Fitch Rates Maryland Water Quality Financing Admin's Ser. 2016 Revolving Loan Fund Revs 'AAA'

AUSTIN, Texas--()--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.

SECURITY

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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'.

Applicable Criteria

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

https://www.fitchratings.com/site/re/750012

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

https://www.fitchratings.com/site/re/872307

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012747

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012747

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Tim Morilla
Associate Director
+1-512-813-5702
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Tim Morilla
Associate Director
+1-512-813-5702
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com