Fitch Assigns Ratings to Utility Debt Securitization Authority Restructuring Bonds Series 2016A
OREANDA-NEWS. Fitch Ratings assigns the following ratings and Rating Outlooks to the Utility Debt Securitization Authority restructuring bonds series 2016A as follows:
--$40,970,000 T-1 bonds 'AAAsf'; Outlook Stable;
--$41,995,000 T-2 bonds 'AAAsf'; Outlook Stable;
--$65,835,000 T-3 bonds 'AAAsf'; Outlook Stable;
--$67,480,000 T-4 bonds 'AAAsf'; Outlook Stable;
--$41,230,000 T-5 bonds 'AAAsf'; Outlook Stable;
--$42,260,000 T-6 bonds 'AAAsf'; Outlook Stable;
--$41,600,000 T-7 bonds 'AAAsf'; Outlook Stable;
--$42,640,000 T-8 bonds 'AAAsf'; Outlook Stable;
--$810,000 T-9 bonds 'AAAsf'; Outlook Stable;
--$850,000 T-10 bonds 'AAAsf'; Outlook Stable;
--$890,000 T-11 bonds 'AAAsf'; Outlook Stable;
--$20,560,000 T-12 bonds 'AAAsf'; Outlook Stable;
--$54,260,000 T-13 bonds 'AAAsf'; Outlook Stable;
--$113,520,000 T-14 bonds 'AAAsf'; Outlook Stable;
--$61,870,000 T-15 bonds '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 of the presale.
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, 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, series 2015, and series 2016A transactions is 3.40 (cents/kWh), or 16.33% of the residential customer bill, which is consistent for 'AAAsf' ratings. Therefore, there is no rating impact on the series 2013T/TE and series 2015, as a result of the issuance of the series 2016A.
Additionally, Fitch assessed the impact of the proposed amendments to the true-up mechanism in the series 2013T/TE and series 2015 servicing agreements, to be consistent with that of series 2016A. Specifically, the annual true-up will be moved to November 15 for each year compared to the annual true-up date of January 1, and to allow for a voluntary midyear true-up to account for over-collections.
The purpose of these changes is to accommodate the lag between the true-up change and billing and collection process. Furthermore, the change would result in more stable RCs over the life of the transaction and reduce over-collections. Based on Fitch's updated stress cash flow analyses for the series 2013T/TE and series 2015, the proposed amendments to the true-up mechanism result in a slightly lower peak tariff rate (as detailed above). As such, there is no rating impact on the series 2013T/TE and series 2015.
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 60.30% 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 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 the Global Structured Finance Transactions' dated March 2, 2016.