OREANDA-NEWS. Fitch Ratings has affirmed the 'A' rating on the Finance Authority of Maine's (FAME) outstanding $10.99 million series 2009A waste motor oil revenue bonds.

The Rating Outlook is Stable.

SECURITY

Limited obligations of the authority payable solely from a portion of revenues generated by a premium on certain motor oil (premium revenues). The bonds also receive support through a moral obligation pledge from the state of Maine.

KEY RATING DRIVERS

MORAL OBLIGATION OF THE STATE: The presence of a state moral obligation enhances the rating above what would be supported by the revenue stream and structure of the bonds on a stand-alone basis, bringing the rating up to the 'A' level. The statutory moral obligation language requires the governor to make an appropriation request to the legislature to make up a deficiency in the capital reserve fund (debt service reserve fund). Maine general obligation (GO) bonds are rated 'AA' with a Stable Outlook by Fitch.

SATISFACTORY COVERAGE: The bonds are paid from revenues derived from a narrow base of entities. The revenue stream continues to perform ahead of original projections, increasing in fiscal 2015 following three years of decline. Fitch expects coverage to remain adequate until the final year of maturity when a bullet payment is expected to be made primarily from cash-funded and pledged reserve funds.

RATING SENSITIVITIES

CHANGES IN PREMIUM REVENUES: The rating is sensitive primarily to the performance of premium revenues and the resulting strength of debt service coverage.

STATE MORAL OBLIGATION COMMITMENT: While no state support is pledged on behalf of bondholders, moral obligation support from the highly-rated state provides critical credit support for the 'A' rating. Any indication of uncertainty around the moral obligation pledge could destabilize the rating. Similarly, a change in the state's rating could change the rating on the bonds.

CREDIT PROFILE

The 'A' rating reflects the security provided by revenues generated from a premium on various motor vehicle oils (premium revenues), as well as the presence of a moral obligation by the state of Maine to make up deficiencies in the program's capital reserve, which serves as the debt service reserve fund. This state moral obligation is sufficient to raise the rating to the 'A' level.

The bonds financed a portion of costs for environmental remediation at the largest of four sites used by a now defunct waste oil recycling business. Although additional borrowing had been anticipated at the time of the original issuance in 2009, a 2011 legislative change statutorily eliminated the ability to issue additional debt related to the program and shifted financing of this program to pay-as-you-go.

REVENUES AHEAD OF PROJECTIONS

The revenue stream that supports debt service was relatively unproven at the time of original issuance and performed well compared to expectations, though collections have been volatile. The premium was instituted in 2008, replacing a previous premium on motor vehicle oil changes that did not generate sufficient revenues to support the authorized bonding program. The current premiums have been in place since Aug. 1, 2008, when the basis for the premium was changed to bulk motor oil sold or distributed in the state. A further enhancement took effect Oct. 1, 2009 when the state expanded application of the premium to include prepackaged motor oil and other lubricating oils. In 2011, the state again revised premiums and related definitions to further clarify the covered oils and associated fees.

Revenues have performed better than originally projected in a 2009 base case, when the bonds were issued, largely due to the 2009 (fiscal 2010) enhancement. Fitch's projection for fiscal 2015 pledged revenues based on 11 months of collections totals $3 million, over 75% ahead of base case projections for the fiscal year, increasing 11.7% from the prior year's collections.

COVERAGE COULD DECLINE, BUT SHOULD REMAIN SUFFICIENT

Premium revenues continue to provide solid debt service coverage despite the history of volatility. Unaudited fiscal 2015 premium revenues of $3 million covered annual debt service by a solid 2.1x, and maximum annual debt service (MADS; the bullet payment in the final year of maturity in 2030) by a weak 1.1x. Coverage improved moderately from the prior year (1.8x annual debt service and 1.0x MADS), and remained well-ahead of the original base case projections. The base case projections developed by a consultant in August 2009 forecast $1.7 million in premium revenues in fiscal 2015, and coverage of just 1.2x annual debt service. The subsequent expansion described above led to sharp improvement in premium revenues. Fitch believes continued weakening in coverage is possible given the state's slow economic recovery and the narrowness of the revenue stream.

Annual debt service declines until 2029, just before the final payment, providing additional cushion even in the event of a very significant decline of premium revenues. Fitch estimates that fiscal 2015 pledged revenues could decline by an annual rate of 9.1% while still providing sum-sufficient coverage of 2029 debt service. Fiscal 2015 coverage of average annual debt service (AADS) was a strong 2.5x. The authority anticipates using its two cash-funded reserve funds to pay a portion of the bullet payment at final maturity. As of June 30, 2015, the $2.3 million balance in the two funds ($1.5 million in the capital reserve fund and $801 thousand in the liquidity fund) covered AADS by 2x and MADS by 0.9x.

STRENGTH OF MORAL OBLIGATION

The moral obligation of the state of Maine to replenish any draw down on the debt service reserve fund significantly strengthens bondholder security. The state's 'AA' GO rating reflects Maine's generally steady revenue performance and very manageable long-term liabilities, offset by persistent structural pressures, thin reserve levels and a relatively stagnant economic base.

Pursuant to its authorizing legislation, the authority may create a capital reserve fund when issuing debt, and did so with the issuance of the 2009A bonds. On or before Dec. 1st of each year, the authority certifies to the Governor any amounts necessary to restore the capital reserve fund to its capital reserve requirement of MADS, excluding the bullet payment in the final year of maturity. If there are not revenues available in the state's contingent account (rainy day fund), the Governor must transmit to the legislature the authority's certification and any amount remaining to be paid. The legislature then has the authority to appropriate and pay to the authority that amount during the fiscal year.