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02 Nov 2016
New York, November 02, 2016 -- Issue: Water Development Refunding Revenue Bonds (Loan Program II), 2016 Series A-II; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $46,780,000; Expected Sale Date: 11/15/2016; Rating Description: Lease Rental: Other;
Issue: Infrastructure Refunding Revenue Bonds (West Virginia Infrastructure and Jobs Development Council Program), 2016 Series A; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $69,430,000; Expected Sale Date: 11/15/2016; Rating Description: Lease Rental: Other;
Summary Rating Rationale
Moody's Investors Service has assigned Aa3 ratings to West Virginia Water Development Authority's $47 million Water Development Refunding Revenue Bonds (Loan Program II), 2016 Series A-II and $69 million Infrastructure Refunding Revenue Bonds (West Virginia Infrastructure and Jobs Development Council Program), 2016 Series A.
The authority's bonds are notched two notches off the state's Aa1 general obligation rating to reflect the moral obligation of the state pledged to the bonds. The general obligation rating is supported by the state's fiscal conservatism and disciplined financial management, evidenced by consistently strong reserve fund balances that have been in place for nearly a decade. The rating also reflects the state's high unfunded pension liabilities and West Virginia's historically underperforming economy, including above-average concentration in the coal industry and below-average per capita income levels.
The negative outlook largely reflects the severity of West Virginia's recession and the ongoing threat it poses to the state's structural balance. Low coal and natural gas prices have led to flagging production, an ongoing restructuring in the labor force and, recently, sharp declines in state tax revenue. Any deviations from past financial best practices, including maintenance of large reserves and adherence to structural balance, could result in negative pressure on West Virginia's rating.
Factors that Could Lead to an Upgrade
Improvement in the state's energy sector that results in the stabilization of employment trends and severance tax revenues
Institutionalization of the conservative management practices that have enabled the state to maintain positive fund balances and healthy reserve levels including the use of surplus funds to bolster weakness in retirement system funding
Long-term growth and diversification of the state economy
Factors that Could Lead to a Downgrade
A prolonged downturn for the coal and natural gas sectors, including any significant mine closures or a continued trend of layoffs
A shift away from the state's sound governance practices and trend of well-managed financial operations
Increases in the state's unfunded pension liabilities resulting from failure to pay full annual required contribution
The Aa3 rating on authority's revenue bonds is based on the State of West Virginia's Aa1 general obligation rating, with a two-notch distinction to reflect the strength of the state's moral obligation pledge to replenish deficiencies in the debt service reserve funds to their required amounts of maximum annual debt service on outstanding bonds.
The authority is authorized to issue bonds for the development of water, wastewater and infrastructure projects. Bond proceeds from authority's sales will be used to refund outstanding debt for debt service savings. The authority has a $500 million statutory debt limit, regardless of the type of pledge, and $357 million currently outstanding. Legislative approval is required for the authority to issue more debt if more than $400 million is outstanding. To date, West Virginia's moral obligation pledge has never been called upon. While adding significant strength to this program, we believe the moral obligation pledge is not as strong as the legal pledge that secures West Virginia's lease appropriation debt. With lease debt, there is a legal contractual obligation to pay debt service once it has been appropriated, which makes that debt relatively stronger than moral obligation debt, even though both types of debt payments are subject to appropriation. It is this distinction that provides the basis for the Aa3 rating on the bonds.
The state's moral obligation is in the form of a deficiency make-up provision, which is typical of state moral obligation pledges. The statute requires that in the event a reserve fund is less than the reserve fund requirement, the authority will certify to the governor before December 1 of each year the amount of the deficiency. The governor may then elect to include that amount in the budget request to be submitted to the next session of the Legislature for appropriation to the authority. The governor may also request a supplemental appropriation during the legislative session. The Legislature is not required to make the appropriation and the amount of the deficiency is not a debt or liability of the state. Debt service payments on the Loan Program II bonds are due May 1 and November 1. Debt service payments on the Infrastructure and Jobs Development Council Program (IJDC) bonds are due April 1 and October 1.
In Moody's view any appropriation necessary to cure a reserve fund deficiency is considered highly likely given the essentiality of the water projects and the state's financial strength. Moreover, the state is a frequent user of lease-backed appropriation financing structures for a variety of capital needs, underscoring the importance of market access. While failure to appropriate for the reserve fund replenishment is not an event of default under the resolution, Moody's would consider either event as a default by the state and the act would materially impact the state's general obligation rating as well.
The authority's loan programs provide loans to governmental agency participants through the purchase of their local bonds subject to a loan agreement. Each loan agreement requires that local bonds are issued pursuant to a local act and secured by revenues of a water development project. Title to the projects remain with the participants.
Each water development project must meet rigorous qualifications for permitting and viability. Participants in the loan programs must also pursue other available sources of funds if their local bonds' reserve funds are insufficient. The authority monitors the local participants and can petition the state Public Service Commission to enforce the rate covenants if one of the participants is unable to meet its debt service payments. The local bonds' rate covenants, reserve funds and oversight by the authority provide considerable protection to bond holders before the authority would have to look to the moral obligation pledge. No local borrower has ever defaulted, but there have been draws on the local reserve funds; if a local borrower is experiencing financial pressure it can request a rate increase from the Public Service Commission. The authority has no current plans to issue any more bonds to make additional loans for these four loan programs.
Use of Proceeds
Proceeds from the Loan Program II bonds will refund outstanding bonds for estimated net present value savings of $10 million, or 18.3% of the refunded bonds. Proceeds from the IJDC Loan Program bonds will refund outstanding bonds for estimated net present value savings of $14.5 million, or 18.5% of the refunded bonds.
The State of West Virginia has a population of 1.85 million people and a gross state product of approximately $70 billion. The state has relatively low industrial diversity, above-average concentration in the natural resource industry and relatively low wealth levels.
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. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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