Fitch Rates 3 Series of NJ Environmental Infra Trust SRF Bonds 'AAA'; Outlook Stable
--Approximately $10.3 million environmental infrastructure bonds, series 2015A-2 (green bonds);
--Approximately $115.3 million environmental infrastructure bonds, series 2015A-R1;
--Approximately $13.9 million environmental infrastructure bonds, series 2015B-R2 (AMT).
Series 2015A-2 bond proceeds will be used to finance certain water and wastewater system improvement projects in the state (including those deemed to be environmentally beneficial), to fund capitalized interest, and to pay for the costs of issuance. The series 2015A-R1 and 2015B-R2 bonds will be used to refund certain previously issued series of bonds and to pay for a portion of the costs of issuance. The bonds are expected to price via competitive bid on or around Nov. 10.
In addition, Fitch affirms the following outstanding bonds:
--Approximately $1,126 million environmental infrastructure bonds at 'AAA'.
The Rating Outlook is Stable.
The bonds are payable from certain loan repayments from interest-bearing loans made directly from bond proceeds (trust loans) and zero-interest loans made primarily from federal capitalization grant and state match amounts (fund loans). In addition, certain bonds issued prior to 2007 also are payable from amounts held in debt service reserves.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that NJEIT's State Revolving Fund (SRF) program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGHLY RATED BORROWER POOL: About 84% of NJEIT's loan portfolio is estimated to be investment grade. Loan provisions are strong with the majority of loan principal secured by general obligation pledges.
MODERATE POOL DIVERSITY: The combined trust and fund loan pool is diverse in comparison to similar programs. The pool consists of 317 borrowers, with the top 10 participants representing approximately 39% of the total portfolio.
STRONG PROGRAM MANAGEMENT: NJEIT maintains sound underwriting and loan monitoring procedures as evidenced by the fact that NJEIT has never experienced a borrower default in the loan portfolio secured by the master program trust agreement.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.
NJEIT is operated independently in a partnership with the New Jersey Department of Environmental Protection (DEP). Pursuant to the Trust Act, NJEIT makes loans to local government, nonprofit, and private borrowers for certain eligible water and wastewater system projects and finances such loans primarily as trust or fund loans.
With respect to NJEIT's current and recent issues, most of the program's credit metrics, including those of the financial structure and pool credit quality, have remained stable over the past several years.
SOUND FINANCIAL STRUCTURE
Fitch measures financial strength of SRFs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments plus reserves divided by total scheduled bond debt service. The trust's PASR is 2.2x, which is strong in comparison to Fitch's 2014 'AAA' median PASR of 1.8x. At approximately 2.0x, minimum annual debt service coverage (DSC) is also strong versus the 'AAA' median level of 1.4x.
Cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four years of the program's life (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability rating stress hurdle of 24% as produced by the PSC. The rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION
NJEIT's SRF program benefits from credit enhancement provided both by pledged loan revenues in excess of bond debt service due (overcollateralization) plus amounts and earnings held in certain pledged accounts. In addition, for each series of bonds issued before 2007, debt service reserve funds (DSRF) funded from a combination of federal capitalization grants, matching state contributions, and/or excess loan repayments, are required.
The DSRF for each applicable bond series is maintained at the least of maximum annual debt service, 125% of average annual debt service, or 10% of original bond proceeds. In aggregate, the DSRFs total $84 million, or about 7% of outstanding bonds. Bonds issued since 2007 have not required a DSRF and therefore the balance as a percentage of outstanding bonds is decreasing. Because the DSRFs are only pledged to certain series of bonds, Fitch's cash flow model results described previously afforded no credit to the DSRF balances.
LOAN POOL MODERATELY DIVERSE, HIGHLY RATED
The combined loan pool is composed of 317 borrowers. In aggregate, the top 10 borrowers represent 39% of the pool versus Fitch's median level of 53%. Middlesex County Utilities Authority and Camden County Municipal Utilities Authority (both not rated by Fitch but assessed to be of strong credit quality) are the two largest participants, making up about 5.3% and 5.2% of the pool, respectively. The remaining top 10 borrowers range from 2.7% to 4.4% in size. Based on the characteristics described above, Fitch views the loan pool as having above-average diversity in comparison to other similar 'AAA' rated programs.
Pool credit quality is strong with approximately 84% of the loans held by investment-grade borrowers. Including indirect or pass-through ratings, the investment-grade portion of the loan pool would be higher. The program's loan security is also solid, with 91% of loan principal backed by direct or indirect general obligation pledges and the remaining 9% backed by revenue pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
NJEIT's underwriting policies require that each borrower carry an investment-grade rating or otherwise satisfy certain other conditions such as providing a letter of credit from a suitably rated institution, as outlined by the credit policy. Management continues to refine its well-documented policy as well as its technological infrastructure; Fitch views these refinements as credit positives.
Borrower repayments are due at least one month prior to bond payment dates. NJEIT has the power to intercept state aid to cure SRF loan repayment defaults otherwise due to borrowers. If a borrower is 30 days late in its repayment obligations, NJEIT may direct the state treasurer to withhold state aid payments and forward such payment.
NJEIT maintains formal procedures in monitoring loan performance. Borrowers are required to provide audited financials annually for review. To date, there have been no loan defaults by any borrowers in the pledged trust portfolio.