Fitch has assigned its ‘AAA’ rating to the Missouri Environmental Improvement and Energy Resources Authority’s (EIERA) $39,735,000 water pollution control and drinking water revenue bonds (state revolving funds [SRF]) programs -- master trust), series 2000B.
The bonds are scheduled to price on Oct. 31 through a syndicate led by PaineWebber, Inc. Fitch also affirms the ‘AAA’ rating on the EIERA’s approximately $516 million outstanding water pollution control and drinking water revenue bonds.
SRF capitalization monies from the U.S. and state governments are used to create large reserves for Missouri SRF bonds, which are available to cure loan defaults from a statewide pool of municipal borrowers, if needed.
Having already achieved superior ‘AAA’ ratings due to these reserves, Missouri’s cross-collateralized clean water and drinking water SRF master trust loan pool should continue to expand and diversify for the foreseeable future. This will further decrease the risk that a single borrower’s financial distress could threaten master trust bondholders.
With this issue, the outstanding loan pool expands to 122 municipal water and sewer utilities, predominantly those in rural and suburban areas, throughout the state. Kansas City, the largest borrower and probably one of the strongest credits in the SRF portfolio, will receive an additional $11.7 million through the clean water program with this issue. The city’s share of the master trust portfolio will increase slightly to 19 percent of outstanding loans, up from 17.6 percent as of the last issue. Future lending through the master trust program to St. Louis’s sewer district and several large private and investor-owned water companies is possible in the future.
Following the series 2000B bond issuance, the Missouri SRFs’ invested reserves should equal 68 percent of outstanding debt, which is among the highest rates of structural collateralization for any leveraged SRF.
The reserves have historically allowed up to 100 percent four-year loan default tolerance, and the master trust’s current score on the Fitch SRF Strength Index remains stable at 237 percent. (This means that estimated loan default tolerance exceeds that assumed in Fitch’s current ‘AAA’ stress test by 2.37 times.
Fitch expects maintenance of current reserve funding levels -- 70 percent of outstanding loans for each clean water SRF borrower and 33 percent for each drinking water SRF (DWSRF) borrower -- for the foreseeable future, although environmental needs continue to be very high relative to available funds.
Following this issue, DWSRF loans will total about 12.5 percent of outstanding master trust loans. As this percentage increases, overall collateralization levels will decline somewhat, given the higher rate of DWSRF leveraging. However, lower overall reserve levels should be offset by increased loan pool diversification, keeping the rating stable.
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.
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