NEW YORK, February 28 (Fitch) Fitch Ratings affirms the ‘AAA’ rating on the outstanding long-term obligations of the Municipal Finance Authority of British Columbia, Canada (MFABC, or the authority), consisting of:
-Approximately $6.3 billion in senior unsecured debentures.
The Rating Outlook is Stable.
The debentures are direct and unconditional unsecured obligations. The authority has a debt reserve fund pledged to debenture holders and the authority retains the power to impose ad valorem taxes without limitation on all taxable property in the province to maintain the debt reserve fund.
-- BROAD TAXING AUTHORITY AND LEGAL PLEDGE: The ‘AAA’ rating is based on the strength of MFABC’s ability to levy a province wide property tax as needed to replenish the debt reserve fund, as well as the joint and several liability of participating regional districts for the debt of their municipalities.
--CONSERVATIVE MANAGEMENT: The authority’s legal structure, careful oversight, stringent monitoring of municipal credit conditions and regimented credit approval process all support well-organized debt financing.
--CONSISTENT MARKET ACCESS: The authority maintains consistent market access for borrowing and liquidity.
--SUFFICIENT LIQUIDITY: MFABC retains modest operating and debt reserves and good access to capital through credit facilities to satisfy any immediate needs, as well as $1.7 billion in sinking fund set-asides. In the medium term, the authority has adequate time to raise tax revenues to replenish the debt reserve fund in the event of a payment delay.
--SOLID REPAYMENT HISTORY: Underlying municipalities have sizeable fiscal reserves, which have stabilized after recessionary weakness. No municipal borrower has ever failed to make its debt service payments and the authority’s debt reserve fund has never been drawn.
--A change in MFABC’s longstanding careful approach to financial management, including its conservative management of borrowing, or in its access to sufficient liquidity;
--A change in the prudent borrowing patterns of constituent municipalities;
--Severe deterioration of the provincial economy.
Created in 1970, MFABC is the borrowing vehicle for all municipalities and regional districts in the Province of British Columbia, Canada (the province) and provides financing for general municipal projects, water and sewer infrastructure, and transportation. The joint-and-several pledge supporting MFABC’s debt issuance requires all member governments within a regional district to satisfy the obligations of a deficient borrower within the district and ultimately requires the borrower to repay the authority for any deficiency. MFABC’s available liquidity to respond to temporary payment interruptions includes a modest debt reserve fund (DRF) of $114 million as of fiscal year (FY) 2012 and $2.1 billion from sinking fund set-asides. In the event a municipality could not meet its payments, MFABC would draw first on the DRF. The authority also maintains a $200 million line of credit available for any short-term disruption and ultimately benefits from its ability to levy ad valorem taxes province-wide.
MFABC’s board and regional administrative districts consist of municipal representatives that carefully manage capital project planning and debt issuance to achieve low borrowing costs for local governments. Additionally, MFABC returns all excess earnings on sinking fund investments to its borrowers, once sinking funds have earned enough to satisfy associated debt service requirements. This sinking fund methodology effectively reduces borrowing costs, as investment earnings on the sinking funds typically are large enough to cover one-quarter to one-third of principal.
The authority maintains the power to levy ad valorem taxes, without external approval, if a borrower fails to meet its debt service payments. This includes the requirement to levy a province-wide tax should the DRF fall below 50% of its required level. With an impeccable record of debt repayment, the authority has never had a payment default from one of its borrowers nor has it needed to levy property taxes or draw fiscal reserves to cure a debt service deficiency in its 40-year history.
The process for accessing MFABC financing is stringent, generally requiring provincial, voter and regional administrative district approvals prior to review by MFABC. Municipalities’ use of debt is restricted to capital purposes, and payments for debt cannot exceed 25% of a municipality’s revenue.
Management of authority debt is conservative and sophisticated. Its outstanding debt consists of approximately $6.3 billion in debentures and approximately $500 million in commercial paper generally used for interim financing. Given timing differences between maturities on loans to municipalities and final maturity of debentures, consistent market access to refinance maturing issues is an important credit consideration. The authority has access to multiple sources of liquidity including the DRF ($114 million), a bank credit facility ($200 million), surplus earnings of the sinking fund ($105 million), as well as the total sinking fund itself ($2.1 billion total). In 2011, the authority established an additional internally designated operating reserve to augment liquidity - the retention fund (included in retained earnings,$26.8 million at FYE 2012). The fund is expected to grow over time via net operating receipts and interest on certain invested short-term borrowing proceeds.
In the event of a default by a borrower, immediately available resources would provide adequate flexibility to bridge cash needs pending the imposition and collection of a tax levy. The authority carefully managed the impact from the recent global downturn. MFABC management stepped up its already vigilant monitoring of municipal credit quality to ensure timely repayments, held more cash in its accounts, and moved credit union and bank investments to provincial instruments with less perceived risk. The authority has the ability to revise its expected returns, and has done so once in the past decade.
As of 2012, MFABC had almost $4.6 billion in outstanding principal on loans to clients net of sinking funds. New loans declined to $292 million in 2012, down from $393 million in 2011, reflecting in part the impact of the economic downturn on municipalities’ borrowing preferences. About 45% of the loan balances outstanding are to Greater Vancouver municipal entities, including TransLink, the regional transportation authority. TransLink now issues its own debt, having last borrowed through MFABC in 2009, and its balance (currently approximately half of the Greater Vancouver share)should continue to decline as a share of MFABC’s portfolio. MFABC’s borrowers in aggregate experienced continued improvement in finances in 2012, with revenues growing to $9.7 billion, 3% higher than fiscal 2011. Borrowers’ reserves totaled $4.7 billion in fiscal 2012, equal to 49% of revenues.
British Columbia’s economy accounts for about 12% of Canada’s gross domestic product. The economy is driven by the Vancouver region, which accounts for more than 50% of jobs in the province. Vancouver serves not only as British Columbia’s financial and industrial center, but also as a principal Canadian trade and transportation hub and Pacific gateway for foreign migration and investment. The vast, resource-rich interior supports the province’s important forestry, mining, and agricultural industries. Tourism is also significant. The economic health of the province is tied broadly to external economic factors, including the health of the U.S. economy, global commodity trends, and Asian growth.
Employment in British Columbia experienced faster growth than Canada overall leading into the recent recession and then was hit harder in the downturn. The province continues to recover, with above-average job growth but unemployment rates remaining above pre-recession levels though now lower than the nation. Ongoing economic risks for the province include global commodities-related volatility as well as the challenge of effectively managing growth.
Fitch has affirmed the following ratings:
Municipal Finance Authority of British Columbia:
--Long-term Issuer Default Rating at ‘AAA’; Outlook Stable;
--Senior unsecured debentures at ‘AAA’.