Fitch Rates MA Water Pollution Abatement SRF Pool Program Bonds Ser. 2014 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns a 'AAA' rating to the following bonds issued by the Massachusetts Water Pollution Abatement Trust (MWPAT or the trust):

--Approximately $561.2 million state revolving fund (SRF) refunding bonds, series 2014.

The bonds are scheduled to price via negotiation the week of May 26. Bond proceeds will be used to refund certain bonds previously issued by the trust and to pay for costs of issuance.

In addition, Fitch has affirmed the following rating:

--$3.2 billion outstanding parity bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

Bonds are primarily secured by pledged loan repayments and Commonwealth of Massachusetts (the Commonwealth) contract assistance payments (CAP). Additional security is provided by either reserve funds, surplus pledged loan repayments initially made from program equity (direct loans), or a combination of the two.

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: More than 96% of the trust's Pool SRF Bond program (the pool program) consists of borrowers exhibiting investment-grade ratings. Loan security is also strong as borrowers are secured by general obligation pledges of city and towns, local utility revenue pledges, or a combination of both.

MODERATE POOL DIVERSITY: The loan portfolio has high borrower concentration, with the Massachusetts Water Resources Authority (MWRA) comprising 28% of total outstanding loan principal. Additionally, the top 10 borrowers represent about 51% of the total loan principal. Programs with higher concentration are assessed at higher stress levels in Fitch's PSC.

STRONG PROGRAM MANAGEMENT: MWPAT manages one of the largest SRF programs in the nation. To date, there have been no pledged loan defaults in the MWPAT's SRF programs.

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 'AAA' liability default 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

MWPAT provides financial assistance to local governments in the Commonwealth under four separate SRF programs which include three standalone, single-borrower programs (MWRA, South Essex Sewer District, and the city of New Bedford, each rated 'AAA' by Fitch), and the pool program.

Funding via the MWPAT programs provides monies for water pollution abatement and drinking water projects within the state.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Fitch calculates the pool program's asset strength ratio (PASR), which includes total scheduled pledged loan repayments, CAP payments, excess releases from the standalone SRF programs, plus any reserve balances and account earnings divided by total scheduled bond debt service, to be strong at approximately 1.3x versus Fitch's '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 100% over any four-year period (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.

Program-level semiannual debt service coverage, which excludes amounts held in the reserve funds, is projected to be a minimum of 1.0x.

HIGH-QUALITY LOAN POOL WITH MODERATE SINGLE-BORROWER CONCENTRATION

Fitch estimates that at least 96% of pool program participants exhibit investment-grade credit quality, with the large majority rated 'A' or higher. In aggregate, pool credit quality is strong versus similar municipal pools as reflected in the low 'AAA' liability stress of 20% versus Fitch's median of 33% (lower liability stresses correlate to stronger credit quality). Loan security is also solid as the loan portfolio is secured by general obligation pledges of city and towns, local utility revenue pledges, or a combination of the two. Fitch notes that MWPAT's pool composition is mostly in line with the pool at Fitch's last rating in April 2013.

CAPs, which are also used to cover a portion of debt service on behalf of certain borrowers, constitute a general obligation of the Commonwealth (GOs rated 'AA+' with a Stable Outlook by Fitch), for which its full faith and credit are pledged. Because of this obligation, CAPs were stressed along with pledged loans in Fitch's cash flow modeling analysis.

The pool program consists of approximately 290 borrowers, the top 10 of which comprise over 50% of outstanding loan obligations. MWRA (senior and subordinate lien revenue bonds rated 'AA+' and 'AA', respectively, with a Stable Outlook) remains the largest borrower, representing an above-average 28% of outstanding pool loan principal versus Fitch's 'AAA' median of 19%. The remaining top 10 borrowers range in size from 1.5%-3.9%.

ENHANCEMENT PROVIDED BY OVERCOLLATERALIZATION AND RESERVES

Certain series of bonds are protected from losses by surplus pledged direct loan repayments made in excess of bond debt service. Enhancement (or overcollateralization) provided by such direct loans typically ranges from 33%-50% of the supported bonds. As bonds enhanced by overcollateralization amortize, excess amounts are then released to the pool program reserve fund and are therefore available to other pool program borrowers prior to being released to the deficiency fund.

In addition, certain other series of bonds have been enhanced by reserves initially funded by the trust (from federal and state grants) in amounts also typically ranging from 33% to 50% of the related loans or bonds. As bonds secured by reserve funds amortize, such reserves will be released to the pool program reserve, so that the original reserve level is maintained relative to outstanding bond principal. Combined series' reserves net of direct loans equal approximately $903 million, or 28% of outstanding bonds.

Amounts not required to be held or used in pool program reserve fund are transferred to the deficiency fund and can be used to cure defaults resulting from loan repayment interruptions in the other MWPAT SRF programs, including the standalone programs. If not needed by the statewide loan pool or the standalone programs, all released reserves are eventually recycled and used to secure additional SRF loans.

SOLID INVESTMENT PRACTICES

Program assets are invested in U.S. Treasury and Agency securities and in investment agreements with providers that are highly rated and/or fully collateralized by direct U.S. Treasury or Agency securities with third-party custodians. The sustained credit quality of the reserve investments is important to maintaining the current 'AAA' rating.

STATE AID INTERCEPT PROVISION

Underlying loans are subject to a state intercept mechanism in the event of delinquent repayments. However, Fitch conservatively did not consider the use of the intercept in its analysis as evidence of each borrower's interceptable aid was not provided.

CROSS-COLLATERALIZATION FEATURE

The clean water SRF (CWSRF) and drinking water (DWSRF) are cross-collateralized with one another, which allow shortfalls in one fund to be covered by surpluses in the other, further enhancing bondholder security. This allows Fitch to analyze both programs together in the same models.

STRONG PROGRAM MANAGEMENT

MWAPT is an interagency management team composed of officials from the commonwealth treasurer's office, the executive office of administration and finance, and the commonwealth's Department of Environmental Protection (DEP) administers Massachusetts' SRFs in an arrangement typical of such programs nationwide. DEP staff members review and monitor projects for several water and wastewater programs, including the pool program. As a result of strong loan underwriting and monitoring, the program has never experienced a default.

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:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719991

State Revolving Fund and Leveraged Municipal Loan Pool Criteria -- Effective May 17, 2013 ¬タモ April 27, 2014

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=830722

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Contacts

Fitch Ratings,New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Major Parkhurst, +1-512-215-3724
or
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Senior Director
Adrienne Booker, +1-312-368-5471
or
Committee Chairperson
Senior Director
Kathy Masterson, +1-512-215-3730

Sharing

Contacts

Fitch Ratings,New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Major Parkhurst, +1-512-215-3724
or
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Senior Director
Adrienne Booker, +1-312-368-5471
or
Committee Chairperson
Senior Director
Kathy Masterson, +1-512-215-3730