Fitch Rates New York City TFA $350MM Building Aid Revs 'AA-'; Outlook Stable

NEW YORK, Nov 12, 2010 (BUSINESS WIRE) -- Fitch Ratings has assigned an 'AA-' rating to the following New York City Transitional Finance Authority (TFA) building aid revenue bonds, fiscal 2011: --$40,000,000 subseries S-1A tax-exempt bonds; --$310,000,000 subseries S-1B taxable bonds (Build America Bonds).

The bonds will be sold through negotiation the week of Nov. 15, 2010.

In addition, Fitch has affirmed the 'AA-' rating on $4.1 billion outstanding TFA building aid revenue bonds.

The Rating Outlook is Stable.

RATING RATIONALE: --School building aid that secures the bonds requires annual state legislative appropriation. Therefore, the rating is linked to the general obligation (GO) rating of the State of New York (currently rated 'AA', Outlook Stable).

--Appropriation risk is minimal given the constitutional mandate for, and strong history of, state support for education.

--The additional bonds test (ABT) relies only on projects that already have been approved, although revenue related to future projects also is pledged.

--Monies for debt service are retained in the city fiscal year prior to the year in which the debt service is due.

KEY RATING DRIVERS: --Continuation of state building aid funding practices.

--Changes in New York State's GO rating, to which this rating is linked.

--The state's GO rating will be driven by its continued ability to address budget shortfalls and protect its cash position.

---Further driving the state's rating would be any meaningful change to the shape of the financial services industry, which would have significant implications for the state's economy and finances.

SECURITY: The bonds are payable from annual New York State appropriations of building aid to New York City. The federal subsidies associated with the Build America Bonds are not pledged.

CREDIT SUMMARY: The rating is based on the credit quality of the State of New York (GO bonds rated 'AA', Outlook Stable by Fitch), as bonds are payable from annual state appropriations of building aid. State building aid assists local school districts across the state with the cost of constructing and improving elementary and secondary education facilities. Appropriation risk is minimal given the constitutional mandate for, and strong history of, state support for education. Moreover, the ABT only considers aid associated with projects that have already been approved by the State of New York, even though aid related to projects that will be approved by the state in the future is also pledged to the bonds.

In the 2006 state legislative session, the TFA was authorized to issue an amount of up to $9.4 billion outstanding for education to address the capital demands of the Campaign for Fiscal Equity (CFE) school funding lawsuit. As permitted by the legislation, the city assigned all of its state building aid to the TFA to secure the bonds.

State building aid, which is earned on an individual project basis, consists of confirmed building aid and incremental building aid. Confirmed building aid refers to aid payable for projects that have already been approved by the state.

Such aid is subject to annual state appropriation but is not subject to any additional statutory or administrative conditions or approvals. The state has covenanted that the calculation of reimbursable costs for a project will not change once the project has been approved; the level of reimbursement can change over time pursuant to a statewide formula that is calculated every year, but this ratio has been relatively stable over time. Incremental building aid refers to state building aid to be received for projects approved by the state in the future.

Both confirmed and incremental building aid are the property of the TFA and are pledged to the bonds. However, the ABT considers only confirmed building aid. In order for additional debt to be issued, confirmed building aid payable in the fiscal year preceding each year in which bonds are scheduled to be outstanding must be at least 1 times (x) debt service in that year. Since state building aid for a given project is provided over 30 years, debt service coverage by confirmed building aid drops from about 2.9x in fiscal 2011 to a low of about 1x in fiscal 2038. Fitch expects that the incremental building aid generated by the city's ongoing education capital program will result in substantially higher actual coverage in the outyears. The average state reimbursement rate for education projects in the city is about 50%, and the TFA receives all building aid regardless of whether the project is financed with TFA building aid bonds or through a different financing mechanism.

State building aid is retained for debt service each year, when the amount of building aid left to be received before the end of the city's fiscal year equals 110% of the debt service payable on the building aid bonds in the following city fiscal year. Although the state's fiscal year runs from April-March, the state budgets education aid, which includes building aid, based on the city's fiscal/school year (July-June). The retention mechanism is likely to trap building aid in the March through June period for debt service payments in the following July and January. Building aid not required to be retained flows to the city. Although recently there have been declines in education aid paid by the state to the city and delays in the timing of education aid payments, reflecting the state's strained budgetary and cash position, building aid has continued to increase and been paid on schedule.

Pursuant to the TFA indenture, since building aid is TFA revenue it must be available first to TFA future tax secured bonds issued prior to the first issuance of building aid revenue bonds in fiscal 2007. Given the very strong coverage that the pledged personal income and sales tax revenues provide for future tax secured bonds (about 7x), it is unlikely that building aid would ever be needed for this purpose. TFA future tax secured bonds sold after the date of the initial issuance of the building aid bonds have no claim on building aid.

There is currently $8.8 billion in TFA future tax secured debt outstanding that was sold prior to the first issuance of building aid revenue bonds.

In addition to previously outstanding TFA future tax secured bonds, the payment of building aid is also subject and subordinate to certain other prior statutory and state constitutional claims. Fitch does not believe that these will impair the ability to pay debt service. Holders of the TFA building aid bonds benefit from the statutory covenants in the original TFA Act prohibiting action that would impair bondholders and the bankruptcy-remote nature of the issuer.

However, since the pledged revenue stream requires annual state appropriation, the bondholders do not enjoy the same insulation from government operations that is a key factor in the 'AAA' rating of the TFA future tax-secured bonds. The issuance of the fiscal 2011 series S-1 bonds does not affect the 'AAA' rating on the future tax secured bonds.

Considerations for Taxable/Build America Bonds Investors The following sector credit profile is provided as background for investors new to the municipal market.

State Appropriation-Backed Bonds: A U.S. state government's overall credit quality is reflected in the rating for its general obligation (GO) full faith and credit pledge, the broadest security that a state can provide to the repayment of its long-term borrowing. In cases where bond payment requires annual or biennial legislative appropriation, this lesser long-term commitment to repayment is reflected in a lower rating than the GO rating. Such debt is typically rated one notch below the GO rating. If concerns about non-appropriation are heightened, for example in cases where there is not clear essentiality for the project being funded, such debt can be rated two or more notches below the GO rating. Conversely, if the risk of non-appropriation is judged to be effectively eliminated, for example through a mechanism that traps substantial operating funds if appropriation is not made, the appropriation debt can be rated on par with the GO credit.

State GO ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State Government Tax- Supported Rating Criteria, dated Oct. 8, 2010.

Additional information is available at ''.

Applicable Criteria and Related Research: --'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit ''.

Applicable Criteria and Related Research: Tax-Supported Rating Criteria U.S. Local Government Tax-Supported Rating Criteria ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.


SOURCE: Fitch Ratings CONTACT: Fitch, Inc. Primary Analyst Laura Porter, Managing Director +1-212-908-0575 One State Street Plaza New York, NY 10004 or Secondary Analyst Douglas Offerman, Senior Director +1-212-908-0889 or Committee Chairperson Ken Weinstein, Senior Director +1-212-908-0571 or Media Relations Cindy Stoller, +1-212-908-0526 Copyright Business Wire 2010 -0- KEYWORD: United States

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New York INDUSTRY KEYWORD: Professional Services

Finance SUBJECT CODE: Bond/Stock Rating