Fitch Rates NIFA Sales Tax Secured Bonds, Series 2000A, `AA+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 17, 2000

Fitch rates the Nassau County Interim Finance Authority's $260 million sales tax secured bonds, series 2000A, 'AA+'. The rating incorporates criteria relating to both structured and municipal financings.

Nassau County Interim Finance Authority (NIFA) was established by an act of the New York State Legislature earlier this year to fulfill both a monitoring and advisory role and to provide a bankruptcy remote funding vehicle for the County of Nassau. Pursuant to the act, sale and compensating use taxes authorized by the state and imposed by the county will be paid to NIFA. The act authorizes NIFA to issue debt backed by those sales tax revenues, which are NIFA's primary assets.

NIFA is a corporate governmental agency and an instrumentality of the State of New York, although the bonds are not debt of the state or the county and are solely payable from the sales tax revenues.

The bonds are secured by the 4 1/4% local sales tax, less 1/4% that is currently required to be paid to local municipalities within the county under the local government assistance program. Revenues from the sales tax will flow from the New York State Department of Taxation and Finance which collects the sales tax revenues, to the state comptroller and then directly to the indenture trustee for the benefit of bondholders. The county will receive residual revenues only after NIFA bondholders have been paid.

The Fitch rating reflects the bankruptcy remote, statutorily defined nature of the issuer; the bond structure involving a first perfected security interest in revenues which are not subject to appropriation; statutory and contractual covenants prohibiting action which would impair bondholders; the cash flow stream which provides strong coverage of debt service; New York State Department of Taxation and Finance as collection agent and a statutorily defined minimum debt service coverage.

Nassau County Interim Finance Authority Act

The Nassau County Interim Finance Authority Act was signed into law on June 23, 2000 by the Governor, creating NIFA, which has limited authority to oversee the county's finances and under certain circumstances, additional oversight authority. All issuances of bonds or notes by the county must be reviewed by the Authority, which has the ability to comment on the prudence of such borrowings. Pursuant to the act, bonds and notes may also be issued by NIFA, to finance capital projects and cash flow needs of the county, as well as, any county deficit.

Under the act and the indenture, the State of New York covenants that the state shall not limit, alter or impair the rights vested in NIFA by the act to fulfill the terms of the indenture or in any way impair the rights and remedies of bondholders. The state constitution allows both the state and the county to amend, repeal, modify or otherwise alter statutes relating to the sales tax. The county, however, is limited by statute and contract in its ability to do this to the extent that a modification will result in sales tax revenues less than 200% of maximum annual debt service on NIFA bonds and other debt. The sales tax revenues collected by the state comptroller for transfer to NIFA are not subject to appropriation by the state or the county. Under the act, both NIFA and the county of Nassau are prohibited from voluntarily filing for bankruptcy protection.

Legal Analysis

A critical part of Fitch's analysis involved a review of the legal framework of the transaction and the covenants of the state and the county. As mentioned previously, NIFA is established as a bankruptcy-remote entity, legally separate from Nassau County. Funds supporting the bonds will flow directly from the state comptroller to the NIFA trustee. Pledged revenues in excess of debt service needs and NIFA operating expenses will be transferred to the county by NIFA and will become property of the county only at that point. The county will not have any claim on the tax revenues before the transfer.

Since this structure does not incorporate a true-sale of assets which would be required in pure structured financing, Fitch also incorporated a public finance methodology into its legal analysis. In a corporate environment, a bankruptcy-remote issuer would be viewed as separate and distinct from the seller of the assets, even in the event of the seller's bankruptcy. However, in the municipal environment, a bankruptcy-remote issuer is viewed as separate only up to the point of an extreme crisis situation.

In an extreme stress scenario, it is uncertain what actions would be taken by the courts to protect bondholders. Fitch believes that there is the possibility, under an extreme stress scenario occurring well after an event of default on Nassau general obligation bonds (rated `BBB' and on Rating Watch Negative by Fitch), that diversion of the sales tax could occur through legislative direction.

To address this risk, Fitch reviewed the statute, local law, bond authorization and bond documents and found the legal structure of the bonds to be fundamentally sound. The county cannot file for bankruptcy without approval of NIFA and the state comptroller, and no such petition may be filed while bonds issued by NIFA are outstanding. Further, the county cannot modify bond revenues in any way, which would result in less than 200% coverage of maximum debt service.

