AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the New Jersey Environmental Infrastructure Trust (NJEIT or the Trust):
--Approximately $7,245,000 environmental infrastructure bonds, series 2016A-2 (green bonds);
--Approximately $34,410,000 environmental infrastructure refunding bonds, series 2016A-R3 (2009A Financing Program) (green bonds);
--Approximately $74,980,000 environmental infrastructure refunding bonds, series 2016A-R4 (2010A Financing Program) (green bonds).
Series 2016A-2 bond proceeds will be used to finance certain water and wastewater system improvement projects in the state (deemed to be environmentally beneficial) and to pay for the costs of issuance. The series 2016A-R3 and 2016A-R4 bond proceeds will be used to refund certain previously issued series of bonds for interest savings and to pay costs of issuance. The bonds are expected to price via competitive bid on December 6.
In addition, Fitch has affirmed the following outstanding bonds:
--Approximately $1.0 billion environmental infrastructure bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable from certain loan repayments from interest-bearing loans made directly from bond proceeds (trust loans) and zero-interest loans made primarily from federal capitalization grants and state match amounts (fund loans). In addition, certain bonds issued prior to 2007 also are payable from amounts held in debt service reserve funds (DSRFs).
KEY RATING DRIVERS
ROBUST FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that NJEIT's Environmental Infrastructure Bond Program (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).
HIGHLY RATED BORROWER POOL: Approximately 84% of the combined trust and fund loan pool is estimated to be investment grade (versus a Fitch 'AAA' median of 70%). Loan provisions are strong, with the majority of loan principal secured by general obligation pledges.
ABOVE-AVERAGE POOL DIVERSITY: The pool is more diverse than comparable municipal loan programs rated by Fitch. The pool consists of 314 borrowers, with the top 10 participants representing approximately 39% of the total portfolio (versus a Fitch 'AAA' median of 55%).
STRONG PROGRAM MANAGEMENT: NJEIT maintains sound underwriting and loan monitoring procedures as evidenced by the fact that NJEIT has never experienced a borrower default in the loan portfolio secured by the master program trust agreement.
RATING SENSITIVITIES
REDUCTION IN MODELED STRESS CUSHION: If the environmental infrastructure bond program, issued by the New Jersey Environmental Infrastructure Trust, were to experience significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in its inability to pass Fitch's 'AAA' liability rating stress hurdle, downward rating pressure would occur.
CREDIT PROFILE
Through the program, NJEIT provides loans to local government and private borrowers for certain eligible water and wastewater system projects within the state. Under the program's cash flow-based structure, bondholders are protected from potential losses primarily by pledged loans made in excess of bond debt service (overcollateralization), as further described below.
With respect to NJEIT's current and recent 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.
ROBUST FINANCIAL STRUCTURE
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 25% 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, loan size, term, and pool concentration.
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 trust's PASR is 2.2x, which is considered strong in comparison to Fitch's 2016 'AAA' median PASR of 1.9x. The model inputs used to calculate the default tolerance and PASR are based on forecasted cash flows provided by the issuer's financial advisor.
ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION
Program bondholders are protected from losses primarily by overcollateralization. On an annual basis, as calculated by Fitch, aggregate pledged cash flows excluding carry-forward surpluses overcollateralize bond debt service by a minimum of 2.0x through maturity. These levels compare favorably to Fitch's 'AAA' median for minimum annual loan-to-bond debt service coverage, which is 1.3x.
In addition, certain bonds issued before 2007 are protected from losses by DSRFs, which were initially funded by a combination of federal capitalization grants, matching state contributions, and/or excess loan repayments. In aggregate, these DSRFs total approximately $82 million.
The DSRF for each applicable bond series is maintained at the least of maximum annual debt service, 125% of average annual debt service, or 10% of original bond proceeds. Because the DSRFs are only pledged to certain series of bonds, Fitch's cash flow model results described previously afforded no credit to the DSRF balances.
LOAN POOL MODERATELY DIVERSE, HIGHLY RATED
The combined loan pool is composed of 314 borrowers. In aggregate, the top 10 borrowers represent 39% of the pool versus Fitch's 'AAA' median level of 55%. Middlesex County Utilities Authority and Camden County Municipal Utilities Authority (neither rated by Fitch but assessed to be of strong credit quality) are the two largest participants, making up about 5.8% and 5.1% of the pool, respectively. The remaining top 10 borrowers range in size from 2.5% to 4.4%. Based on the characteristics described above, Fitch views the loan pool as having above-average diversity in comparison to other similar 'AAA' rated programs.
Pool credit quality is strong with approximately 84% of the loans held by investment-grade borrowers (measured by publicly available ratings of the same security and lien). Including indirect or pass-through ratings, the investment-grade portion of the loan pool would be higher. The program's loan security is also solid, with 90% of loan principal backed by direct or indirect general obligation pledges and the remaining 10% backed by water and/or sewer revenue pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
NJEIT is operated under a partnership with the New Jersey Department of Environmental Protection. Underwriting policies require that each borrower carry an investment-grade rating or otherwise satisfy certain other conditions such as providing a letter of credit from a suitably rated institution, as outlined by the credit policy. Management continues to refine its well-documented underwriting policies as well as its technological infrastructure. Fitch views these refinements as credit positives.
Borrower repayments are due at least one month prior to bond payment dates. NJEIT has the power to intercept state aid to cure SRF loan repayment defaults otherwise due to borrowers. If a borrower is 30 days late in its repayment obligations, NJEIT may direct the state treasurer to withhold state aid payments and forward such payment.
NJEIT maintains formal procedures in monitoring loan performance. Borrowers are required to provide audited financials annually for review. To date, there have been no loan defaults by any borrowers in the loan portfolio secured by the Master Program Trust Agreement.
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. 20 Oct 2016)
https://www.fitchratings.com/site/re/888966
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015427
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015427
Endorsement Policy
https://www.fitchratings.com/regulatory
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