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13 Jul 2017
New York, July 13, 2017 -- Summary Rating Rationale
Moody's Investors Service has affirmed the Alaska Municipal Bond Bank's general obligation rating at A1. The bond bank has approximately $1.2 billion of outstanding bonds. The outlook remains negative.In concert with our downgrade of the State of Alaska to Aa3 from Aa2 (see separate credit opinion published today), this action effectively narrows the distance between Alaska's general obligation rating and the Alaska Municipal Bond Bank's rating, to one notch from two notches.We have historically rated the bond bank two notches below the state's GO rating, which is a typical notching distance for a moral obligation security. However, the state has established the practice of appropriating funds to replenish the bond bank's reserve fund if necessary each year. Now in the ninth year of this practice, we believe these annual appropriations plus a few other security features warrant a one-notch differential at this level, rather than a two-notch differential.
The negative outlook mirrors the outlook on the State of Alaska.
Factors that Could Lead to an Upgrade
Upgrade of the State of Alaska
Factors that Could Lead to a Downgrade
Discontinuation of the practice of appropriating funds to cure deficiencies each year
Downgrade of the State of Alaska
Five sources of security protect Alaska Municipal Bond Bank bondholders. Viewed holistically, we believe these various layers of security working in tandem are materially stronger than a simple moral obligation commitment, all else being equal.Security #1: Loan RepaymentsThe Alaska Municipal Bond Bank is a conduit borrower that sells bonds and lends the proceeds to municipalities and other types of governmental borrowers in Alaska. The bond bank's bonds are secured in the first instance by loan repayments from these borrowers. As of April, 38 borrowers had nearly $1 billion of loans outstanding.Borrowers use these loans for such essential purposes as education, roads, hospitals, and utility projects. Security #2: Alaska's Moral Obligation CommitmentThe State of Alaska has pledged its moral obligation to cure any deficiencies that arise from missed borrower payments. As usual, this moral obligation pledge is activated by a debt service reserve fund, which is required to be funded at the standard three-pronged test.Each year, the bond bank is required to certify by Jan. 30 whether the reserve fund has a deficiency. Should the bond bank report a deficiency, the legislature may - but is under no legal obligation to - appropriate money sufficient to restore the reserve fund to the required level.This structure is typical. We ordinarily rate such structures two notches below a state's general obligation rating. The bond bank has certified its reserves without a deficiency every year for 41 straight years. In January 2017, the bond bank as usual certified to the governor and the legislature that the amount needed to replenish the debt service reserve fund to its requirement was "zero dollars and zero cents." Security #3: Annual AppropriationEach year since fiscal 2010 (ended 6/30/2010), Alaska has included in its operating budget an appropriation to replenish any deficiencies in the bond bank's reserve fund. (See page 113 of the 2018 budget for the latest example.)The practice of enacting this appropriation annually prior to the beginning of the fiscal year is materially stronger than the typical moral obligation structure. In a more typical structure, the state considers appropriating to replenish a debt service reserve fund only after it is drawn from. A legislative appropriation to replenish a reserve fund draw after the fact introduces the various risks that lead us to usually rate moral obligation pledges a notch lower than annual appropriation obligations.By appropriating annually before any potential draw from the reserve fund takes place, the Alaska legislature converts this structure into something that more functionally resembles an annual appropriation obligation, which is more typically rated one notch below the state's general obligation rating rather than two. The legislature's now fully established history of appropriating for this purpose is one of the key factors driving our decision to narrow the notch differential between Alaska's GO rating and the rating on the bond bank. Of course, the legislature could at any time discontinue the practice of appropriating reserve fund replenishments in advance. Such an action could prompt us to begin once again seeing the bond bank as more like a moral obligation structure, which might lead us to rate the bond bank two notches below the state.Security #4: State Aid InterceptUnder state law, should a borrower default on a payment to the bond bank, the state is required to withhold aid appropriated to that borrower and redirect it to the bond bank to pay debt service on the loan.Many categories of aid to governmental units are interceptable, including local shares of state-collected taxes and fees, reimbursements for school and transportation debt, operational educational aid, and capital grants.According to the bond bank, all 38 borrowers receive aid that exceeds the annual debt service on their bond bank loans. Although the bond bank's reserve fund mitigates any timing problems, we note that the interceptable aid is favorably spaced out throughout the year. The largest aid category for many borrowers is aid for education operations, which is distributed in 12 equal monthly installments. For many borrowers, this single category is the majority of interceptable aid.With Alaska aggressively cutting many kinds of spending, including some of the big categories of aid to municipalities, this coverage has been going down and could continue to decline. Furthermore, because the bond bank is lending more, total debt service is going up for many borrowers. Though lower coverage is not universally the case, most borrowers in the pool have lower coverage than they did five years ago, in some cases substantially lower.Security #5: Bond Bank's General ObligationThe bond bank has pledged its "full faith and credit" to its general obligation bonds. Because the bond bank has some liquid reserves in addition to the debt service reserve fund, the bond bank itself represents a source of pledged funds that could help prevent a reserve fund deficiency or to cure such a deficiency before a legislative appropriation becomes necessary.In its fiscal 2016 financial statements, the bond bank reported an unrestricted net position of $20.4 million. To put this into perspective, bond bank debt service in 2016 was a bit less than $100 million.The bond bank's revenues consist almost entirely of loan repayments, and the legislature could claim the bond bank's reserves at any time. Therefore, the bond bank's general obligation pledge largely duplicates the credit strengths captured in the other securities described in this section. However, to the extent that the complexity of the moral obligation payment mechanism is one of the key risks that lead us ordinarily to rate moral obligation pledges lower than annual appropriation commitments, the bond bank's reserves could, by replenishing the reserve fund or preventing a draw from it in the first place, eliminate some of the complexities that might arise if a borrower misses a payment.Additionally, bond bank borrowers with revenue loans are required to have a borrower-level reserve fund.
Use of Proceeds
The Alaska Municipal Bond Bank is a conduit borrower established in 1975 to facilitate municipal borrowings in Alaska. Primarily, the bond bank issues bonds, lends the proceeds to municipalities, and repays the bonds with the debt service payments from the municipal borrowers.
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The additional methodology used in this rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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