In addition, the state and the county have agreed not to impair bondholder rights. The statutory and contractual non-impairment covenants by the county and the state are deemed to be contractual property rights under the New York State Constitution. Further, the contracts clause in the Federal Constitution prohibits the state from taking action which would impair the obligations of contracts. Fitch has reviewed drafts and expects to receive final legal opinions from counsel regarding NIFA bonds. These opinions relate to NIFA's valid, binding and perfected security interest in sales tax and sales tax revenues; the inability of the state, the county, or NIFA to declare bankruptcy and the state and county covenants as contractual property rights under the state constitution. Fitch concluded that the statute creates a valid perfected security interest in the pledged revenues, which cannot be abrogated by the county or the state without a legislative amendment.

However, Fitch is aware of one statutory issue relating to the state's and the county's rights in a crisis situation. Under the statute, the state and the county reserve the right to unilaterally alter the tax structure. The state has the ability to do this regardless of coverage requirements, as opposed to the county, which has the 200% debt service coverage requirements. In addition, historically sales tax receipts accounted for approximately 50% of the county's general fund receipts, which inherently provides an incentive for the county to maintain the tax rate. Despite this, Fitch feels that there remains a possibility that in an extreme crisis scenario, one in which the state would be under enormous pressure to give the county desperately needed funds, the state may exercise their right. Thus, Fitch incorporated this risk into its analysis, assuming a low probability of occurrence. Barring this remote scenario, Fitch found the statutory structure to be invulnerable.

Transaction Structure - Flow of Funds 

The collection of sales tax revenues will not be changed by the issuance of the NIFA bond structure. Sales tax revenues will continue to be collected by the New York State Department of Taxation and Finance, which will then transfer funds to the state comptroller. Thus, between the two collection entities, New York State will act as servicer for these bonds.

NIFA bonds have a first lien on the sales tax revenues. Upon receipt by NIFA, pledged revenues are immediately available for debt service with no legislative appropriation required. Debt service payments will be made semiannually. The state comptroller will pay the sales tax revenues monthly, directly to the trustee for application in accordance with the terms of the act and the indenture. On a monthly basis, the trustee will transfer all revenues from the collection account to the bond account in an amount equal to the anticipated debt service for that month. After payment of debt service, all remaining amounts will then be applied to NIFA expenses (as required) and residual funds will flow to the county.

In addition to covenants found in the NIFA statute, the bond indenture provides additional restrictions on bond issuance. The indenture restricts the issuance of additional bonds, subject to debt service coverage of 3.0 times (x) maximum debt service on the bonds. While Fitch believes this requirement as well as other structural enhancements are favorable to the cash flow coverage requirements of the bonds, they do not mitigate the remote constitutional and statutory risk relating to the state's and the county's rights in a crisis situation.

Cash Flow Analysis

As mentioned previously, the bonds are secured by the state authorized local sales tax, which is currently 4 1/4%, less 1/4% that is currently required to be paid to local municipalities within the county under the local government assistance program for a net NIFA sales tax rate of 4%. Of this 4%, a base rate of 3% is not subject to renewal, while the additional 1% along with the local government assistance portion, is subject to periodic renewal by both the county and the state legislatures.

For the period from 1981 through 1999, Nassau County's sales tax revenues have grown at an average annual rate of 6.86%. This growth is a function of changes in both the tax rate and the tax base. Eliminating the effects of changes in the tax rate, Nassau has seen strong growth in the sales tax base, which has grown at an average annual rate of 5% over that same period.

The county benefits from a diversified and growing economic base, which supports this revenue stream. Wealth levels are exceptionally high with per capita income of $39,691 in 1997, which was 157% of the national average. Nassau's unemployment rate, 2.9% in 1999, was well below that of the state and the nation, at 5.2% and 4.4% respectively. The county has consistently been among the top counties in the state in terms of retail sales, trailing only New York City.

Fitch reviewed the cash flow stress scenarios assuming various levels of stress on the sales tax base and concluded that the revenues provided strong coverage in severe stress scenarios. The base case scenario, which assumes no growth in the sales tax revenues, provides 3.3x coverage of maximum annual debt service. In the breakeven scenario, a 6.2% compounded annual decline from current levels is required before debt service coverage drops below 1.0x in 2020.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide.