Fitch Rates Manteca Financing Auth's (California) $19MM Sewer Revs 'A+'; Upgrades Outstanding Revs

Fitch Ratings assigns an 'A+' rating to Manteca Financing Authority, California's (the authority) approximately $18.6 million sewer revenue bonds, series 2009. The bonds are expected to price the week of May 18, 2009 via negotiation. The bonds are secured by a pledge of net revenues of the City of Manteca's (the city) sewer system (the system). City staff is evaluating the possibility of issuing the bonds as Build America Bonds under the federal American Recovery and Reinvestment Tax Act of 2009, in which case the bonds would be sold as taxable obligations. A determination of whether or not to issue under this structure will be determined nearer the pricing date.

At this time, Fitch also upgrades the authority's outstanding sewer revenue bonds as follows:

--$18.2 million, series 2003A to 'A+' from 'A';
--$14.7 million, series 2003B to 'A+' from 'A'.

The Rating Outlook is Stable.

The upgrade reflects the system's consistently strong financial performance and the city council's demonstrated willingness to pass multi-year rate increases in order to preserve fiscal margins and provide for necessary capital expenditures. Prior to issuance of the series 2003 bonds, system operating results were relatively weak. However, in anticipation of the 2003 offering, the city council approved a multi-year rate package, which has allowed the system to generate strong annual debt service (ADS) coverage and liquidity levels since the issuance of the 2003 bonds. The city council also approved additional multi-year rate adjustments to ensure continued ADS coverage performance in light of the current offering as well as to provide sufficient operating and capital reserves.

The 'A+' rating reflects the system's solid financial performance; strong leadership in passage of necessary rate increases; moderate debt levels and weak amortization; manageable capital improvement program (CIP); and high unemployment rates. Despite the increased leverage from the current offering, ongoing financial margins are expected to remain sound and will allow the city to fund most, if not all, future capital needs from surplus revenues. This should cause system debt ratios to improve over time relative to comparably-rated credits.

System financial performance has been very good over the last five fiscal years. ADS coverage on senior lien bonds has been no less than 4.4 times (x) and was 5.6x for fiscal 2008. The system is required to apply excess connection fees not needed for payment of debt service or replenishment of the debt service reserve for extraordinary redemption of parity bonds. Including these redemptions, ADS coverage has been no less than 1.7x since fiscal 2003. In addition to ADS coverage, system liquidity is very healthy. For fiscal 2008, days cash on hand and days of working capital were in excess of 1,150 and 310 days, respectively. For the same period cash flows were also favorable, with surplus cash equaling close to 350% of depreciation for the year.

Despite the increase in debt from the current offering, financial performance is expected to remain strong given passage of a five-year rate package by the city council for calendar years 2009-2013. As a result of these rate hikes, ADS coverage is expected at no less than 2.8x through fiscal 2013. Similarly, liquidity and cash flow levels are anticipated to remain favorable as well. While the annual increase recently adopted equal 7% on average, system charges are expected to remain at or below Fitch's affordability threshold through the fiscal 2013 projection period.

The system CIP for fiscals 2009-2013 totals under $12 million. The current bonds will fund a portion of the CIP costs related to completion of the system's single treatment plant - the Wastewater Quality Control Facility (the WQCF) - and also reimburse the city for costs associated with the WQCF. Upon completion, the WQCF will allow the city to meet future growth demands for at least the next decade. Because of these bonds, as well as the 2003 bonds, which were issued to fund the WQCF expansion, system leverage ratios are moderate. In addition, amortization of system debt after this transaction is weak, with just 60% of principal amortizing over the next 20 years. However, because the city has no plans for additional debt issuance over the near term, fixed costs should remain manageable.

The system provides retail service to around 70,000 city residents and also serves approximately 17,000 people in the City of Lathrop through a wholesale contract. Located 76 miles east of San Francisco in the northern San Joaquin Valley, the city has experienced rapid urbanization in recent years. While income levels in the city have increased to nearly 120% of the U.S. as a result of this growth, the area continues to have a large agricultural presence and attending high unemployment. For the most recently available month (March 2009), the unemployment rate in the city was a high 14.4%, above the 11.5% and 9% for the state and nation, respectively.

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