Santa Fe wastewater bond rating cut to AA as Fitch flags rising costs and borrowing risk

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Santa Fe wastewater bond rating cut

Highlights

Fitch downgraded Santa Fe's wastewater utility revenue bond rating to AA due to rising operating expenses and uncertainty in future capital spending and borrowing.
Fitch projects leverage could rise from 1.6x in fiscal 2026 to above 5.0x within several years if the capital plan is fully executed, maintaining a Negative Outlook.
Despite the downgrade, Fitch cites the system's 'Very Strong' revenue defensibility and a Standalone Credit Profile of 'aa', with leverage at negative 0.5x in fiscal 2025.

Cost pressures and capital plan risks

As reported by Fitch Ratings, the downgrade reflects expectations for materially higher system operating expenses without matching revenue growth, alongside uncertainty tied to prospective capital spending and related borrowing.

Fitch said it estimates leverage at 1.6x in fiscal 2026, and that it could climb above 5.0x over the next few years under its stress scenario as the city works to stabilize the wastewater treatment plant, maintain compliance, and address long-term capital needs.

The agency kept the Rating Outlook at Negative, saying leverage could rise further over a five-year horizon under its Analytical Stress Test rating case if the capital improvement plan is fully implemented. Fitch said rate increases could help offset higher debt service, but sizable planned increases in capital spending and borrowing may limit the system's ability to materially improve leverage and coverage metrics.

Further negative rating action could follow if leverage is not projected to stabilize at or below 7.0x in conjunction with execution of the capital improvement plan.

Financial profile remains strong despite downgrade

The 'AA' wastewater utility revenue bond rating continues to reflect what Fitch describes as a 'Very Strong' financial profile, supported by 'Very Strong' revenue defensibility assessed at 'aa' and a 'Strong' operating risk profile assessed at 'a'.

Fitch also assessed the system's Standalone Credit Profile at 'aa'. The agency said leverage of negative 0.5x in fiscal 2025, for the year ended June 30, indicates that cash and investments available for debt service exceed net adjusted debt, even as forward-looking cost and borrowing pressures weigh on the rating.

In our earlier article on sovereign borrowing risks in a higher-rate environment, we noted that persistent geopolitical shocks and elevated public spending can erode fiscal headroom and increase refinancing strain. We also highlighted that emerging and frontier markets are especially exposed because interest-service burdens are often high relative to narrower revenue bases, leaving credit outlooks more vulnerable when funding costs stay elevated.

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