AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the New Jersey Environmental Infrastructure Trust (NJEIT or the trust):
--Approximately $59.3 million Environmental Infrastructure Bonds, Series 2014A;
--Approximately $5.6 million Environmental Infrastructure Bonds, Series 2014B (AMT).
Bond proceeds will be used to finance certain water and wastewater system projects in the state and to pay for the cost of issuance. The bonds are expected to price via competitive bid on May 7.
In addition, Fitch has affirmed the following rating:
--$1.2 billion outstanding parity bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are primarily secured by certain loan repayments payable by interest-bearing loans made directly from bond proceeds (trust loans) and zero-interest loans made primarily from federal capitalization grant and state match amounts (fund loans). In addition, certain bonds issued prior to 2007 are also secured by amounts held in reserves.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGHLY-RATED BORROWER POOL: About 87% of NJEIT's loan portfolio is estimated to be investment grade. Loan provisions are strong with the majority of loan principal secured by general obligation pledges.
DIVERSE LOAN POOL: The combined trust and fund loan pool is diverse in comparison to similar programs. The pool consists of 323 borrowers, with the top 10 participants representing approximately 40% of the total portfolio.
STRONG PROGRAM MANAGEMENT: NJEIT maintains sound underwriting and loan monitoring procedures as evidenced by the fact that NJEIT has never experienced a borrower default in the loan portfolio secured by the master program trust agreement.
RATING SENSITIVITIES
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration or increased leveraging resulting in the program's inability to pass Fitch's liability default 'AAA' hurdle would put downward pressure on the rating. The Stable Rating Outlook reflects Fitch's view that these events are not likely to occur.
CREDIT PROFILE
NJEIT is operated independently of the state in conjunction with the New Jersey Department of Environmental Protection (DEP). Pursuant to the Trust Act, NJEIT makes loans to local government, nonprofit, and private borrowers for certain eligible water and wastewater system projects.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch calculates the program's asset strength ratio (PASR), which equals total scheduled loan repayments plus any reserve balances and account earnings divided by total scheduled bond debt service, to be very strong at approximately 2.1x versus Fitch's 2013 'AAA' median of 1.6x. Because of this strong coverage, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 72% over the first four years, and 100% in the middle and last four years of the program's life (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability stress hurdle of 20% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION
NJEIT's trust bonds benefit from credit enhancement provided both by pledged loan revenues in excess of bond debt service due (overcollateralization) and amounts and earnings held in certain pledged accounts. Minimum annual debt service coverage from over-collateralization alone remains strong at approximately 2.0x.
In addition, for each series bonds issued before 2007, debt service reserve funds (DSRF) funded from a combination of federal capitalization grants, matching state contributions, and/or excess loan repayments, had been required. The DSRF for each applicable bond series is typically maintained at the least of MADS, 125% of average annual debt service, or 10% of original bond proceeds. In aggregate, the DSRFs total $95 million, or about 7.4% of outstanding bonds. Bonds issued since 2007 have not required a debt service reserve fund.
DIVERSE, HIGHLY-RATED LOAN POOL
The combined loan pool is composed of 323 borrowers. In aggregate, the top 10 borrowers represent 40% of the loan pool versus Fitch's median level of 52%. Middlesex County Utilities Authority (not rated by Fitch) is the largest participant, composing about 5% of the pool. The remaining top 10 borrowers range from 2.4% to 5% in size. Based on the characteristics described above, Fitch views the loan pool as having good diversity in comparison to other similar 'AAA' programs.
Pool credit quality is strong with approximately 86.5% of the loans held by investment-grade borrowers. The program's loan security is also solid, with 90% of loan principal backed by general obligation pledges and the remaining 10% backed by revenue pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
NJEIT's underwriting policies require that each borrower carry an investment-grade rating or otherwise demonstrate adequate credit quality such as by providing a letter of credit from a suitably rated institution, as outlined by the credit policy. Management continues to refine its already well-documented policy as well as its technological infrastructure; Fitch views these refinements as credit positives.
Borrower repayments are due at least one month prior to bond payment dates. NJEIT has the power to intercept state aid to cure SRF loan repayment defaults otherwise due to borrowers. If a borrower is 30 days late in its repayment obligations, NJEIT may direct the state treasurer to withhold state aid payments and forward to NJEIT. The ability to intercept state aid does not apply to trust loans made to private borrowers or fund loans. To date, the intercept mechanism has never been tested and is not a part of Fitch's analysis.
The NJEIT maintains formal procedures in monitoring loan performance. Borrowers are required to provide audited financials annually for review. To date, there have been no loan defaults by any borrowers secured by the master program trust agreement.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 17, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool 2013 Peer Review' (Oct 31, 2013);
--'Revenue-Supported Rating Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719991
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707257
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827428
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.