CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the State of Missouri Environmental Improvement and Energy Resources Authority (EIERA, or the authority) under its 2010 Master Trust Agreement (MTA):
--$31.1 million water pollution control and drinking water revenue bonds (state revolving funds programs - 2010 MTA), series 2015A.
The bonds are expected to price via negotiation during the week of Jan. 19. The series 2015A bond proceeds will be used to reimburse the Missouri Department of Natural Resources (DNR) for a portion of its prior expenditures related to the state revolving funds (SRF).
In addition, Fitch affirms the 'AAA' ratings on the following outstanding EIERA bonds:
--$345.6 million senior lien water pollution control and drinking water revenue bonds (2004 MTA);
--$223.8 million subordinate lien water pollution control and drinking water refunding revenue bonds (2004 MTA);
--$254.2 million senior lien water pollution control and drinking water revenue bonds (2010 MTA).
The Rating Outlook is Stable.
The 2010 MTA senior lien bonds are secured primarily by pledged loan repayments and deallocated reserves released from the 2004 MTA.
The 2004 MTA senior lien bonds are secured by pledged loan repayments, debt service reserve funds and interest earnings from the debt service reserve funds and excess loan repayments from the 2010 MTA.
All subordinate lien bonds are secured by excess loan repayments and deallocated released reserves from both MTAs.
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the SRF program can continue to pay bond debt service even if there were loan defaults in excess of Fitch's 'AAA' liability default hurdle.
CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The 2004 and 2010 MTAs include cross-collateralization features wherein excess funds from the clean water SRFs (CWSRF) are available to cover deficiencies in the drinking water SRFs (DWSRF) and vice versa. The ability for the two funds to cross-collateralize within each MTA helps to minimize losses if defaults were to occur.
HIGH QUALITY LOAN POOL: Approximately 61% of EIERA's combined loan portfolio consists of entities with at least investment grade ratings, with the remaining amount unrated. Additionally, loan provisions are very strong, with the majority secured by water and/or wastewater revenue pledges.
SOUND PROGRAM MANAGEMENT: The DNR, which administers and manages the SRF program, maintains sound underwriting and loan monitoring procedures. To date, the pledged portfolio has not experienced a permanent loan default.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in loan repayment performance and/or a measurable reduction in pledged reserves could put downward pressure on the rating. The Stable outlook reflects Fitch's view that such deterioration is unlikely to occur.
EIERA issues revolving fund revenue bonds on behalf of DNR to fund SRF loans to various public entities within the state. Funds are typically disbursed to borrowers to pay eligible CWSRF or DWSRF project costs or used to pay the state's 20% match required to receive federal capitalization grants. The 2010 MTA was established as a cash flow structure, which benefits from cross-collateralization with the existing reserve fund-structured 2004 MTA. The available excess de-allocations from one MTA to another effectively combine the two structures into one SRF program. While the 2004 MTA remains open, EIERA does not anticipate issuing additional 2004 MTA bonds in the foreseeable future.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
The combined SRF programs' scheduled pledged loan repayments are projected to provide minimum debt service coverage of 1.0x (excluding significant reserves). Overall, Fitch calculates the program's asset strength ratio (PASR) to be 1.8x, which is consistent with Fitch's 'AAA' median of 1.8x. The PASR includes total scheduled loan repayments and reserve funds divided by total scheduled bond debt service. Given the significant pledged resources, Fitch's cash flow modeling demonstrates that the combined SRF program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four-year period of the bonds 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 31% as produced by the portfolio stress calculator (PSC). The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size, and loan term.
Under the 2010 MTA, pledged borrower obligations are deposited into the applicable drinking water/clean water account of the repayment fund held by the trustee and are used to make debt service payments on 2010 MTA bonds. The interest portion of borrower obligation payments and interest earnings on other designated funds are first allocated to satisfy state match requirements. Payments are structured in this manner to satisfy conditions for DNR to receive federal capitalization grants. The remaining loan repayment amounts are then used to pay remaining 2010 MTA debt service.
In the event of borrower defaults, excess moneys in the repayment fund under the 2010 MTA and reserve releases from bonds secured under the 2004 MTA are available for any series of outstanding master trust bonds (both 2004 and 2010 MTAs) to cover debt service shortfalls, and replenish required reserve balances prior to their release to non-pledged program equity.
The 2010 MTA requires that coverage be maintained at only 1.0x. However, the SRF program's 70% interest rate subsidy makes it necessary for the program to be over-collateralized from participant obligations. As a result, Fitch expects that program cash flows will remain over-collateralized offsetting concerns of over-leveraging.
Under the 2004 MTA, as revenue bonds secured by the master trust series reserves are retired, excess reserves above program requirements are released to the unallocated fund and are available to cover shortfalls within the 2010 MTA's program. The 2004 MTA required a reserve account with each new issue. Reserves were funded at levels equal to 33%, 50%, or 70% of the participant's principal obligation. Currently, the program's pledged reserves total approximately $536.6 million, or approximately 65% the combined outstanding bond par amount. This reserve amount provides significant program enhancement.
CROSS-COLLATERALIZATION ENHANCES BONDHOLDER SECURITY
In addition to the cross-collateralization between the 2004 and 2010 MTAs, the programs provide for cross-collateralization within each CWSRF and DWSRF account, meaning that deficiencies in one SRF account may be covered by available moneys from the other SRF within each MTA. This feature enhances bondholder security by providing additional sources of available revenues from which to draw for debt service and increases the overall diversity of the portfolio. Any such transfer within each CWSRF and DWSRF creates a repayment obligation by the deficient SRF, but the obligation is subordinate to the trust estate's pledge under the MTAs.
ABOVE AVERAGE CREDIT QUALITY LOAN POOL; MODERATELY CONCENTRATED
The combined pledged obligation portfolios contain 243 borrowers. The Metropolitan St. Louis Sewer District (MSD; senior wastewater system revenue bonds rated 'AA+', Stable Outlook by Fitch) is the largest combined pool participant, representing $343.8 million in junior and subordinate lien clean water obligations, or approximately 22% of the combined borrower pool. Because MSD accounts for more than 10% of the total amount of outstanding MTA bonds, it is considered a Material Master Trust Participant under the indenture and therefore subject to additional reporting information.
The pool is concentrated in its top borrowers which make up about 59% of the portfolio. Offsetting this concern are the strong underlying obligation security provisions, with most obligations secured by water and/or sewer net revenue pledges. Concentration concerns are also somewhat mitigated by the strong overall credit quality of the pool, with approximately 61% of loans issued to investment grade borrowers.
STRONG PROGRAM UNDERWRITING
Loan projects are reviewed extensively by the state DNR, which prepares an intended use plan to identify water and sewer projects that are eligible for the SRF program. In addition, every borrower must provide detailed information regarding the project and scope, loan security, and ability to repay the debt. EIERA and DNR also assess each participant before loans are underwritten and may stipulate certain parameters prior to loan approval.
Each borrower's audited financials are reviewed on an annual basis. The MTAs require the trustee to notify the EIERA immediately if a borrower paid late. EIERA and DNR report that they maintain regular contact with participants and financial advisors to stay current on borrower events or issues that may arise. The program's extensive planning and oversight features are credit strengths and contribute to the 'AAA' rating. There has not been a default within the program to date.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (April 28, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria