OREANDA-NEWS. Fitch Ratings has assigned an 'AA+' rating to the following bonds issued by the New York State Environmental Facilities Corporation's (EFC) state clean water and drinking water revolving fund (New York City Municipal Water Finance Authority [MWFA] Project):

--Approximately \$216,865,000 second resolution subordinated SRF bonds, series 2015A.

A portion of bond proceeds will be used to provide financial assistance to the MWFA for eligible water pollution control projects. The remaining bond proceeds will be used to refund certain series of previously issued bonds the proceeds of which were initially used for water pollution control and drinking water projects. The 2015A bonds are expected to price via negotiation around June 22.

In addition, Fitch affirms its ratings on the following EFC bonds:

--\$1.4 billion in outstanding clean water and drinking water revolving funds (MWFA Project), second resolution SRF revenue bonds at 'AAA';
--\$2.8 billion in outstanding state clean water and drinking water revolving fund (MWFA Project), second resolution subordinated SRF revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY
The series 2015A bonds and parity subordinate lien bonds (the EFC MWFA subordinate bonds) are secured by loan repayments from the MWFA, enhanced by reserves released after meeting any potential deficiencies for 1991 master financing indenture (MFI) bonds and EFC MWFA senior bonds. Series-specific and general reserves also secure the EFC MWFA subordinate lien bonds. Senior and subordinate EFC MWFA bonds are also secured by excess cash flows from the 2010 MFI.

KEY RATING DRIVERS
STRONG LOAN SECURITY FROM MWFA: The high ratings on the 2015A and other EFC MWFA bonds primarily reflect the strong credit quality of loan repayments from MWFA, whose first and second lien bonds are rated 'AA+' with a Stable Outlook by Fitch.

SIGNIFICANT SENIOR LIEN RESERVES: The 'AAA' EFC MWFA senior lien bond rating considers the strong enhancement derived from aggregate pledged reserves totaling 53% of senior bond par outstanding.

LIMITED SUBORDINATE BOND ENHANCEMENT: The enhancement (i.e. reserves and surplus cash flow from the other EFC programs) provided to the EFC MWFA subordinate bonds is limited in certain years and such coverage could be further diminished as related assets (to which the bonds have a subordinate claim) are released via deallocations and/or refundings. Further leveraging of the 2010 MFI program could produce a similar effect of reduced surplus cash flow.

RATING SENSITIVITIES

DECREASE IN MWFA'S RATING: The ratings assigned to the EFC MWFA senior and subordinate bonds are sensitive to shifts in MWFA's underlying credit quality.

REDUCTION OF SENIOR BOND ENHANCEMENT: The 'AAA' EFC MWFA senior bonds' rating is additionally sensitive to a decrease in pledged senior lien reserves and/or program releases from the 2010 MFI. Given the reserve requirements and significant enhancement currently available to the senior bonds, Fitch views this scenario as unlikely.

IMPROVEMENTS IN SUBORDINATE BOND ENHANCEMENT: Sustained improvements to the enhancement available to the EFC MWFA subordinate lien SRF bonds could lead to positive rating action over the intermediate term.

CREDIT PROFILE
State revolving fund (SRF) loans made to the MWFA are funded outside the EFC's SRF pooled loan programs (1991 and 2010 MFI programs both rated 'AAA' with a Stable Outlook by Fitch) to mitigate single-borrower concentration risks resulting from the MWFA's significant outstanding debt balance. SRF loans made solely to the MWFA are secured either on a senior and subordinate lien basis.

STRONG MWFA CREDIT QUALITY
The MWFA's second general resolution SRF bond repayments are on parity with MWFA's second general resolution loan repayments to EFC. Fitch maintains an underlying 'AA+', Stable Outlook on MWFA's first and second general resolution revenue bonds.

STRONG RESERVES AND ENHANCMENT FOR SENIOR LIEN
Debt service on the EFC MWFA senior bonds is paid from MWFA loan repayments and reserve earnings. These bonds are also secured by senior lien reserves which, after this issuance, are projected to approximate \$730 million, or 53% of outstanding EFC MWFA senior bond principal. Typically, senior lien EFC MWFA bonds require reserves equal to a minimum of 33 1/3% of bond principal.

The senior bonds are further secured by released reserves from the 1991 MFI program, released reserves from certain EFC MWFA subordinate bonds, and surplus cash flow from the 2010 MFI program. As of September 2015, the 1991 MFI reserves are projected to be \$135 million, or approximately 34% of the outstanding 1991 MFI bond principal. Projected releases from the 2010 MFI program, including the series 2013A NYSERDA debt service, are currently calculated to total approximately \$815 million over the life of the program, which equates to 92% of the outstanding 2010 MFI bonds. In Fitch's view, available pledged EFC MWFA senior lien reserves combined with reserve deallocations and cash flow releases from the other programs provide sufficient enhancement at an 'AAA'-rating level for such senior lien bonds.

SUBORDINATE BOND ENHANCEMENT LIMITED
Reserve deallocations and surplus cash flows available to the EFC MWFA subordinate bonds (after being made available to senior obligations) add limited value to such bonds credit quality. Reserve deallocations from the 1991 MFI and EFC MWFA senior and (certain previous) subordinate lien bonds are scheduled to be depleted by 2037 while the EFC MWFA subordinate bonds are currently scheduled to mature in 2045. Additionally, refundings of the senior bonds in recent years have resulted in erosion of such enhancement. The bonds are also enhanced, on a subordinated basis to the 1991 MFI and EFC MWFA senior lien bonds, by excess cash flow released from the 2010 MFI.

In its analysis, Fitch ran stress scenarios to calculate the potential availability of enhancement to the EFC MWFA subordinated bonds. Incorporating its SRF rating criteria, scheduled loan repayments from the 1991 and 2010 MFI were subjected to Fitch's 'AAA' liability rating stress hurdles, which led to reductions in the amount of reserves and surplus cash flow deallocations available to the EFC MWFA subordinate bonds. Fitch also applied a stress to the EFC MWFA senior and subordinate reserve deallocations. After application of such stresses, minimum annual debt service coverage of the EFC MWFA subordinated bonds was approximately 1.2x. This number compares to a pre-stress minimum of approximately 1.4x. While all-in coverage of the EFC MWFA subordinate bonds has demonstrated slight improvements since Fitch's last review in 2014, at this time Fitch does not view such enhancement as being sufficient to improve the rating above MWFA's 'AA+' rating.

GENERAL RESERVE FUNDS PROVIDE ADDITIONAL ENHANCEMENT
The general reserve fund consists of a direct loan made from the EFC's equity account to the EFC MWFA and is invested in subordinated MWFA bonds. As the risk of nonpayment of the EFC MWFA loan is directly linked to MWFA's underlying credit risk (and hence its 'AA+' rating), the general reserve fund is therefore afforded no credit in Fitch's analysis.