Fitch Expects to Rate Utility Debt Securitization Authority Restructuring Bonds, Series 2016A
--\\$41,035,000 class T1 'AAAsf'; Outlook Stable
--\\$41,865,000 class T2 'AAAsf'; Outlook Stable;
--\\$65,485,000 class T3 'AAAsf'; Outlook Stable;
--\\$67,125,000 class T4 'AAAsf'; Outlook Stable;
--\\$40,865,000 class T5 'AAAsf'; Outlook Stable;
--\\$41,885,000 class T6 'AAAsf'; Outlook Stable;
--\\$41,220,000 class T7 'AAAsf'; Outlook Stable;
--\\$42,250,000 class T8 'AAAsf'; Outlook Stable.
The collateral for the restructuring bonds consists primarily of the restructuring property, which represents the right to impose, charge and collect through the applicable non-bypassable restructuring charges (RCs) payable by retail electric customers.
Details regarding the restructuring bonds as well as Fitch's stress and rating sensitivity analysis are discussed in the presale report titled 'Utility Debt Securitization Authority Restructuring Bonds Series 2016A', dated Feb. 18, 2016, which is available on Fitch's web site. The presale report details how Fitch addresses the key rating drivers which are summarized below.
KEY RATING DRIVERS
Statutory and Regulatory Framework: The strength and stability of the underlying RCs are established by the financing order issued by the authority as part of the Act. The financing order establishes the irrevocable and nonbypassable RCs and defines bondholders' property rights in the 2016A restructuring property. The financing order contains the key elements important in a utility tariff securitization, as discussed in detail on page 19.
Adequate Credit Enhancement via True-Ups: Mandatory annual true-up filings adjust RCs to ensure collections are sufficient to provide all scheduled payments of principal and interest, pay fees and expenses and replenish the debt service (1.50%) and operating reserve (0.50%) subaccounts. Furthermore, semiannual and quarterly true ups may occur if necessary but must meet certain defined parameters.
Supports 'AAAsf' Stresses: Demand shifts in consumption can be caused by various factors such as the introduction of new technologies and demographic changes or shifting usage patterns, which present greater risk in this transaction relative to others in this asset class given the longer tenor of the restructuring bonds. Fitch's 'AAAsf' scenario analysis stresses key model variables such as consumption variance, chargeoff rates and delinquencies, to address this risk. Under Fitch's 'AAAsf' stress assumptions, the aggregate RC for the Series 2013T/TE, and Series 2015, and Series 2016A transactions is 3.44 (cents/kWh), or 16.52% of the residential customer bill, which is consistent for 'AAAsf' ratings. As the peak 'AAAsf' aggregate RC is below 20%, there is no negative rating impact on the Series 2013T/TE and Series 2015 bonds.
Sound Legal Structure: Fitch reviews all associated legal opinions furnished to analyze the integrity of the legal structure.
While Fitch believes that bondholders are protected from the various aforementioned risks based on the 'AAAsf' cash flow stress case, the break-the-bond case provides an alternative means by which to measure the potential effects of rapid, significant declines in power consumption while capping the residential RC at 20% of the total residential customers' bill. In this scenario, the structure is able to withstand a maximum consumption decline of approximately 59.7% in year one. This is the level of forecast energy consumption decline that would cause a default in required payments on bonds or cause the RC to exceed 20% of the total residential customers' bill. Despite this severe decline in consumption, due to the true-up mechanism, RCs are able to pay all debt service by the legal final maturity date.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Key Rating Drivers and Rating Sensitivities are further described in the presale report dated Feb. 18, 2016. Fitch's analysis of the Representations and Warranties (R&W) of this transaction can be found in 'Utility Debt Securitization Authority Restructuring Bonds Series 2016A - Appendix'. These R&Ws are compared to those of typical R&W for the asset class as detailed in the special report 'Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions' dated Jan. 21, 2016.