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MOODY'S ASSIGNS Aaa RATING TO MISSOURI STATE ENVIRONMENTAL IMPROVEMENT AND ENERGY RESOURCES AUTHORITY SRF REFUNDING BONDS, SERIES 2010B

03 Nov 2010

Aaa RATING AFFIRMED ON $1.1 BILLION OUTSTANDING BONDS

State
MO

Moody's Rating

ISSUE

RATING

Water Pollution Control and Drinking Water Revenue Bonds (State Revolving Funds Programs) Series 2010B

Aaa

  Sale Amount

$65,215,000

  Expected Sale Date

11/03/10

  Rating Description

Revenue

 

Opinion

NEW YORK, Nov 3, 2010 -- Moody's has assigned a Aaa rating to the Missouri State Environmental Improvement and Energy Resources Authority's $65.2 million Water Pollution Control and Drinking Water Revenue Bonds (State Revolving Funds Programs) Series 2010B. Moody's also affirms the Aaa rating on $1.1 billion of outstanding state revolving fund bonds.

RATINGS RATIONALE

Moody's highest rating, which carries a stable outlook, is based on the expectation that the program will continue to have substantial resources available through its reserve fund structure for debt outstanding under the 2004 Master Trust Agreement and cash-flow structure under the 2010 Master Trust Agreement as well as the credit strength and diversity of the loan portfolio.

The proceeds of the current series will be used to reimburse the Missouri Department of Natural Resources for previously originated loans for its Clean Water and Drinking Water programs.

The current offering represents the Authority's first series under a new, 2010 Master Trust Agreement (MTA) which establishes a cash flow model for securing new debt going forward. Bonds issued under the 2010 MTA will be cross collateralized with the bonds issued under the 2004 MTA whereby the available reserves from the previous bonds will be available to meet shortfalls under the 2010 MTA and excess coverage available from the 2010 MTA will be available to cure shortfalls for bonds issued under the 2004 MTA.

The Missouri state revolving fund program was established to meet the requirements under the 1987 amendments to the federal Clean Water Act and the 1996 amendments to the federal Safe Drinking Water Act. The loan repayment obligations of all borrowers in the program mirror a proportionate share of the debt service on the bonds. The pledges to repay these loans, and those made under prior bonds issued, include net sewer and/or water revenues, general obligations, sales tax, and, in limited instances, annually appropriated revenues. In most cases, constituents have authorized the issuance of municipal bonds in connection with their financings.

PROGRAM-WIDE STRENGTHS:

In order to maintain default tolerance levels consistent with the current rating, and generate the desired interest rate subsidies for the participating borrowers, the Authority's future series are likely to be substantially over-collateralized as is the current series. The cash flow from loans in excess of approximately $240 million will be supporting the current borrowing of $65.2 million. As a result, debt service coverage from cash flow is expected to be robust. Borrowers in the leveraged Clean Water program will be securing $42.3 million of the current borrowing and loan principal and interest will be covering debt service by no less than 2.3x with coverage exceeding 3.0x after 2014. The coverage on the Clean Water State Match bonds of $9.7 million is estimated at 2.3x from 2012 onward after a coverage of 3.3x in 2011. On the Drinking Water side, the Leverage bonds of $7.7 million will enjoy coverage of no less than 2.4x, and the State Match bonds of just $4.6 million will enjoy coverage of just 1.05x to 1.9x through much of the life of the bonds.

The Authority has established sizeable reserves to generate an interest rate subsidy to borrowers under the 2004 MTA. The loan pool could experience a significant, but highly unlikely default rate of 38.23% of the loan payments securing the bonds through the maturity of the bonds outstanding and sufficient revenues from reserves and cash flow would still be available to pay debt service

Under the 2004 MTA, each borrower in the program has a separate dedicated reserve, but participants are linked through the Unallocated Fund created under the Master Trust Agreement. De-allocated reserves and funds not needed for debt service are deposited into the Unallocated Fund and are available to cure deficiencies in any borrower's reserve fund.

The program has a large and diverse pool of underlying borrowers with sound credit characteristics. The three largest borrowers are the St. Louis Metropolitan Sewer District (MSD) (19.9% of loans outstanding), whose senior lien bonds are rated Aa1; Little Blue Valley Sewer District at 7.2% (unrated); and Kansas City, (6.6% of the loans outstanding), whose Sanitary Sewer System Revenue Bonds are rated Aa2

Strong program management and oversight includes stringent underwriting standards and on-going surveillance of program borrowers:

PROGRAM WIDE CHALLENGES

Demand for the Drinking Water program is beginning to exceed available funds and as a result, the sizable subsidies may need to be reduced at some point in the future.

The Additional Bonds test under the 2010 Indenture requires a coverage of just 1.0 times.

Much of the outstanding bonds issued in the 1990's are enhanced with reserves consisting of Guaranteed Investment Contracts with American International Group and MBIA Investment management Corp. While the combined amount of these reserves is only approximately$58 million, a small fraction of total reserves of $862 million, the release of these reserves will represent a proportionally larger share of the reserves being released over the next several years.

