NEW YORK, Jan 20, 2012 (BUSINESS WIRE) –
Fitch Ratings has assigned an ‘AA+’ rating to the following water and
sewer system second general resolution revenue bonds for the New York
City Municipal Water Finance Authority (NYW):
–Approximately $350 million, fiscal 2012 series CC;
–Approximately $50 million, fiscal 2012 series DD.
The fiscal 2012 series CC and DD bonds are scheduled for negotiated sale
on Jan. 23. Proceeds will provide funds for the authority’s ongoing
capital program and retire outstanding commercial paper notes.
In addition, Fitch has affirmed NYW’s outstanding bonds as follows:
–$8.8 billion first general resolution revenue bonds at ‘AA+’;
–$18.6 billion second general resolution revenue bonds at ‘AA+’;
–$200 million extendible municipal commercial paper (CP) notes, series
seven, at ‘F1+’;
–$200 million extendible municipal CP notes, series eight, at ‘F1+’.
The Rating Outlook is Stable.
SECURITY
The second general resolution (SGR) bonds are special obligations of
NYW, payable solely from and secured by a subordinate lien on gross
revenues of NYW. First general resolution (FGR) bonds are secured by a
first lien on gross revenues of NYW. The bonds currently being issued
will not have a debt service reserve fund.
Note interest is secured by moneys and investments in the FGR
subordinated indebtedness fund, on parity with $400 million in
outstanding CP notes and $18.6 billion of outstanding SGR bonds. Note
principal is also secured by moneys and investments in the FGR
subordinated indebtedness fund, and ultimately the authority pledges the
sale of first resolution bonds or SGR bonds to the payment of principal
on the notes. The original maturity on the notes is 1 to 90 days;
however, NYW has the option to extend the maturity of any note by an
additional 180 days, and redeem notes at any time during the extension
period.
KEY RATING DRIVERS
SOUND LEGAL PROTECTIONS: NYW’s primary credit strength is its unique
legal structure, including its status as a bankruptcy-remote issuer,
providing substantial protection to bondholders from potential operating
risks associated with the utility system and New York City (the city).
REGIONAL PROVIDER OF AN ESSENTIAL SERVICE: The combined system provides
an essential service to a large and diverse service area and benefits
from an abundant, high-quality water supply exempt from expensive
filtration requirements and transmission costs.
WELL MANAGED CAPITAL PROGRAM: Sophisticated capital planning efforts
have helped achieve compliance with large, costly mandated regulatory
projects aiding the timely implementation of the large capital
improvement plan (CIP).
INDEPENDENT RATE SETTING AUTHORITY: Strong financial management and a
proven ability to independently raise rates are reflected in
consistently solid financial results, despite some volatility in demand.
HIGHLY LEVERAGED SYSTEM: Debt levels are high as a result of having to
comply with environmental mandates and maintain a large urban system and
its aging assets. Sizeable debt plans programmed into the current
capital plan will keep debt levels elevated for the long-term.
IMPROVED COLLECTIONS: Below average collection rates persist, although
the implementation of payment incentives and strong enforcement
mechanisms has yielded positive results in recent years.
WHAT COULD TRIGGER A RATING ACTION:
MAINTENANCE OF SUFFICENT RATES: Failure to achieve rate hikes sufficient
to ensure adequate financial margins and maintain debt service coverage
levels on senior and subordinate lien obligations would be viewed
negatively.
DEBT LEVELS EXCEEDING PROJECTIONS: Escalation of debt levels beyond what
is currently included in the five-year financial forecast.
Fitch believes NYW bondholders benefit from strong legal protections
that include:
–Revenues collected in a lock box structure and controlled by the
trustee and used to pay debt service of FGR and SGR bonds before
operations and maintenance (OM).
–The bankruptcy-remote, statutorily defined nature of the issuer.
–Ownership of system revenues by the bankruptcy-remote New York Water
Board, which sets rates without city council approval.
–Legal covenants that require adjustment of water and sewer rates
sufficient to provide at least 1.15 times (x) coverage of FGR bond
annual debt service and 1.0x coverage on SGR bonds and operating
expenses.
These layers of protection serve to shield bondholders significantly
from the operational risks of the city’s massive water and sewer
enterprise as well as other city government operations. NYW SGR
bondholders benefit from similar legal protections afforded FGR
bondholders. SGR bondholders’ claim on gross revenues is subordinate
only to FGR debt service deposits, NYW administrative costs, and FGR
debt service reserve fund (DSRF) requirements.
Following such deposits, revenues flow from the subordinated
indebtedness fund of the FGR revenue fund directly to the SGR revenue
fund to pay SGR debt service deposits. Only after monthly required
deposits under the SGR are satisfied are funds released from the
trustee-controlled lock box to pay operations and maintenance.
NYW’s strong financial management and conservative budgeting continue to
yield solid operating results, despite sizable growth in debt service
obligations and volatility in consumption. Historically below-average
collection rates have shown noticeable improvement with the ongoing use
of a payment incentive program for delinquent customers, a reduction in
the threshold applicable to accounts eligible for termination of
service, and the reauthorization by city council to conduct a lien sale
program for property owners independent of the existence of property tax
liens.
