Fitch Rts NYC MWFA $400MM Water & Sewer Bonds 2006 Series AA 'AA/F1+'.

NEW YORK -- Fitch assigns a rating of 'AA/F1+' to the $400,000,000 New York City Municipal Water Finance Authority (the Authority) water and sewer system second general resolution revenue bonds, adjustable-rate fiscal 2006 series AA, consisting of

-- $200,000,000 sub-series AA-1 bonds;

-- $100,000,000 sub-series AA-2 bonds;

-- $100,000,000 sub-series AA-3 bonds.

The long-term 'AA' rating and Stable Outlook on the bonds is based on the Authority's long-term credit quality.

The short-term 'F1+' rating on the sub-series AA-1 bonds is based on the liquidity support of a standby bond purchase agreement (SBPA) provided, on a several basis, by State Street Bank and Trust Company (State Street Bank) and California State Teachers' Retirement System (CALSTRS). The short-term 'F1+' rating on the sub-series AA-2 and AA-3 bonds is based on the support of a SBPA provided by Dexia Credit Local, acting through its New York Branch. Proceeds of the series 2006 AA bonds will be used by the Authority to: repay principal and interest on a portion of the Authority's outstanding commercial paper notes; fund a portion of the Authority's capital program; and pay certain costs of issuance.

The long-term 'AA' rating on New York City Municipal Water Finance Authority's (NYW) water and sewer system second general resolution revenue bonds reflects the unique structural protections for bondholders, sound financial operations, adequate water supply, and moderate rates. The rating also considers the enormous capital improvement program (CIP) involved in addressing the water, wastewater treatment, and infrastructure replacement needs of New York City's water and sewer system. Moderate annual rate hikes are likely and rates should remain competitive with other urban systems, and affordable for the broad customer base with its above-average income characteristics. The long-term Rating Outlook is Stable.

NYW second general resolution (SGR) bondholders benefit from similar legal protections afforded first general resolution (FGR) bondholders, provided by a debt structure similar to those within structured finance. The legal framework is believed to be stronger than that of other U.S. municipal water/sewer bonds. The rating reflects the bankruptcy remote, statutorily defined nature of the issuer; ownership of system revenues by the bankruptcy remote New York City Water Board; annual required adjustment of water rates to a level to provide 1.10 times (x) coverage of annual debt service on SGR bonds; cash flow stress testing on system revenues; and a detailed review of relevant legal precedents and opinions and the large and diverse customer base.

SGR bondholders' claim on gross revenues is subordinate only to FGR debt service deposits, authority administrative costs, and the FGR debt service reserve fund (DSRF). Following such deposits, revenues flow from the subordinated indebtedness account of the FGR directly to the SGR revenue account to pay SGR debt service. Only after required deposits under the SGR are satisfied are funds released from the trustee-controlled lock box to pay operations and maintenance. These layers of protection serve to shield bondholders significantly, but not entirely, from the operational risks of the city's massive water and sewer enterprise, as well as other city government operations.

The SBPAs provide for the payment of the purchase price of tendered bonds during the daily and weekly rate modes in the event the proceeds of a remarketing of the bonds following an optional or mandatory tender are insufficient to pay the purchase price. The SBPAs are sized to provide for the entire principal amount of the bonds, plus interest coverage of 35 days calculated at a maximum interest rate of 9%, based on a year of 365 days. The SBPA supporting sub-series AA-1 bonds will expire on Oct. 27, 2012 or upon the occurrence of other events of termination, all in accordance with its terms. The SBPA supporting sub-series AA-2 and AA-3 bonds will expire Oct. 27, 2017 or upon the occurrence of other events of termination, all in accordance with its terms. Fitch's short-term rating expires on the expiration or termination of the SBPAs. The Bank of New York, as tender agent, is required to give notice to the bank in the event that remarketing proceeds are insufficient to pay the purchase price for tendered bonds. The remarketing agents for the fiscal 2006 series AA bonds are: Goldman, Sachs & Co. for sub-series AA-1; Banc of America Securities LLC for sub-series AA-2; and Loop Capital Markets, LLC for sub-series AA-3.

The sub-series AA-1 and AA-2 bonds will be issued in the daily interest rate mode; the sub-series AA-3 bonds will be issued in the weekly rate mode. Bonds may also be converted to commercial paper, flexible, or fixed interest rate modes. While the bonds bear interest in the daily or weekly rate modes, interest will be payable on the 15th calendar day of each month, commencing on Nov. 15, 2005. Holders of bonds bearing interest in the daily or weekly rate modes may tender their bonds for purchase upon delivery of prior notice to the remarketing and tender agents.

Bonds are subject to a mandatory tender: on interest mode change dates; on each interest reset date for bonds in the commercial paper and term rate modes; upon the expiration or any substitution which results in a reduction or withdrawal of the short-term rating; and upon termination of a SBPA following the trustee's receipt of a Notice of Default from the SBPA provider. Optional and mandatory redemption provisions also apply to the bonds pursuant to the terms of the documents

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.