Massachusetts Water Resources Authority -- Moody's assigns Aa2 rating and stable outlook to MWRA's (MA) $62.8 million Multi-Modal Subordinated General Revenue Refunding Bonds, 2012 Series E

New York, November 06, 2012 --

Moody's Rating

Issue: Multi-Modal Subordinated General Revenue Refunding Bonds, 2012 Series E; Rating: Aa2; Sale Amount: $62,800,000.; Expected Sale Date: 11/15/2012; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has assigned a Aa2 rating to the Massachusetts Water Resources Authority's (MWRA) $62.8 million Multi-Modal Subordinated General Revenue Refunding Bonds, 2012 Series E. Concurrently, Moody's has affirmed the Aa1 rating assigned to the authority's $3.49 billion of outstanding senior lien general revenue bonds and the Aa2 rating assigned to the authority's $1.18 billion of outstanding subordinated general revenue bonds. The outlook is stable.

The 2012 Series E bonds are being issued through a negotiated direct-purchase agreement with Citibank, N.A. (long term rating A3/negative outlook). In addition to the 2012 Series E bonds, the Authority is also issuing $60.3 million Multi-Modal Subordinated General Revenue Refunding Bonds, 2012 Series F through a direct purchase agreement with RBC Capital Markets (issuer rating A2/stable outlook), and $57.8M Multi-Modal Subordinated General Revenue Refunding Bonds, 2012 Series G through a direct purchase agreement with Wells Fargo Bank, NA (Wells Fargo, issuer rating Aa3/stable outlook). The 2012 Series F and 2012 Series G bonds are unrated by Moody's.

Proceeds from the 2012 Series E, F, and G bonds will be used to refinance $181 million of the MWRA's 2008 Series B, and 2008 Series C-1 bonds, which had been supported with Bank of America, NA (long term rating A3/stable) Standby Bond Purchase Agreements (SBPA's). The bonds are secured by a subordinate lien pledge of net system revenues and benefit from satisfactory structural provisions including a 1.1 times rate covenant on total debt (senior and subordinate). Additional security is provided for two-thirds of MWRA's revenues, because of the underlying strength of the member communities' general obligation pledges to make timely assessment payments to the authority as well as a tested state intercept program.

SUMMARY RATINGS RATIONALE

The Aa2 subordinate lien rating incorporates the bonds' subordinate position relative to MWRA's senior lien debt and the authority's weaker legal covenants requiring rate revenue coverage of 1.1 times on combined senior and subordinated debt service, including subordinated fixed-rate loans issued to the authority by the State Revolving Fund (Massachusetts Water Pollution Abatement Trust rated Aaa/stable outlook).

The Aa1 senior lien rating recognizes the solid and stable credit strength of the authority's service area, a high, but manageable debt burden with significant variable rate exposure, and a satisfactory financial position with satisfactory debt service coverage levels. Also factored into the rating are the authority's reliance on regular rate increases to support debt service and anticipated capital needs.

The stable outlook reflects MWRA's sound financial performance despite pressure to limit rate increases from its members, most of which are experiencing ongoing financial stress relating to the lingering regional recession. Also incorporated in the stable outlook are the authority's expected maintenance of sound reserve levels after the upcoming release of debt service reserve funds under the amended bond resolution, expected in 2016. Further, the stable outlook incorporates MWRA's plan to achieve full funding of its pension and OPEB liabilities.

STRENGTHS

-- Strong credit quality and excellent payment history of local government members

-- Availability of intercept of members' state aid to cure delinquencies

-- Effective management of financial performance, capital needs and debt profile

-- Satisfactory debt service coverage

-- Ample water supply and well-maintained treatment facilities

CHALLENGES

-- High debt ratio

-- Significant exposure to risks associated with variable-rate debt and swap agreements

-- Reduced flexibility from lowered budget for variable-rate interest costs

-- Pending resolution changes allowing reductions in debt service and other reserves

-- Reliance on regular rate increases for foreseeable future

-- Limited ability to expand service area

Outlook

The stable outlook reflects Moody's expectation that MWRA will maintain positive operations, sound reserve levels, active management of its variable rate portfolio, healthy debt service coverage and steady progress toward funding long-term pension and OPEB liabilities. Critical to maintaining the stable outlook will be authority's ability to maintain financial flexibility after the amended bond resolution and release of reserves takes effect.

WHAT COULD MAKE THE RATING GO UP

-- Improved coverage for senior and total debt service

-- Substantial enhancement of service area's composite credit strength

-- Lower debt ratio

-- Reduced exposure to risks associated with variable rate debt and derivative agreements

WHAT COULD MAKE THE RATING GO DOWN

-- Significant reduction of cash reserves and financial flexibility after amended bond resolution takes effect

-- A prolonged period of minimal rate increases, shifting funding of capital needs and long-term liabilities to the future

-- Failure to reduce debt burden as planned

-- Higher debt ratio or increased exposure to variable rate debt

-- Acceleration of debt amortization due to failed remarketings and subsequent bank bond repayment at higher interest rate

-- Deterioration of service area's composite credit strength

-- Reduction in debt service coverage

-- Failure to effect mid-year rate adjustments or expenditure controls when necessary

RATING METHODOLOGY

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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