Fitch considers the lien sale program a strong enforcement mechanism
given the recovery of approximately $287 million in delinquent accounts
over the last three years as a result of actual or pending lien sales.
Fitch views positively city’s council’s recent vote to extend the lien
sale program through Dec. 31, 2014.
Audited results for fiscal 2010 reflect the impact of a 2% drop in
consumption compared to actual demand in the prior year and the 1%
decline assumed in the adopted budget. In addition, a one-time payment
($267.4 million) related to a retroactive collective bargaining
settlement drove a 10% overall increase in operating expenses.
In response, management reduced pay-go for capital projects, implemented
mid-year spending cuts of approximately $46 million and utilized the
release of $99 million from an escrow account. The rise in operating
costs was also tempered by a positive variance in debt service costs
driven by actual variable rates that were lower than assumed in the
adopted budget.
The one-time revenues, mid-year cost cutting, and conservative budgeting
produced favorable annual debt service (ADS) coverage from net operating
revenues for senior lien bonds of 2.1x and adequate coverage on an
all-in basis of 1.3x. Debt service coverage per the bond indenture,
which reflects the gross lien on revenues, was higher in fiscal 2010 at
5.2x and 3.1x, respectively, for the FGR and SGR debt service.
For fiscal 2011 the board adopted another sizeable rate hike of 12.9%,
marking the fourth consecutive year that rates experienced a
double-digit increase. The negative trend in demand abated as
consumption increased by approximately 2.5% compared to the prior year,
prompting financial results to outperform budgeted expectations.
Consequently, year-end debt service coverage from net operating revenues
improved to 3.2x and 1.5x on FGR and SGR debt service (5.8x and 2.7x
reflecting the gross lein), respectively and exceeded forecasted
expectations.
Liquidity has been relatively stable over the last five years, averaging
nearly 110 days cash on hand. The authority’s prudent practice of
carrying forward and applying any surplus generated in the prior year to
SGR debt service precludes the build-up of more robust cash balances.
The net surplus generated in fiscal 2011, measured on a cash basis,
totaled $377.
Through the first six-months of the current fiscal year consumption is
reportedly down by about 2.7% compared to the same period in the prior
fiscal year. Despite the drop in demand, year-to-date revenues are down
by just a nominal amount compared to budget. Financial projections
through fiscal 2016 show a continuation of more moderate annual rate
hikes, including 9.3% in fiscals 2013 and 2014 and 6% in fiscals 2015
and 2016.
The financial forecast incorporates significant annual debt issuance and
reasonable assumptions that include the aforementioned increases in user
charges, 3% annual increases in salary and wage adjustments, no change
in demand for fiscal 2012 and a 1% decline in consumption in fiscals
2013 and 2014 followed by a 2% drop in 2016. As a result, ADS coverage
on all obligations from net revenues is projected to remain at a
satisfactory level at about 1.4x through the forecast period.
Similar to most large urban utility systems, NYW’s capital needs are
significant, primarily the result of state and federally mandated
projects. The CIP for fiscal years 2012 – 2021 includes an estimated
$13.2 billion in water and sewer projects, down from a peak of $19.4
billion projected in the fiscal years 2008 – 2017 CIP. The relatively
smaller CIP is primarily a result of costly regulatory projects
beginning to decline to about one-fourth of total capital spending
versus an average of about 75% over the latter part of the prior decade.
Capital funding is expected to come almost entirely from NYW’s extensive
CP program and long-term debt issuance.
Historical funding of mandated projects and the overall capital program
of the system required a substantial amount of debt issuance over the
last several years, leaving the system highly leveraged as a result.
Continued escalation in debt levels could pressure the rating over the
longer term. Rate increases are approved by the independent board
without approval by the city council. Fitch believes the board’s
demonstrated commitment to raising rates as well as management’s
conservative budgeting will be key to preserving operating margins and
meeting the continued growth in debt service costs included in NYW’s
financial forecast.
Additional information is available at ‘
www.fitchratings.com ‘.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch’s
Revenue-Supported Rating Criteria, this action was additionally informed
by Creditscope and HIS Global Insight.
Applicable Criteria and Related Research:
–’Revenue-Supported Rating Criteria’, dated June 20, 2011;
–’Water and Sewer Revenue Bond Rating Guidelines’, dated Aug. 10, 2011;
–’2012 Water and Sewer Medians’, dated Dec. 8, 2011;
–’2012 Outlook: Water and Wastewater Sector’, dated Dec. 8, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647331
2012 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657111
2012 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657110
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SOURCE: Fitch Ratings
Fitch Ratings
Primary Analyst
Christopher Hessenthaler, +1-212-908-0773
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Doug Scott, +1-512-215-3725
Managing Director
or
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Senior Director
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Email: brian.bertsch@fitchratings.com
Copyright Business Wire 2012
Article source: http://www.marketwatch.com/story/fitch-rates-new-york-city-muni-water-finance-authoritys-400mm-revs-aa-2012-01-20