PROGRAM STRUCTURE: SIGNIFICANT RESERVE LEVELS SUPPORT Aaa RATING

Under the 2004 MTA, the SRF Program leverages its federal and state match capitalization grants by using bonds to fund loans and the grants to fund the large reserves. Each participant in the program has a separate dedicated reserve account, used to generate investment earnings to subsidize the rates paid by the participant. The reserve percentage is 50% for Clean Water SRF program participants prior to 1993, and for Drinking Water SRF participants, 33.33% through December 2001 and 50% from 2002 to 2005. The current reserve is a sizable 70% of loan principal for both drinking and water pollution control programs (WPC). The SRF Program can reduce subsidies below the 70% level if needed. In the case of St. Louis MSD, most of their reserves are sized at 60% of outstanding principal. The lower reserve level allowed St. Louis MSD to increase the amount borrowed while still benefiting from the subsidy provided by a substantial reserve.

In addition to the large reserve funds available for each series of bonds, the bonds have a parity lien on the de-allocated reserves and other funds deposited into the Unallocated Fund created under the 2004 Master Trust Agreement. As bonds are repaid, the amounts held in the reserve are proportionately reduced, and such de-allocations are deposited into the Unallocated Account and are available to cure deficiencies of any Master Trust bonds. The de-allocated reserve funds are projected to be approximately $43 million to $38 million annually through 2019, after which the amounts available drop off.

The substantial reserves and funds released under the Master Trust Agreement to the Unallocated Fund along with the excess loan repayments from the 2010 bonds provide sufficient revenues to withstand a continuing significant, but highly unlikely default rate of 38.23% of all borrower loan repayments through the maturity of the bonds, and debt service would still be paid. In Moody's opinion, the strong default tolerance provided by the reserves and the Master Trust structure is a key element to the highest quality rating on the bonds.

The total WPC and drinking water reserves are approximately $862 million, or 73.7% of the Authority's $1.144 billion in bonds. Under the 2004 MTA, the borrowers are obligated to make debt service payments at the same rate as the rate on the bonds, prior to subsidy, and the interest generated from the investment of the reserves is a credit to the borrower. Thus, in the unlikely event that the interest income is not available, the bonds have a legal claim to payment from the underlying borrowers, which is an added strength of this program.

LARGE PORTFOLIO EXHIBITS ABOVE AVERAGE CREDIT QUALITY

The credit quality of the participants in the program is an important element of the rating assignment, and Missouri's loan portfolio demonstrates above average credit quality. St Louis MSD, whose senior lien bonds are rated Aa1, is the largest borrower with 19.9% of the total loans. Little Blue Valley Sewer District at 7.2% (unrated) is second at 6.6%. Kansas City (sewer revenue bonds rated Aa2) and Springfield at 5.1% (GO bonds rated Aa1 although most of the Springfield bonds are annual appropriation debt) are the third and fourth largest borrowers.

When Moody's assessment of the unrated borrowers is considered, approximately 99% of the pool exhibits investment grade credit quality, with weighted average quality consistent with A1 rating. Another important credit factor is the diversity in loans, with over 34% of the 214 borrowers representing less than 1% of total loans.

PROGRAM OVERSIGHT

In Moody's opinion program policies and oversight that include underwriting standards and borrower monitoring provide further assurances that loan debt service will be made. Each project must be approved for funding by the Missouri Department of Natural Resources and be included in the Intended Use Plan as required by the US EPA. Most loan repayments are made monthly, enabling early detection of any difficulties with a borrower. The rating also reflects the program's proactive management of the portfolio. In particular, the program works with other state and federal agencies to identify appropriate funding for projects to ensure that the borrowers within the leveraged loan program have the capacity to repay their loans.

Outlook

The stable outlook on the bonds reflects Moody's expectation that the credit quality of the pool of borrowers will remain relatively stable. The outlook further reflects Moody's expectation that the clean water program, with loans supported by the larger reserve fund, will continue to dominate the overall portfolio.

KEY STATISTICS

Fund Structure: Combined Reserve and Cash Flow Model

Debt Outstanding (including the current offering): $1.144billion, $1.079 billion under the 2004 Indenture

Reserves: $842 million

Total debt to reserves: 73.4%

Default Tolerance: 38.23% of Clean and Drinking Water loans could default without causing a default on the bonds

Number of Borrowers: 214

Portfolio Credit Quality: approximately 99% consistent with Investment Grade

Largest Borrowers: St Louis MSD, senior lien bonds rated Aa1, 19.9% of the total loans; Kansas City (sewer revenue bonds rated Aa2) second at 6.6%; Little Blue Valley Sewer District, 7.2% (unrated); and Springfield, 5.1% (GO bonds rated Aa1).

The principal methodology used in rating Missouri State Environmental Improvement & Energy Resources Authority was "U.S. State Revolving Fund Debt", published in July 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Kevork Khrimian
Analyst
Public Finance Group
Moody's Investors Service

Omar Ouzidane
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aaa RATING TO MISSOURI STATE ENVIRONMENTAL IMPROVEMENT AND ENERGY RESOURCES AUTHORITY SRF REFUNDING BONDS, SERIES 2010B
No Related Data.
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