AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the Texas Water Development Board (TWDB):
--Approximately $68.2 million state revolving fund (SRF) revenue refunding bonds, series 2013A.
Bond proceeds will be used to refund the outstanding SRF senior lien revenue bonds and to pay for the cost of issuance. The outstanding bonds were initially issued to finance or refinance clean water SRF (CWSRF) loans to local government entities. Bonds are expected to price via negotiated sale on July 9, 2013.
In addition, Fitch affirms the following rating:
--Approximately $870.6 million SRF revenue bonds at 'AAA'.
The Rating Outlook on all bonds is Stable.
SECURITY
All bonds are secured primarily by pledged loan repayments and account earnings.
KEY RATING DRIVERS
SOUND 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).
HIGH QUALITY PROGRAM POOL: Approximately 94% of the TWDB's SRF loan portfolio is calculated to be investment grade. Loan provisions are also strong, with the majority of loan principal secured by borrowers' utility system revenue pledges, general obligation pledges, or a combination (double-barrel) pledge.
SIGNIFICANT BORROWER CONCENTRATION: The top 10 program borrowers represent a significant 80% of the total loan pool. Fitch assesses programs with high concentration at higher stress levels in its PSC.
STRONG PROGRAM MANAGEMENT: TWDB's management team is experienced and maintains sound underwriting and loan monitoring procedures, as evidenced by the fact that the TWDB has never experienced a borrower default.
RATING SENSITIVITIES
REDUCTION OF STRUCTURAL ENHANCEMENT: A significant deterioration in loan repayment performance could put downward pressure on the rating. The Stable Outlook reflects Fitch's view that such deterioration is highly unlikely.
CREDIT PROFILE
Through its CWSRF program, the TWDB provides at or below market rate loans to pool participants for eligible wastewater treatment projects. Loans are funded using bond proceeds, SRF federal capitalization grants, state match amounts, and recycled funds.
PLEDGED RESOURCES WITHSTAND FITCH'S 'AAA' RATING STRESS
Annual debt service coverage (DSC) provided by pledged loan repayments, projected investment projections and scheduled reserve balances is strong, exceeding 3.0x annually. Fitch's 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 26%, 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.
HIGH QUALITY YET CONCENTRATED BORROWER POOL
TWDB's CWSRF loan pool exhibits strong credit quality, with approximately 94% of the pool's loans held by investment-grade borrowers, including 73% rated at or above 'AA-'. The program's loan security is also strong, with approximately 88% of aggregate loan principal backed by net system revenue pledges and the remaining 12% backed by general obligation or a combination of revenue/general obligation pledges.
Although the loan pool contains a somewhat large number of borrowers at close to 200, concentration is high, with the top 10 representing nearly 80% of the aggregate pool. The largest borrower, the Trinity River Authority (regional wastewater system revenue refunding bonds rated 'AA+' by Fitch), represents about 29% of the loan pool, while the second largest borrower, the city of Houston (junior lien water and sewer system revenue bonds rated 'AA' by Fitch), represents 39% of the total loan pool. The program's high single borrower concentration makes the program vulnerable to fluctuations in underlying borrower credit profiles. Concentration risk is largely mitigated by the high ratings of the largest borrowers and the program's strong DSC. In addition, concentrated portfolios are stressed at higher levels in Fitch's PSC to account for concentration risk.
STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING
The TWDB establishes the financial terms of the loans. In doing so, the board determines that an eligible borrower has the financial capability to ensure payment of debt service on the entities' bonds. TWDB's staff is also responsible for monitoring borrowers' compliance with covenants and their overall financial profiles. If a borrower's payment is three days late, the collection process begins with calls to the borrower and negotiations continue until payment is received. To date, no payments have been more than 30 days late and no defaults have occurred.
SRF SENIOR LIEN BONDS NO LONGER OUTSTANDING
With the issuance of the series 2013A bonds all outstanding senior lien bonds will be effectively defeased, and the TWDB has covenanted to not issue any additional bonds senior to those outstanding, including the series 2013A bonds. Thus, upon the series 2013A closing date, all outstanding and future bonds are secured on a parity and first lien basis. Funds on deposit in the senior lien reserve account will be used to defease the senior lien bonds.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 17, 2013);
--'Rating Guidelines for State Credit Enhancement Programs' (Apr 18, 2013);
--'Counterparty Criteria for Structured Finance Transactions' (May 13, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707257
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794583
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