NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the Finance Authority of Maine's (FAME) outstanding $12.405 million series 2009A waste motor oil revenue bonds.
The Rating Outlook is Stable.
Limited obligations of the authority payable solely from a portion of revenues generated by a premium on certain motor oil (premium revenues). The bonds also receive support through a moral obligation pledge from the state of Maine.
KEY RATING DRIVERS
MORAL OBLIGATION OF THE STATE: The presence of a state moral obligation enhances the rating above what would be supported by the revenue stream and structure of the bonds on a stand-alone basis, bringing the rating up to the 'A' level. The statutory moral obligation language is strong, requiring the governor to make an appropriation request to the legislature to make up a deficiency in the capital reserve fund (debt service reserve fund). Maine general obligation (GO) bonds are rated 'AA' with a Stable Outlook by Fitch.
SATISFACTORY, THOUGH DECLINING COVERAGE: The bonds are paid from revenues derived from a narrow base of entities. The revenue stream is down year-over-year, but still performing ahead of original projections. Fitch expects coverage could continue to decline, though it should remain adequate until the final year of maturity when a bullet payment is expected to be made primarily from pledged reserve funds.
CHANGES IN PREMIUM REVENUES: The rating is sensitive primarily to the performance of premium revenues and the resulting strength of debt service coverage.
STATE DEBT SERVICE COMMITMENT: While no state support is pledged on behalf of bondholders, moral obligation support from the highly-rated state provides critical credit support for the 'A' rating. Any indication of uncertainty around the moral obligation pledge could destabilize the rating.
The 'A' rating reflects the security provided by revenues generated from a premium on various motor vehicle oils (premium revenues), as well as the presence of a moral obligation by the state of Maine to make up deficiencies in the program's capital reserve, which serves as the debt service reserve fund. This strong state moral obligation is sufficient to raise the rating to the 'A' level.
The bonds financed a portion of costs for environmental remediation at the largest of four sites used by a now defunct waste oil recycling business. Although additional borrowing had been anticipated at the time of the original issuance in 2009, a 2011 legislative change shifted financing of this program to pay-as-you-go and eliminated the ability to issue additional debt related to the program.
REVENUES AHEAD OF PROJECTIONS, BUT DOWN RECENTLY
The revenue stream that supports debt service was relatively unproven at the time of issuance and has performed well compared to expectations, though collections are down in the past two years. It was instituted in 2008, replacing a previous premium on motor vehicle oil changes that did not generate sufficient revenues to support the authorized bonding program. The current premiums have been in place since Aug. 1, 2008, when the basis for the premium was changed to bulk motor oil sold or distributed in the state. A further enhancement took effect Oct. 1, 2009 when the application of the premium was expanded to include prepackaged motor oil and other lubricating oils. And in 2011, the state again revised premiums and related definitions to further clarify the covered oils and associated fees.
Revenues have performed better than originally projected, largely due to the 2009 (fiscal 2010) enhancement. Unaudited fiscal 2013 revenues of $2.9 million were nearly 60% ahead of base case projections, though they were down 9.4% from fiscal 2011 and 0.4% from fiscal 2012. Fitch attributes the recent declines to the state's weak economic performance, which has lagged national trends.
COVERAGE COULD DECLINE, BUT SHOULD REMAIN SUFFICIENT
Unaudited fiscal 2013 premium revenues of $2.9 million covered annual debt service by a solid 1.9x, and maximum annual debt service (the bullet payment in the final year of maturity in 2030) by 1.1x. While those revenues are down over the past several years, they remain well ahead of the original base case projections. Base case projections developed by a consultant in August 2009 had forecast $1.8 million in premium revenues in fiscal 2013, and coverage of just 1.2x annual debt service. The expansion described above led to the sharp improvement in premium revenues. Fitch believes weakening in coverage is possible given the state's challenged economic environment and the narrowness of the revenue stream. However, annual debt service declines until 2029, just before the final payment, providing additional cushion even in the event of a very significant decline of premium revenues. Fiscal 2013 coverage of average annual debt service was a strong 2.4x.
STRENGTH OF MORAL OBLIGATION
The moral obligation of the state of Maine to replenish any draw down on the debt service reserve fund significantly strengthens bondholder security. Maine's 'AA' GO rating reflects the state's low debt burden and responsive fiscal management, offset by a strained budgetary situation with continued use of one-time measures and sluggish economic growth. Pursuant to its authorizing legislation, the authority may create a capital reserve fund when issuing debt, and did so with the issuance of the 2009A bonds. On or before Dec. 1st of each year, the authority certifies to the Governor any amounts necessary to restore the capital reserve fund to its capital reserve requirement of MADS, excluding the bullet payment in the final year of maturity. If there are not revenues available in the state's contingent account (rainy day fund), the Governor must transmit to the legislature the authority's certification and any amount remaining to be paid. The legislature then has the authority to appropriate and pay to the authority that amount during the fiscal year.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. State Government Tax-Supported Rating Criteria'(Aug. 14, 2012);
--'Rating Guidelines for Moral Obligations'(April 18, 2013);
--'Fitch Downgrades Maine's GOs To 'AA' From 'AA+'; Outlook Revised to Stable' (Jan. 13, 2013).
Applicable Criteria and Related Research:
U.S. State Government Tax-Supported Rating Criteria
Rating Guidelines for Moral Obligations