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Fitch Affirms Maryland Water Quality Fin Admin Rev Loan Fund at 'AAA'; Outlook Stable

From
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AUSTIN, Texas–(BUSINESS WIRE)–

Fitch Ratings affirms its ‘AAA’ rating on the following bonds issued by the Maryland Water Quality Financing Administration (MWQFA):

–Approximately $3.1 million revolving loan fund revenue bonds, series 2005A;

–Approximately $30.7 million revolving loan fund revenue bonds, series 2008A.

The Rating Outlook is Stable.

SECURITY

The 2008A bonds are secured by loan repayments pledged under the 2008 program indenture. The 2005A bonds, which are scheduled for final payment on Sept. 1 2015, are currently secured by funds held in the 2005A debt service reserve account. The 2005A bonds are separately secured under the 2005 program indenture.

The information remaining in this press release pertains to the bonds outstanding under the 2008 indenture unless otherwise noted.

KEY RATING DRIVERS

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

HIGH-QUALITY LOAN POOL: Approximately 75% 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.

ELEVATED POOL CONCENTRATION: The loan portfolio is concentrated, with the top 10 borrowers representing approximately 74% of the loan pool. The largest borrower, Baltimore City, represents nearly 20% of the total pool.

EFFECTIVE PROGRAM OVERSIGHT: MWQFA’s loan underwriting and administration practices have proven effective as its revolving funds have never experienced a loan payment default.

2005A BONDS FULLY SECURED: In addition to the 2005A debt service reserve account, which is currently funded in excess of the 2005A bonds final annual debt service requirement, loan repayments in excess of debt service coverage continue to be pledged to the outstanding 2005A bonds until final maturity.

RATING SENSTIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program’s inability to pass Fitch’s ‘AAA’ liability rating stress hurdle would put downward pressure on the rating. The Stable Rating Outlook reflects Fitch’s view that these events are unlikely to occur.

CREDIT PROFILE

Through its Water Quality Financing Revolving Fund Loan Fund (Clean Water Revolving Loan Fund), MWQFA provides financing at below-market rates to governmental entities within the state for eligible clean water revolving fund projects. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects. In addition to the Clean Water Loan Fund, MWQFA administers the state’s Drinking Water Revolving Loan Fund. However, there are currently no drinking water loans pledged under MWQFA’s 2008A indenture.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Because of the program’s available enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% in the first, middle and last four years of the outstanding bonds’ life. This is in excess of Fitch’s ‘AAA’ liability stress hurdle of 28% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Per Fitch criteria, a 90% recovery is applied when determining default tolerance.

Fitch calculates the pool program’s asset strength ratio (PASR), which includes total scheduled pledged loan repayments divided by total scheduled bond debt service, to be exceptionally strong at above 10.0x. This is substantially in excess of Fitch’s state revolving fund (SRF) portfolio 2013 ‘AAA’ median PASR of 1.6x.

HIGH-QUALITY BORROWER POOL WITH HIGH CONCENTRATION

Fitch estimates that approximately 75% 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 28% versus Fitch’s median of 33% (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 55 active borrowers, the top 10 of which comprise a high 74% of the total pool. Consistent with Fitch’s last review, Baltimore City (wastewater revenue bonds not rated by Fitch but assessed to be of very strong credit quality) remains the largest borrower, representing 20% of outstanding pool loan principal. The next two largest borrowers are the Washington Suburban Sanitation District (11% of total) and Baltimore County (10% of total), both of which have general obligation bond ratings of ‘AAA’ by Fitch. The remaining top 10 borrowers range in size from 2.9% to 7.4% of the total pool.

ENHANCEMENT 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 7x. Additional enhancement is provided from the program’s ($100 million) in outstanding loan principal available in its equity fund. 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. Since the equity fund is not pledged, Fitch did not factor it into the 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 used. Although recognized as an added strength, state-aid intercept credit was not included in Fitch’s model analysis.

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.

DEBT SERVICE RESERVES, LOAN REPAYMENTS SECURE 2005A BONDS

The final payment for the 2005A bonds is due on Sept. 1, 2015. As required by the 2005 indenture, the debt service reserve account has been funded at 1x maximum annual debt service. In addition to this security, approximately $9 million of scheduled loan repayments continue to secure the 2005A bonds. Because of this enhancement, pledged loans can default in full without interrupting final debt service payments to the 2005A bondholders.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘State Revolving Fund and Leveraged Municipal Loan Pool Criteria’ (April 28, 2014);

–‘State Revolving Fund and Leveraged Municipal Loan Pool 2013 Peer Review’ (Oct 31, 2013);

–‘Revenue-Supported Rating Criteria’ (June 16, 2014).

Applicable Criteria and Related Research:

State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719991

State Revolving Fund and Leveraged Municipal Loan Pool Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746076

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=874894

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘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.

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Fitch Ratings, Inc.

111 Congress Avenue

Austin, TX 78701

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+1-312-368-5471

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Amy Laskey

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Fitch Affirms Maryland Water Quality Fin Admin Rev Loan Fund at 'AAA'; Outlook Stable

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