NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the rating on the following bonds of the Maine Municipal Bond Bank to 'AA-'from 'AAA':
--$1.4 billion outstanding General Resolution bonds
The rating has been removed from Rating Watch Negative and assigned a Negative Outlook.
Bonds issued under the general resolution are general obligations of the bond bank, payable from loan repayments of participating local governments. The loans are obligations of the participating local governments. A moral obligation (MO) pledge of the state of Maine to restore draws on the debt service reserve fund provides additional security and is the basis for the rating.
KEY RATING DRIVERS
RATING BASED ON STATE MORAL OBLIGATION: The rating downgrade reflects the transition from using revolving fund criteria to focusing on the security provided by the state's moral obligation to replenish the debt service reserve fund. Under the moral obligation criteria, the rating is limited to two notches below that of the State General Obligations (GO), rated 'AA+' with a Negative Outlook by Fitch Ratings.
RATING LINKED TO STATE: The rating is two notches below that of the State GO. The direct linkage reflects that the bond bank is an entity of the state, services a broad state purpose of providing lower cost financing for local governments through the state, and finances basic infrastructure. The provision to intercept state aid indicates the further commitment of the MO provider, the state of Maine, to the bond bank.
SOUND MO MECHANISM AND TIMING: The moral obligation mechanism and timing meet Fitch's criteria with all requirements related to the moral obligation spelled out in the authorizing legislation for the Bond Bank. The timing of the mechanism is satisfactory and the processes of notification and appropriation request are specifically spelled out and mandatory for the various parties.
The rating downgrade reflects the application of Fitch's moral obligation criteria rather than the pool criteria that had been used to rate the bonds. The change reflects the publication of a new quantitative approach to rating state revolving funds and leveraged municipal loan pools (criteria dated May 21, 2012). The general resolution bonds do not satisfy the revised criteria to be analyzed as a pool; however, the presence of a sound moral obligation from the state of Maine provides significant credit strength.
According to Fitch's criteria, 'Rating Guidelines for Moral Obligations', dated April 20, 2012, a rating may be linked to that of the moral obligation provider, notching down from its rating rather than up from the primary security's rating, in certain limited circumstances. The general resolution bonds display characteristics that permit such linking to the MO provider. The bond bank is an independent political subdivision of the state whose board includes the State Treasurer, the Superintendent of Maine Bureau of Financial Institutions, and three gubernatorial appointees. It serves a broad state purpose of providing lower cost financing to local governments in the state. The projects financed are for basic infrastructure of the participating local governments, more than half of which are school districts. There is provision to intercept state aid, indicating the further commitment of the MO provider, the state of Maine, to the program.
The MO mechanism, which is spelled out in the authorizing legislation for the bond bank and is triggered by a draw upon the debt service reserve fund, requires the chairman of the bond bank to certify to the governor by Dec. 1 of each year whether additional funds are necessary to restore the reserve to its required level. Such funds will then be appropriated and paid by the state to the bond bank during that fiscal year. The debt service reserve is fully cash funded, the timing of the mechanism is satisfactory and the processes of notification and appropriation request are specifically spelled out and mandatory for the various parties. While the make-up provision does not constitute a legally enforceable obligation or create a debt on behalf of the state, bond counsel has opined that there is no constitutional bar to future Legislatures to appropriate such funds.
State support of the bond bank includes a provision to intercept state aid to participating governmental units in the event of a payment default to the bond bank. If any governmental unit fails to make a scheduled payment of principal or interest to the bond bank, the Chair must notify the State Treasurer who is required to intercept any funds due to that governmental unit for the remainder of the fiscal year. Neither the intercept nor the moral obligation has ever been utilized, because no borrower has defaulted on a loan repayment since the bond bank began operations in 1973.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
--'Rating Obligations for Moral Obligations' (April 20, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Rating Guidelines for Moral Obligations
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
Karen Krop, +1-212-908-0661
New York, NY 10004
Adrienne Booker, +1-312-368-5471
Marcy Block, +1-212-908-0239
Source: Fitch Ratings