Fitch Rates Michigan Finance Authority Revolving Fund Bonds 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the Michigan Finance Authority (MFA):

--Approximately $299.8 million clean water revolving fund revenue and revenue refunding bonds, series 2016B.

Bond proceeds will be used to provide funds for the purchase of municipal obligations in the State of Michigan, fund capitalized interest on the series 2016B bonds, refund a portion of the series 2009 and 2010 bonds, refund the bond anticipation notes, series 2016A, and pay costs of issuance. The bonds are expected to sell via negotiation during the week of Oct. 24.

In addition, Fitch has affirmed the 'AAA' rating on the following bonds:

--$1.2 billion in outstanding clean water and drinking water revolving fund (senior lien) revenue bonds;

--$165.3 million in outstanding clean water and drinking water revolving fund subordinate revenue bonds.

The Rating Outlook is Stable.

SECURITY

The series 2016B bonds are senior lien bonds and are secured primarily by pledged loan repayments. All bonds benefit from annual surplus debt service coverage and reserve releases after any requirements are met within each program type.

KEY RATING DRIVERS

SOUND FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

QUALITY BORROWER POOL: On a combined-program basis, approximately 93% of MFA's clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) have investment-grade ratings. Most loans are secured by borrowers' general obligation and/or utility revenue pledges.

AVERAGE POOL DIVERSITY: MFA's state revolving fund (SRF) programs demonstrate average borrower diversity, with the top 10 borrowers representing approximately 55% of the loan pool. Junior-lien loans to the Great Lakes Water Authority (GLWA; second lien bonds rated 'A-', Outlook Stable by Fitch) is the largest borrower at 16% of the pool.

CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: MFA's separate DWSRF and CWSRF programs are cross-collateralized with one another, which further enhances bondholder security by allowing for shortfalls in one program to be covered by surpluses in the other.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the Michigan Finance Authority program's inability to pass Fitch's 'AAA' liability default hurdle would put downward pressure on the rating. The Stable Rating Outlook reflects Fitch's view that these events are not likely to occur.

CREDIT PROFILE

MFA provides low-cost financing to governmental entities within the state for eligible clean water and drinking water projects.

FINANCIAL STRUCTURE EXHIBITS SOUND DEFAULT TOLERANCE

Fitch's 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 Fitch's 'AAA' liability rating stress hurdle of 26% as produced by the PSC. The rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.

As an additional measure of financial strength, Fitch calculates the program asset strength ratio (PASR). MFA's PASR calculation includes total scheduled loan repayments, reserve balances and account earnings divided by total scheduled bond debt service. The resulting PASR is sound at approximately 1.9x, which corresponds to Fitch's 2015 'AAA' median PASR of 1.9x.

HIGH-QUALITY LOAN POOL WITH AVERAGE CONCENTRATION

The combined program consists of 246 borrowers, the top 10 of which comprise approximately 55% of outstanding loan obligations. After GLWA, the Oakland-Macomb Interceptor Drain Drainage District (not rated by Fitch but assessed to be of strong credit quality) is the next largest borrower, representing 8% of outstanding pool loan principal. The remaining top 10 borrowers range in size from 2%-8% of the pool. Single-borrower and top 10 concentration measures are mostly in-line with Fitch's 'AAA' medians.

Fitch estimates that approximately 93% of program participants exhibit investment-grade credit quality. In aggregate, pool credit quality is better than similar municipal pools as reflected by the 'AAA' liability rating stress hurdle of 26% (lower liability stresses correlate to stronger credit quality), which is lower than Fitch's 'AAA' median of 30%. The better-than-average rating stress hurdle is attributable largely to the size and rating of GLWA. On Sept. 30, 2016, Fitch upgraded GLWA's senior and second-lien water and sewer revenue bonds to 'A' and 'A-', respectively.

Pool loan security is solid with approximately 51% secured by utility revenue pledges, 14% secured by general obligation (GO) and utility revenues (double-barrel) and the remaining 35% secured by unlimited tax GO or limited tax GOs. The pool composition has remained mostly consistent since its inception.

LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION AND RESERVES

Loss protection for bondholders is provided by overcollateralization, or surplus loan repayments remaining after paying debt service on the bonds. In addition, for certain pooled project bonds, dedicated reserve funds are also available. As the loans/bonds amortize, these reserves are released from each series' dedicated reserve account to the extent that remaining reserves for each series equal their required minimum. Combined reserves total $518.1 million, or 38% of bonds outstanding. Reserves are currently scheduled to provide significant loss protection to bonds through 2029 at which point overcollateralization and surplus revenue balances will begin providing more protection.

A surplus revenue account has also been established for each series of bonds. The combined revenue balance is $161.1 million or 12% of bonds outstanding.

CROSS-COLLATERALIZATION PROVIDES TERTIARY PROTECTION

The CWSRF and DWSRF are cross-collateralized, meaning surplus amounts released from each SRF program are available to cure deficiencies in the other. This feature increases the diversity of the loan pool and lessens the risk of any one borrower's default eroding reserve balances and threatening bondholder payments.

EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING

MFA uses conservative underwriting guidelines and sound investment policies. Borrowers that do not have public investment-grade ratings are required to exhibit investment-grade characteristics through state credit support or private credit assessments or must otherwise provide an alternative security pledge or pledges. In addition, borrowers must demonstrate, among other things, rates and charges sufficient to cover all operational expenses of the project including the ability to pay loan principal and interest. Strength in underwriting is demonstrated by the fact that neither pool has ever experienced a default or delinquency.

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013101

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013101

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Tim Morilla
Associate Director
+1-512-908-0547
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Garcia Seebach
Director
+1-512-215-3743
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Tim Morilla
Associate Director
+1-512-908-0547
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com