NEW YORK--(BUSINESS WIRE)--On the effective date of March 29, 2016, Fitch Ratings will revise the long-term rating to 'AAA' from 'AA' and assign a short-term rating of 'F1' to the $74,060,000 The City of New York general obligation bonds, fiscal 2008, series J, subseries J-8 (adjustable rate bonds). The Rating Outlook is Stable for the long-term rating. The rating action is in connection with: (i) conversion of the bonds from an index rate mode, with no tender feature, to a weekly interest rate mode, with a tender feature; (ii) procurement of an irrevocable standby letter of credit (LOC) to support tenders of the bonds; and (iii) the mandatory tender and reoffering of the bonds, which will occur on March 29, 2016.
KEY RATING DRIVERS
The long-term rating will now be determined using Fitch's dual-party pay criteria and will be based jointly on the underlying rating assigned to the bonds by Fitch (currently rated 'AA', Outlook Stable), and the rating assigned by Fitch to Sumitomo Mitsui Banking Corporation (rated 'A/F1'), which will provide the LOC as support for the bonds. The short-term 'F1' rating will be based solely on the LOC. For information about the underlying credit rating of New York City see press release dated Feb. 16, 2016 available at 'www.fitchratings.com'.
Fitch's dual-party pay criteria consider the likelihood of the failure of both a rated obligor and a bank LOC provider. The methodology results in a long-term rating that is up to two notches higher than the stronger of the two credits if the following conditions are met: (1) both entities have a rating of 'A' or higher; (2) the transaction is structured such that payments from both the municipal issuer and the bank are in the flow of funds and both entities would have to fail to perform before the bonds defaulted; and (3) the credit of the bank and the rated obligor have no more than a medium degree of correlation. Fitch has determined a low degree of correlation between Sumitomo Mitsui Banking Corporation and the obligor which results in a rating of 'AAA' for the bonds. If either the underlying bond rating or the bank rating were downgraded to 'A-' or lower, the dual-party pay criteria could no longer be applied, and the long-term rating assigned to the bonds would then be adjusted to the higher of the bank rating and the underlying bond rating.
Bond documents and statutes require the city to make regularly scheduled payments of principal and interest on the bonds. If, however, the city fails to provide funds for a scheduled interest or principal payment by 11 a.m. NY time on the due date, bonds are subject to mandatory tender and the purchase price will be paid with a drawing on the LOC. In addition, whenever remarketing proceeds are insufficient to pay the purchase price of tendered bonds, the tender agent will draw on the LOC for the deficiency. The LOC has a stated expiration date of Aug. 2, 2021, unless earlier terminated, and provides full and sufficient coverage of principal plus an amount equal to 35 days of interest at a maximum rate of 9% based on a year of 365 days and purchase price for tendered bonds, while in the weekly rate mode. A mandatory tender of the bonds will occur on the effective date of the LOC on March 29, 2016. The Remarketing Agent for the bonds is Mizuho Securities USA, Inc.
As described above, the long-term rating is tied to the long-term rating assigned to the obligor and the long-term rating that Fitch maintains on the bank providing the LOC. Changes to one or both of these ratings may affect the long-term rating assigned to the bonds.
The short-term rating is exclusively tied to the short-term rating that Fitch maintains on the bank providing the LOC and will reflect all changes to that rating.
Additional information is available at 'www.fitchratings.com'.