NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the New York City Municipal Water Finance Authority's $400 million Water and Sewer System Second General Resolution (SGR) Revenue Bonds Adjustable Rate Fiscal 2015 Series BB:
--$100,000,000 Fiscal 2015 subseries BB-1 'AA+/F1';
--$100,000,000 Fiscal 2015 subseries BB-2 'AA+/F1';
--$100,000,000 Fiscal 2015 subseries BB-3 'AA+/F1';
--$100,000,000 Fiscal 2015 subseries BB-4 'AA+/F1+'.
The Rating Outlook is Stable for the long-term ratings.
The SGR bonds are special obligations of the New York City Municipal Water Finance Authority (NYW), payable solely from and secured by a subordinate lien on gross revenues of NYW's combined system.
KEY LONG-TERM RATING DRIVERS
SOUND LEGAL PROTECTIONS: NYW's primary credit strength is its legal structure, including its status as a bankruptcy-remote issuer, providing substantial protection to bondholders from potential operating risks associated with the combined utility system (the system) and New York City (the city).
REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: The system provides an essential service to an exceptionally large, diverse and economically important service area. The system benefits from an abundant, high-quality water supply exempt from expensive filtration requirements and transmission costs.
INDEPENDENT RATE-SETTING AUTHORITY: Strong financial management and a proven ability and willingness to independently raise rates are reflected in consistently solid financial results, despite the continued volatility in consumption.
WELL-MANAGED CAPITAL PROGRAM: Sophisticated capital planning efforts have helped achieve compliance with large and costly mandated regulatory projects and ensured the system's total assets are adequately maintained.
HIGHLY LEVERAGED SYSTEM: Debt levels are high as a result of having to comply historically with environmental mandates and maintain a large urban system and its aging assets. Declining but still sizeable debt issuances programmed into the current capital plan will keep debt levels elevated for the long term.
IMPROVED COLLECTIONS: Below-average current collection rates persist, although payment incentives and strong enforcement mechanisms have yielded positive results in recent years.
KEY SHORT-TERM RATING DRIVERS
The short-term ratings are based on the liquidity support in the form of Standby Bond Purchase Agreements (SBPAs) provided by Bank of America, National Association ('A/F1', Stable Outlook) for subseries BB-1, Mizuho Bank Ltd. ('A-/F1', Stable Outlook) for subseries BB-2, Wells Fargo Bank, National Association ('AA-/F1+', Stable Outlook) for subseries BB-4, and on the liquidity support in the form of a standby letter of credit (LOC) provided by Sumitomo Mitsui Banking Corporation ('A-/F1', Stable Outlook) for subseries BB-3.
The SBPAs provide for the payment of the principal component of purchase price plus an amount equal to 35 days of interest calculated at a maximum rate of 9%, based on a year of 365 days for tendered bonds during the daily, weekly, and two-day rate modes in the event that the proceeds of a remarketing of the bonds are insufficient to pay the purchase price following an optional or mandatory tender. The LOC for subseries BB-3 provides for the payment of the principal component of purchase price plus an amount equal to 35 days of interest calculated at a maximum rate of 9%, based on a year of 365 days for tendered bonds during the weekly rate mode only. The SBPAs will expire on July 10, 2017 (BB-1), July 8, 2016 (BB-2), July 10, 2018 (BB-4), the stated expiration dates, unless such dates are extended, conversion to a rate mode other than daily, weekly, or two-day rate; or upon the occurrence of certain other events of default which result in a mandatory tender or other termination events related to the credit of the bonds which result in an automatic and immediate termination. The LOC will expire on July 10, 2018, the stated expiration date, unless such date is extended, conversion to a rate mode other than weekly rate; or upon the occurrence of certain other events of default which result in a mandatory tender or other termination events related to the credit of the bonds which result in an automatic and immediate termination. The remarketing agents for the bonds are Merrill Lynch, Pierce, Fenner and Smith Incorporated (subseries BB-1), RBC Capital Markets LLC (subseries BB-2), Citigroup Global Markets Inc. (subseries BB-3) and Wells Fargo Bank, National Association (subseries BB-4). The bonds are expected to be delivered on or about July 10, 2014.
The subseries BB-1, BB-2, and BB-4 bonds will be issued in the daily rate mode, but may be converted to a weekly, two-day, commercial paper, flexible or fixed rate. The subseries BB-3 bonds will be issued in the weekly rate mode, but may be converted to a daily, two-day, commercial paper, flexible or fixed rate. While bonds bear interest in the daily, weekly, or two-day rate mode, interest is paid on the 15th calendar day of each month, commencing Aug.15. 2014. Holders of bonds bearing interest in the daily, weekly, or two-day rate modes may tender their bonds for purchase with the requisite prior notice. The trustee/tender agent is obligated to make timely draws on the SBPAs and LOC to pay purchase price in the event of insufficient remarketing proceeds, and in connection with the expiration or termination of the SBPAs and LOC, except in the case of the credit-related events permitting immediate termination or suspension of the SBPAs and LOC.
Funds drawn under the SBPAs and LOC are held uninvested, and are free from any lien prior to that of the bondholders. Bonds are subject to a mandatory tender: (1) on each interest rate mode conversion date, except between daily, weekly, and two-day rate modes; (2) on each interest reset date for bonds in the commercial paper and flexible rate modes; (3) upon the expiration or earlier termination of the SBPAs or LOC, and (4) on any substitution of the SBPAs or LOC which results in a reduction or withdrawal of the ratings assigned to the bonds. Optional and mandatory redemption provisions also apply to the bonds pursuant to the terms of the documents.
Bond proceeds will be used by the Authority to pay: (i) principal on a portion of the Authority's outstanding commercial paper notes, (ii) costs of improvements to the water and sewer systems, and (iii) certain costs of issuance.
LONG-TERM RATING SENSITIVITIES
MAINTENANCE OF SUFFICIENT RATES: Failure to achieve rate hikes sufficient to ensure comparable financial margins and maintain current debt service coverage (DSC) levels on senior and subordinate lien obligations would be viewed negatively.
RISING DEBT LEVELS: The continued escalation in the system's debt levels remains an increasing concern that could ultimately pressure the rating. Increases in leverage beyond what is currently forecast would likely place added pressure on the authority's current rating.
SHORT TERM RATING SENSITIVITIES
The short-term ratings reflect the short-term ratings that Fitch maintains on the banks providing liquidity support and will be adjusted upward or downward in conjunction with the short-term rating of the respective bank and, in some cases, the long-term rating of the bonds. The long-term rating is exclusively tied to the creditworthiness of the bond obligor and will reflect all changes to that rating.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'U.S. Municipal Structured Finance Criteria', Feb. 24, 2014;
--'Rating Guidelines for Variable-Rate Demand Obligations and Commercial Paper Issued with External Liquidity Support', Jan. 27, 2014.
Applicable Criteria and Related Research:
Rating Guidelines for Variable-Rate Demand Obligations and Commercial Paper Issued with External Liquidity Support
U.S. Municipal Structured Finance Criteria