Fitch Rates Missouri's Environmental Improv & Energy Resources Auth's $106.1MM SRF Revs 'AAA'

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the State of Missouri's Environmental Improvement and Energy Resources Authority (EIERA) through its 2010 Master Trust Agreement (MTA):

--Approximately $106.1 million water pollution control and drinking water refunding revenue bonds (state revolving funds programs), series 2015B.

The bonds are expected to sell via negotiation during the week of Dec. 7. Bond proceeds will be used to refinance certain previously issued series of bonds for present-value savings.

In addition, Fitch affirms the 'AAA' rating on the following outstanding bonds:

--Approximately $197.7 million senior lien water pollution control and drinking water revenue bonds (2004 MTA);

--Approximately $214.2 million subordinate lien water pollution control and drinking water refunding revenue bonds (2004 MTA);

--Approximately $379.8 million senior lien water pollution control and drinking water revenue bonds (2010 MTA).

The Rating Outlook is Stable.

SECURITY

The 2010 MTA senior lien bonds are secured primarily by pledged loan repayments, certain account earnings, and deallocated reserves released from the 2004 MTA.

The 2004 MTA senior lien bonds are secured by pledged loan repayments, debt service reserve funds, interest earnings and excess loan repayments from the 2010 MTA. All subordinate lien bonds under the 2004 MTA are secured by loan repayments and deallocated reserves released from both MTAs.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that EIERA's combined clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) programs (the programs) can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

SOLID BORROWER POOL: Approximately 58% of the combined programs' pledged loan pool (the loan pool) consists of borrowers exhibiting investment-grade ratings, which is somewhat below average in comparison to similar municipal loan programs rated 'AAA' by Fitch. Loan security is strong as borrowers are secured primarily by net utility system revenue pledges.

MODERATE POOL DIVERSITY: EIERA's loan pool compares closely in diversity to similar programs rated by Fitch. The pool consists of 267 loans to approximately 243 pledged borrowers, with the top 10 borrowers representing 59% of the total portfolio.

EFFECTIVE PROGRAM MANAGEMENT: The Missouri Department of Natural Resources (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.

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 rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.

CREDIT PROFILE

Through its DWSRF and CWSRF programs, the EIERA provides loans to fund water and water pollution control infrastructure projects within the state. Eligible participants, some of which may have limited access to the capital markets, receive favorable financing options through these programs.

Most of the program's credit metrics, including those of the financial structure and pool credit quality, have remained stable over the past several years. Although not considered a credit factor, as the program shifts from more of a traditional reserve-fund structure (i.e. the 2004 MTA) to more of a cash-flow structure (the 2010 MTA), bondholder loss protection is expected to also shift, in aggregate, from reserves to overcollateralization, as described below.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Fitch measures financial strength of SRFs by calculating each program's asset strength ratio (PASR). The PASR includes the sum of the total scheduled pledged loan repayments, account earnings, and reserves divided by total scheduled bond debt service. The EIERA's PASR is 2.1x, which is slightly better than Fitch's 2015 'AAA' rating category median of 1.9x and is indicative of a strong financial structure.

Due to 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 the first, 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 the EIERA's 'AAA' liability rating stress hurdle of 32%, as produced by Fitch's PSC. The rating stress hurdle is calculated based on overall program credit quality as measured by the ratings of underlying borrowers, borrower size, loan term and concentration.

LOSS PROTECTION PROVIDED BY RESERVES AND OVERCOLLATERALIZATION

The series 2015B bonds and other bonds issued since the establishment of the 2010 MTA utilize a cash flow-based structure, wherein bondholders are protected from losses primarily by pledged loan repayments made in excess of bond debt service, or overcollateralization. Bonds issued prior to the 2010 MTA typically utilized a reserve-fund structure, wherein bondholders are protected from losses primarily by pledged reserve funds.

The 2004 and 2010 MTAs cross-collateralize one another as the aforementioned excesses from each MTA are made available to the other prior to being released from lien, effectively combining the two structures into one. In addition, the MTAs include similar cross-collateralization features wherein excess funds from the CWSRF are available to cover deficiencies in the DWSRF and vice-versa. The ability to cross-collateralize helps to minimize losses in a single program or MTA if defaults were to occur. Because of the cross-collateralization features, Fitch combines both SRF pools and MTAs in its modeling analyses.

Reserves from the series pledged under the 2004 MTA bonds currently stand at approximately $504 million, which equates to a substantial 61% of total bonds outstanding. On an annual basis, loan repayments plus reserve account earnings are projected to overcollateralize aggregate bond debt service by a minimum of 1.2x, which is close to Fitch's 'AAA' rating category median.

SOLID BORROWER POOL WITH MODERATE DIVERSITY

The combined loan pool is composed of about 243 pledged borrowers. In aggregate, the top 10 borrowers represent 59% of the pool versus Fitch's 'AAA' median level of 55%. The Metropolitan Sewer District of St. Louis (senior lien revenue bonds rated 'AA+' by Fitch) is the pool's largest participant, making up 23.4% of the total. At 6.9% and 5.3% respectively, the second largest and third largest borrowers are the Little Blue Valley Sewer District and Cape Girardeau (neither rated by Fitch but both assessed to be strong in credit quality). The remaining top 10 borrowers range from 2.1% to 4.9% of the pool. Based on these characteristics, Fitch views the loan pool as having diversity similar to or slightly weaker than other 'AAA'-rated municipal loan pool programs.

At least 58% of the portfolio is considered to be investment grade compared to Fitch's 'AAA' median of 70%. Underlying obligation security provisions are strong, with most obligations secured by water and/or sewer net revenue pledges. Based on the pool's underlying characteristics, its resulting 'AAA' liability rating stress hurdle is in line with Fitch's 'AAA' median level of 31%, aided in part by the pool's lower than average weighted average life.

EFFECTIVE PROGRAM MANAGEMENT AND OVERSIGHT

Loan applications are reviewed by the state DNR, which prepares an intended use plan to identify water and sewer projects that are eligible for the SRF programs. In addition, every borrower must provide detailed information regarding the project and scope, loan security, and ability to repay the debt (the DNR typically requires loan applicants to demonstrate a minimum of 1.1x debt service coverage). 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

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 29 Oct 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872307

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995734

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3743
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1-512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Julie G. Seebach
Director
+1-512-215-3743
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com