AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Rhode Island Clean Water Finance Agency's (RICWFA) water pollution control revolving fund revenue bonds:
--Approximately $49 million series 2013A (pooled loan issue).
The bonds are scheduled to sell via negotiation the week of May 20. Bond proceeds will be used to fund loans which will be used to finance or refinance portions of the cost of certain water pollution control projects, fund the state matching funds, and pay costs of issuance.
In addition, Fitch affirms the rating on following CWSRF bonds:
--$445 million in outstanding clean water revolving fund revenue bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The series 2013A and outstanding senior bonds are secured by borrower loan repayments, debt service reserve funds, reserve account earnings and scheduled reserve deallocations.
The series 2010A outstanding subordinated revenue bonds are secured by moneys released from the senior lien including excess loan repayments, interest earnings, and de-allocated reserves after senior debt service is paid.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults equal to Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGHLY-RATED BORROWER POOL: At least 78% of RICWFA's clean water state revolving fund (CWSRF) loan portfolio is determined to be investment grade. Loan provisions are strong with the majority of loan principal secured by borrowers' net system revenue pledges.
SIGNIFICANT BORROWER CONCENTRATION: The loan portfolio has a high level of concentration risk as the pool consists of only 27 borrowers. To account for this, programs with higher concentration are assessed at higher stress levels in Fitch's PSC.
STRONG PROGRAM MANAGEMENT: RICWFA's management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that the agency has never experienced a borrower default.
CROSS INVESTMENT ABILITY STRENGTHENS PROGRAM: The agency's ability to invest in its Drinking Water State Revolving Fund (DWSRF, pooled loan program revenue bonds rated 'AAA'/Outlook Stable by Fitch) or CWSRF reserves in either pool should any of the borrowers default is a positive credit factor. However, the agency is not legally obligated to use this cross investment feature.
RATING SENSITIVITIES
REDUCTION OF STRUCTURAL ENHANCEMENT: A significant deterioration in loan repayment performance and/or a measurable reduction in pledged reserves could put downward pressure on the rating. The Stable Outlook reflects Fitch's view that such deterioration is unlikely to occur.
CREDIT PROFILE
RICWFA issues bonds to provide subsidized financing to governmental entities throughout Rhode Island for its drinking water and clean water SRF projects. In association with its bond issues, RICWFA makes loans to eligible borrowers from bond proceeds and the state's required 20% matching funds for the federal capitalization grants.
PLEDGED RESOURCES WITHSTAND FITCH'S 'AAA' RATING STRESS
Debt Service Coverage (DSC) provided by pledged loan repayments, reserve fund earnings and scheduled reserve releases is strong, exceeding 1.4x annually. Due to this coverage and available remaining reserves, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over any four-year period (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability default hurdle of 38%, as produced by the PSC, which is derived based on the overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
Reserves (or LIST funds) are maintained at a level sufficient to generate funds to cover the borrower interest subsidies. Reserves are released from the fund annually as bonds amortize, at which point they can back additional bonds or be used to fund pledged or non-pledged federal direct loans. RICWFA's CWSRF LIST fund balance totals $107 million, or about 22% of outstanding bonds.
CROSS INVESTMENT AGREEMENT PROVIDES ADDITIONAL SUPPORT
As additional security the agency could invest its CWSRF or DWSRF reserves in either pool should any of the borrowers default. This mechanism is permitted under the 2004 cross-investment agreement as long as there are no defaults in the pool that is providing the support. It is important to note that while the ability to cross invest exists, the agency is not legally obligated to use this feature.
CONCENTRATED, ALBEIT HIGHLY-RATED LOAN POOL
The CWSRF loan pool is small and highly concentrated comprising only 27 borrowers, with the top 10 obligors representing approximately 86% of the aggregate loan pool. With this debt issuance, Narragansett Bay Commission (NBC) will be the agency's largest borrower, representing 46% of the pool. NBC's loans are secured by system revenues. Concentrated portfolios are stressed at higher levels in Fitch's PSC to account for concentration risk.
Pool credit quality is strong with approximately 78% of the pool's loans held by investment-grade borrowers. The program's loan security is also solid, with approximately 76% of loan principal backed by net system revenue pledges and the remaining 24% backed by general obligation pledges.
STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING
RICWFA maintains a formal underwriting process involving extensive review of pool participant eligibility and security. The agency requires all prospective borrowers to maintain a minimum of 1.25x DSC on loans and covenant to raise rates if DSC is not met. All projects must be listed on the Intended Use Plan Project Priority List (a requirement for SRF funding).
Loan repayments are tracked closely by the RICWFA staff. All borrowers must submit annual financial information to the agency. In addition, the agency reviews borrower credit quality on a regular basis.
The CWSRF portfolio carries an interest rate of approximately two-thirds of the borrower's market rate. However, in the event of a borrower default, RICWFA is authorized to require all pool borrowers to pay higher interest rates up to the borrower's market rate, thereby creating a step-up provision, which provides additional bondholder security. To date, there have been no defaults on borrower loans.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Revenue-Supported Rating Criteria (June 12, 2012);
--State Revolving Fund and Leveraged Municipal Loan Pool Criteria (May 21, 2012);
--Rating Guidelines for State Credit Enhancement Programs (June 19, 2012);
--Counterparty Criteria for Structured Finance Transactions (May 30, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677858
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880
Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790845
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