CHICAGO--(BUSINESS WIRE)--Fitch Ratings today published an updated Asset-Backed sector-specific criteria report titled 'Rating Criteria for U.S. Utility Tariff Bonds'. There have been no material changes from the previous version; therefore Fitch expects no impact on existing ratings.
This report updates and replaces the prior criteria report of the same title, dated Dec. 20, 2012.
The report presents Fitch's analytical approach to rating U.S. utility tariff bonds. It outlines the unique features 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. In addition, the report details key rating drivers associated with U.S. utility tariff bonds 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.
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 write-offs 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 determine whether 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 conducted in accordance with Fitch's counterparty criteria for structured finance transactions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Rating Criteria for U.S. Utility Tariff Bonds