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Moody's assigns (P)Aaa (sf) to LIPA's Series 2022 Restructuring Bonds

·21 min read

Rating Action: Moody's assigns (P)Aaa (sf) to LIPA's Series 2022 Restructuring BondsGlobal Credit Research - 29 Aug 2022New York, August 29, 2022 -- Moody's Investors Service (Moody's) has assigned provisional ratings of (P)Aaa (sf) to the Series 2022 restructuring bonds (the 2022 bonds) to be issued by Utility Debt Securitization Authority (the issuer) and sponsored by the Long Island Power Authority (the Authority; A2 stable). This will be the Authority's sixth utility cost recovery charge (UCRC) bond issuance.The servicer of the transaction will be Long Island Lighting Company, a wholly owned subsidiary of the Authority, operating as LIPA and Power Supply Long Island, which will collect the restructuring charges (RCs) from all current and future ratepayers in the Authority's service area. Although LIPA is the named servicer for this securitization, PSEG Long Island LLC (PSEG LI), a subsidiary of Public Service Enterprise Group Incorporated (Baa2, stable), will perform LIPA's key servicing duties pursuant to an operations services agreement, including billing and collecting the RCs, meter reading and forecasting electricity usage, among others.The bond issuance is permitted under the State of New York law (Part B of the LIPA Reform Act, or the Securitization Law) as amended by Chapter 369 on 2 August 2021. The Securitization Law authorizes the Authority to finance the retirement of a portion of its and the issuer's outstanding debt through the issuance of restructuring bonds by the issuer as well as to finance system resiliency costs. Furthermore, the issuance has been authorized under an irrevocable Financing Order issued by the Authority. The bonds will be backed primarily by restructuring property, which includes the issuer's irrevocable right to impose, charge and collect a nonbypassable usage-based restructuring charge from all existing and future retail electric customers in the Authority's service area including the right to periodically adjust the charge through a statutory, mandatory, uncapped true-up adjustment mechanism to ensure timely bond payments until the bonds are repaid in full. The true-up adjustment mechanism is the primary form of credit enhancement supporting the bonds.The complete rating action is as follows:Issuer: Utility Debt Securitization Authority Restructuring Bonds, Series 2022Restructuring Bonds Series 2022T (Federally Taxable) Tranche 1, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 2, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 3, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 4, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 5, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 6, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 7, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 8, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022T (Federally Taxable) Tranche 9, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 1, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 2, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 3, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 4, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 5, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 6, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 7, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 8, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 9, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 10, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 11, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 12, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 13, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 14, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 15, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 16, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 17, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 18, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 19, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 20, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 21, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 22, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 23, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 24, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 25, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 26, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 27, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 28, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 29, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 30, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 31, Assigned (P)Aaa (sf)Restructuring Bonds Series 2022TE (Federally Tax-Exempt) Tranche 32, Assigned (P)Aaa (sf)RATINGS RATIONALEThe provisional ratings assigned to the bonds are based primarily on the following:1) the strength of the State of New York's law (the LIPA Reform Act), including the state's non-impairment pledge, and the irrevocable Financing Order issued by the Authority authorizing the creation of securitization's restructuring property which together authorize the creation of the restructuring property backing the bonds, and strongly protect the securitization properties,2) credit enhancement consisting of a statutory uncapped true-up adjustment mechanism that mandatorily adjusts the restructuring charges at least annually to ensure that collections are sufficient to timely pay interest and principal on the bonds until the bonds are paid in full, a non-declining operating reserve subaccount fully funded at closing with 0.50% of the initial principal balance of the bonds, and a debt service reserve account fully funded at closing with 0.50% of the aggregate principal balance of the bonds.3) the remote likelihood of a successful legal, political or regulatory challenge to the restructuring property and other rights that the Authority has transferred