AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the Maryland Water Quality Financing Administration (MWQFA):
--Approximately $21.085 million revolving loan fund revenue refunding bonds series 2016.
Bond proceeds will be used to refund all of the callable series 2008A bonds and pay for expenses related to the issuance of the 2016 bonds. The bonds are expected to sell via a competitive sale on Oct. 18, 2016.
In addition, Fitch has affirmed the following:
--Approximately $29.205 million outstanding revolving loan fund revenue bonds series 2008A at 'AAA' (pre-refunding).
The Rating Outlook is Stable.
The bonds are secured by pledged loan repayments under the 2008 program indenture, pledged funds and accounts, and investment earnings on such funds and accounts.
KEY RATING DRIVERS
SOUND FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that MWQFA's combined Water Quality Revolving Loan Fund (WQRLF) and Drinking Water Revolving Loan Fund (DWRLF) loan pool programs (the program) 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). MWQFA's program bonds also benefit from substantial overcollateralization as surplus loan repayments meaningfully exceed bond debt service. These excess amounts provide very robust minimum annual debt service coverage of 5.3x.
HIGH QUALITY LOAN POOL: Approximately 80% of MWQFA's loan pool consists of borrowers exhibiting investment-grade ratings. Loan security is very strong, with all loan principal secured by general obligation and/or utility revenue pledges.
MODERATE POOL CONCENTRATION: The top 10 borrowers represent 72% of the pool, displaying moderate concentration relative to Fitch's 2015 'AAA' median of 55%.
EFFECTIVE PROGRAM OVERSIGHT: MWQFA's loan underwriting and administration have proven effective as its revolving funds have never experienced a loan payment default.
REDUCTION IN MODELED STRESS CUSHION: If the Maryland Water Quality Financing Administration's revolving loan program were to experience significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased bond leveraging resulting in its inability to pass Fitch's liability default 'AAA' hurdle downward pressure on the rating would occur.
MWQFA provides financing at below-market rates to governmental entities within the state for eligible clean water revolving fund projects through its WQRLF and drinking water revolving fund projects through its DWRLF. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects.
With respect to MWQFA's current and recent bond issues, 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.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch's cash flow modeling demonstrates that the availability of program resources allow for hypothetical loan defaults of 100% in 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) while still paying bond debt service in full. This is in excess of Fitch's 'AAA' liability rating stress hurdle of 19%, thereby indicating a passing result under Fitch's quantitative analysis.
As an additional measure of financial strength, Fitch calculates the program asset strength ratio (PASR). The PASR, an asset-to-liability ratio, includes total scheduled loan repayments plus any additional pledge funds divided by total scheduled bond debt service. The resulting PASR for MWQFA's program is exceptionally strong at approximately 9.4x, well above Fitch's 2015 'AAA' median level of 1.9x.
HIGH-QUALITY BORROWER POOL WITH MODERATE CONCENTRATION
Fitch estimates that approximately 80% of program participants exhibit investment-grade credit quality. In aggregate, pool credit quality is better than similar municipal pools, as reflected by a 'AAA' PSC liability stress of 19% versus Fitch's median of 32% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very good with all loans secured by general obligation and/or utility revenue pledges.
The program consists of 54 active borrowers, the top 10 of which comprise a high 72% of the total pool. The two largest borrowers are Washington Suburban Sanitary District (13% of total, general obligation and utility revenue bonds rated 'AAA' by Fitch) and Baltimore County (11% of total, general obligation bonds rated 'AAA' by Fitch). The remaining top 10 borrowers range in size from 3.7% to 9.3% of the total pool.
LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION
MWQFA's revolving fund utilizes a cash-flow structure, wherein program bonds are primarily protected from losses by overcollateralization, or surplus loan repayments made in excess of bond debt service. These excess amounts provide very robust minimum annual debt service coverage of 5.3x.
Additional enhancement is provided from the program's $294 million available in its equity fund as of June 30, 2016. While the equity fund itself is not pledged to repayment of the bonds, the direct loan repayments provided by equity fund amounts may be pledged to bondholders at MWQFA's discretion if coverage levels were to significantly decline. Due to the non-pledged nature of the equity fund, credit for amounts in this fund was not applied in Fitch's cash flow modeling.
The program is also supported by a state-aid intercept to cover any potential borrower defaults of general obligation-backed loans. Positively, the intercept has never needed to be utilized.
EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING
The MWQFA, a unit within the Maryland Department of the Environment (MDE), oversees the legal and financial eligibility of all revolving fund borrowers. The Engineering and Capital Projects Program, also a division of the MDE, is responsible for managing the technical and eligibility requirements of each loan. Loan underwriting generally requires a double-barrel commitment of both utility revenue and general obligation pledges. In addition, MWQFA requires a minimum of 1.2x cash flow coverage from utility system revenues. Overall loan performance has been strong as there have never been any payment defaults in MWQFA's revolving fund loan programs.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 29 Oct 2015)
Dodd-Frank Rating Information Disclosure Form
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