Fitch Rates New York EFC's $198MM Series 2006C Sub SRF Bonds 'AAA'.

NEW YORK -- Fitch Ratings assigns an 'AAA' rating to the New York State Environmental Facilities Corp.'s (EFC) approximately $198 million state clean water and drinking water revolving funds revenue bonds (Pooled Financing Program subordinated master financing indenture bonds), series 2006 C. The bonds are scheduled to price on June 27 via negotiation through a syndicate led by Goldman, Sachs & Co. Fitch also affirms the 'AAA' rating on $1.9 billion of outstanding senior lien pooled financing program state revolving funds (SRF) bonds and on $198 million in outstanding subordinate lien bonds, both of which are secured by the EFC's master financing indenture (MFI). The Rating Outlook is Stable for both the senior and subordinate lien bonds.

Bond proceeds will be loaned to 22 New York municipalities and local authorities as part of the state's federally capitalized clean and drinking water revolving fund loan programs. Borrowers use loaned funds to improve wastewater treatment and drinking water supply facilities.

The 'AAA' rating for the EFC MFI senior and subordinate lien SRF bonds is based on substantial reserves, which currently total $845 million, or 37% of senior and subordinate lien MFI bonds, and the diversification and credit quality of the loan pool, which includes approximately 320 participants. The reserves are sufficient to cover over 28% of borrower defaults over the next four years without any disruption in senior or subordinate lien debt service. A repayment shortfall this severe is in excess of what Fitch would expect to occur in an 'AAA' stress scenario, given the loan pool's credit quality and diversity.

In addition, the MFI reserves and program equity funded from federal SRF capitalization grants and state matching funds generate investment earnings, which are used to subsidize local borrower loans, the primary source of security for MFI bonds. The subsidization keeps the EFC's SRF loan programs attractive to large and small borrowers around the state, thereby aiding in the diversification of the loan pool. The diversification of the MFI loan pool lessens the risk of any one borrower's default eroding the reserve collateralization of the clean water and drinking water SRFs and threatening bondholder payments.

With this issue, EFC will further leverage the program by issuing the series 2006C subordinate lien bonds without a Debt Service Reserve Fund deposit. Increased leveraging provides EFC management with significant program flexibility and allows the EFC to adjust to shrinking EPA capitalization grants and growing program needs. Fitch expects that the EFC will further leverage the program but will do so with an eye to maintaining the 'AAA' rating on both the senior and subordinate liens.

Senior lien MFI loans have dedicated reserve accounts equal to 33% of par outstanding, or 50% in the case of certain clean water SRF (CWSRF) loans. Reserves are released as loans amortize so that the original 33%-50% reserve level is maintained. Released reserves flow first to the general reserve fund, which is available to cure deficiencies in other MFI recipient repayments funded from parity bonds.

Deallocated reserves remaining are then available for deficiencies in MFI recipient repayments funded from subordinated MFI bonds. Excess reserves remaining are then released and made available for deficiencies under EFC's SRF bond indenture that funds loans to the New York City Municipal Water Finance Authority (NYCMWFA) outside the MFI. Both the CWSRF and drinking water SRF (DWSRF) programs are accounted for separately. However, the CWSRF and DWSRF are cross-collateralized, with excess reserves of the CWSRF securing debt of the DWSRF program and vice versa.

Westchester County (general obligation bonds rated 'AA'+ by Fitch) is the largest pool borrower, constituting only 8% of the portfolio. The diverse loan pool is also marked by strong credit quality and security provisions. Approximately 79% all underlying loans are secured by general obligation pledges, with the balance, 21%, secured by revenue pledges. Fitch conservatively estimates that 87% of all MFI outstanding loans are to borrowers exhibiting investment-grade characteristics.

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