to the issuer for the benefit of the trustee on behalf of bondholders.4) the economic stability, size, and diversity of the ratepayer base in the Authority's service area, from whom the restructuring charges will be collected.5) the credit strength, experience, and expertise of LIPA as servicer of the restructuring property,6) the low probability that collections arising from the restructuring property could fall short of the scheduled principal and interest payments on the 2022 bonds, and7) the initial RC, which Long Island Power Authority expects to represent about 2.3% of a typical residential customer's electricity bill in its service territory. When combined with similar charges related to previously issued Series 2013, 2015, 2016A, 2016B, and 2017, LIPA expects the cumulative RCs to represent approximately 12.8% of a typical residential customer's electricity bill in its service territory. The combined charges are higher than the average charge of about 5% for prior UCRC transactions that we rate. The relatively high combined charge is mitigated by the expectation that the charge will decline over time as the bonds amortize.The restructuring property backing the bonds only applies to the Authority's service territory. The RC will apply to the entire territory served with electricity by the Authority and the RC will be based on customers' electricity usage. The Authority's service territory covers approximately 1.2 million residential and commercial customers in almost all of Nassau and Suffolk counties and the Rockaway Peninsula.The Securitization Law establishes the issuer and allows the Authority to finance the retirement of a portion of its and the issuer's outstanding debt through the issuance of restructuring bonds by the issuer as well as to finance system resiliency costs. The Authority expects that the issuance of the 2022 bonds will result in savings to the Authority's customers on a net present value basis. The Securitization Law gives the Authority the right to impose restructuring charges, which is the key asset backing this securitization. The Securitization Law, as amended by Chapter 369 on 2 August 2021, allows for an aggregate initial issuance amount not to exceed $8.0 billion, inclusive of the previously issued bonds, and provides the Authority with the ability to finance system resiliency costs. System resiliency costs, as defined by the Securitization Law, include costs of rebuilding, improving or constructing transmission and distribution assets to increase their resiliency, better withstand changes in climate, absorb impacts from outage events, and recover quickly from outagesThe Securitization Law, coupled with the adoption the Financing Order, authorizes the Authority to create additional restructuring property as collateral for the issuance of bonds. The Financing Order authorizes: 1) the creation of the restructuring property; 2) the Authority to sell the restructuring property to the issuer (the restructuring property is created simultaneous with its sale to the issuer); 3) the imposition, billing and collection of restructuring charges on, to and from the customers in the service area; 4) the issuance of the bonds by the issuer; 5) the issuer to use the bond proceeds to purchase the restructuring property from the Authority and pay upfront financing costs; and 6) the Authority to use the proceeds of the sale of the restructuring property to retire a portion of its and the issuer's outstanding debt and fund system resiliency costs.The transaction will benefit from the inclusion of a non-impairment pledge from the State of New York included in the Securitization Law, which strongly protects the restructuring property backing the bonds. Under the state pledge, the State of New York pledges to bondholders that it will not take or permit any action that would impair the value of the restructuring property or that would reduce or alter (except as allowed in the context of a true-up adjustment mechanism provisions in the Securitization Law) or otherwise impair the RC approved in the Financing Order until the principal and interest on the bonds have been paid in full. In addition, the Securitization Law and the Financing Order contain the typical strong security interest provisions and provides that the RCs are non-bypassable.The Securitization Law authorizes, and the Financing Order requires, the restructuring charges be adjusted at least annually to ensure the timely payment of scheduled payments of principal and interest on the bonds and other amounts due in respect of the bonds, including the replenishment of draws on the debt service reserve account. The Financing Order also authorizes more frequent interim adjustments at any time if the servicer deems necessary to ensure timely bond payments. The servicer may also elect to perform a voluntary mid-year true-up adjustment to decrease charges to customers to correct for any undercollections or overcollections in any year.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was "Utility Cost Recovery Charge Securitizations Methodology" published in February 2021 and available at https://ratings.moodys.com/api/rmc-documents/70479. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Factors that would lead to an upgrade or downgrade of the ratings:Factors or circumstances that could drive the rating down are a significant decline in the ratepayer base or consumption in Long Island Power Authority's service territory, unanticipated consumer delinquencies and defaults, self-generation, extreme weather fluctuations, or natural disasters or pandemics affecting the servicer's ability to accurately forecast electricity usage.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.Moody's did not use any models, or loss or cash flow analysis, in its analysis.Moody's did not use any stress scenario simulations in its analysis.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Ekrem Cinar Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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