, Fitch reviews the composition of the service territory. Fitch also reviews the size of the tariff relative to the total customer bill to determine its viability, as, in Fitch's view, excessive charges may present additional risk of political or regulatory challenge.
Economic Outlook: The economic environment can have a material impact on U.S. utility tariff ABS. As such, Fitch takes into consideration the strength of the U.S. economy, as well as future expectations. To account for the potential weak U.S. economy, Fitch's analysis stresses the peak absolute variance and highest annual writeoffs by a 5.0x multiple.
Structural and Cash Flow Analysis: Fitch uses a proprietary internal cash flow model, which is customized to reflect the payment structure of the transaction, and tests the impact of stressing various assumptions, including historical charge-off and variance patterns. The output of the cash flow model is reviewed to verify that the rated bonds are fully paid in accordance with the transaction documents in each stress scenario associated with a particular bond's rating.
Counterparty Analysis: This portion of the analysis is largely qualitative and includes a review of the utility's servicing operations. The review of other counterparty-related issues, such as commingling of remittance collections and segregation of bank accounts, is consistent with Fitch's counterparty criteria for structured finance transactions.
The full report 'Rating Criteria for U.S. Utility Tariff Bonds' is available on the Fitch web site at 'www.fitchratings.com' under the sectors: Structured Finance >> Asset-Backed Securities.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research: Rating Criteria for U.S.
Utility Tariff Bonds