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Fitch Rates NY State EFC's NY Water 2018B SRF Bonds 'AAA'; Outlook Stable.

New York: Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the New York State Environmental Facilities Corporation (EFC):

--Approximately $258.0 million state clean water and drinking water revolving funds revenue bonds (New York City Municipal Water Finance Authority [NYCMWFA] projects - second resolution bonds) series 2018B subordinated state revolving fund (SRF) bonds (the NYCMWFA SRF Bonds).

Bond proceeds will be used to finance or refinance certain NYCMWFA water pollution control and drinking water projects. The bonds are expected to price via negotiation on or around November 13.

In addition, Fitch has affirmed the following outstanding NYCMWFA SRF bonds at 'AAA':

--Approximately $579.0 million (pre-transaction) in outstanding clean water and drinking water revolving funds (NYCMWFA projects - second resolution SRF revenue bonds) (the senior NYCMWFA SRF bonds);

--Approximately $3.76 billion (pre-transaction) in outstanding state clean water and drinking water revolving funds (NYCMWFA projects - second resolution subordinated SRF revenue bonds) (the subordinate NYCMWFA SRF bonds).

The Rating Outlook is Stable.

SECURITY

Subordinate NYCMWFA SRF bonds, including the series 2018B bonds are secured by subordinate-lien NYCMWFA repayment obligations, moneys available from time-to-time in the general reserve fund, and, on a subordinated basis, releases from certain other EFC programs. Senior NYCMWFA SRF bonds are secured by NYCMWFA payments, debt service reserve funds, and, on a priority basis, surplus amounts released from the other EFC's SRF programs.

KEY RATING DRIVERS

RATINGS LINKED TO NYCMWFA: The ratings of both the senior and subordinate NYCMWFA SRF bonds are closely linked to the strong underlying credit quality of NYCMWFA (senior and second lien bonds both rated AA+/Stable). The bonds are also supported by surplus cash flows from the EFC's 2010 master financing indenture pool program (the 2010 MFI) and reserve deallocations, as further described below. These additional forms of enhancement allow the bonds to achieve a one-notch rating uplift above NYCMWFA's standalone ratings.

SIGNIFICANT RESERVES: The senior NYCMWFA SRF bonds have aggregate pledged reserves totaling approximately 90.5% of outstanding bond par. As senior bonds amortize, related reserve releases become available to the subordinate bonds. The subordinate NYCMWFA SRF bonds also maintain pledged reserves totaling approximately 4.5% of outstanding subordinate bond par.

POOL-PROGRAM RELEASES: The senior and subordinated NYCMWFA SRF bonds are also secured by annual surplus cash flows released from the 2010 MFI program. Scheduled releases from this program are projected to average approximately $40.1 million annually over the next 10 years.

RATING SENSITIVITIES

LOWERING OF NYCMWFA'S RATING: The ratings on the New York State Environmental Facilities Corporation's New York City Municipal Water Finance Authority bonds are sensitive to shifts in the authority's underlying credit quality. A downgrade to NYCMWFA would result in a downgrade to the EFC NYCMWFA bonds.

REDUCTION OF ENHANCEMENT: The EFC NYCMWFA bonds' ratings are additionally sensitive to decreases in surplus cash flow releases tied to the EFC's 2010 master financing indenture pool program. Current cash flows demonstrate sufficient enhancement provided by surplus cash flow releases throughout the EFC NYCMWFA bonds' maturity.

CREDIT PROFILE

The EFC's NYCMWFA SRF bond program was created to mitigate single-obligor concentration risk arising from the NYCMWFA's out-sized balance within the EFC's SRF pool program. The senior and subordinate NYCMWFA SRF bonds are issued separately and apart from the traditional pool program, but the ratings are closely linked to the underlying rating of NYCMWFA. The rating on EFC's SRF pool program is AAA/Stable.

RESERVES AND SURPLUS CASH FLOWS ENHANCE SENIOR BONDS

The senior NYCMWFA SRF bonds are secured by senior NYCMWFA payments, reserves totaling approximately $524 million (or 90.5% of outstanding senior NYCMWFA SRF bonds) and reserve earnings. The senior NYCMWFA SRF bonds' reserve requirement typically equals a minimum of 33 1/3% of bond principal.

Further securing the senior NYCMWFA SRF bonds are surplus cash flows released from the 2010 MFI program. Annual surpluses average $40.1 million over the next 10 years and total approximately $829 million over the current life of the program. In Fitch's view, available pledged senior NYCMWFA SRF reserves alone provide sufficient enhancement to achieve a rating uplift above NYCMWFA's 'AA+' senior lien bond rating.

RESERVE RELEASES & SURPLUS CASH FLOWS ENHANCE SUBORDINATE BONDS

Subordinate NYCMWFA obligor repayments and combined series' subordinate reserve cash flows totaling approximately $231 million (or 6% of outstanding subordinate bonds) secure the subordinate NYCMWFA SRF bonds. Additionally, EFC has $1.85 billion in general reserve funds (GRF) pledged to the subordinate NYCMWFA SRF bonds (approximately 46% of outstanding bonds). The GRF consists of direct loans made from the EFC's equity account to the NYCMWFA and certain other recipients. Lastly, senior reserve deallocations and other surplus cash flows (including surpluses from the 2010 MFI program) are available on a junior lien basis to the subordinate NYCMWFA SRF bonds.

In total, NYCWMFA repayments (including the GRF) plus scheduled reserve releases from both the senior and subordinate NYCMWFA SRF programs provide a minimum of 1.4x coverage annually to the subordinate NYCMWFA SRF bonds. This level has been stable over the past four years and is stronger than the 1.25x recorded in fiscal 2014.

In its analysis, Fitch ran stress scenarios to calculate the availability of enhancement to the subordinated NYCMWFA SRF bonds. Incorporating its SRF rating criteria, projected obligor repayments from the 2010 MFI were subjected to Fitch's 'AAA' liability rating stress hurdles (defaults of approximately 32% plus a 90% recovery), which led to reductions in the amount of reserves and hence surplus cash flow deallocations available to the subordinate NYCMWFA SRF bonds. Simultaneously, Fitch also applied stresses to the pledged senior NYCMWFA reserves releases assuming a hypothetical impairment of the senior NYCMWFA SRF bonds. After application of such stresses, minimum annual debt service coverage of the subordinated NYCMWFA SRF bonds was approximately 1.0x (versus 1.4x pre-stress).

ADDITIONAL FORMS OF ENHANCEMENT

EFC also maintains an equity account funded from excess obligor repayments and deallocated reserves from the 2010 MFI and NYCMWFA SRF programs, after satisfying all indenture requirements of these programs. While not pledged to bondholders, and thus not considered in Fitch's stress analysis of the senior and subordinate NYCMWFA SRF bonds, the equity accounts consist of around $1.2 billion (as of September 2018) and could be used to cure any shortfalls in either the 2010 MFI or NYCMWFA SRF programs at the discretion of management.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 10, 2019
Words:1050
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