CHICAGO--(BUSINESS WIRE)--As part of its continuous surveillance effort, Fitch Ratings has affirmed the California Infrastructure and Economic Development Bank's (CIEDB) Infrastructure State Revolving Fund (ISRF) as follows:
--$132,850,000 infrastructure state revolving fund revenue bonds, series 2004, 2005 and 2008.
The Rating Outlook is Stable.
RATING RATIONALE:
--CIEDB's ISRF program exhibits solid pool collateralization from loan repayments and debt service reserves, which results in strong tolerance to borrower defaults under Fitch's 'AA' stress scenario.
--Program management demonstrates solid loan-monitoring procedures.
--While CIEDB has the ability to leverage to 1.20 times (x) coverage, management has set an internal coverage target at its current level of 1.30x. Furthermore, the current availability of additional loan repayments pledged directly to the master indenture (MI) increases coverage.
--The CIEDB's ISRF pool has exhibited incremental growth and moderate diversification expanding to 67 borrowers from 47 in 2005.
--The program's specific loan underwriting criteria provides for nontraditional security pledges although the associated risk is reflected in our analysis.
KEY RATING DRIVERS:
--Balancing of future leveraging with program resources is necessary to maintain sufficient collateralization to yield strong tolerance to potential loan defaults.
--Continued performance of the loans is important to sustain cash flow coverage.
SECURITY:
The bonds are secured by borrower loan repayments, reserve funds and interest earnings.
CREDIT SUMMARY:
CIEDB created the ISRF program in 1999 to provide low-cost loans for several different categories of eligible public infrastructure projects throughout the state. In this hybrid (cash flow/reserve fund) program structure, each series of bonds issued under the master indenture (MI) is secured primarily by separate portfolios of loans, reserve funds and excess loan repayments. Approximately $65 million in outstanding loan principal is pledged to each of the three outstanding series of bonds (2004, 2005 and 2008). Aggregate cash flow coverage is managed to approximately 1.3x. The three outstanding series of bonds are also separately secured by debt service reserve funds equal to the least of 10% of bond proceeds, maximum annual debt service, and 1.25x average annual debt service (ADS). The program's aggregate outstanding reserves total approximately $10.6 million. As bonds amortize, a portion of the reserves are released into the cross collateral account (CCA) along with excess loan repayments, which may be used, to pay debt service requirements on any series of SRF bonds issued under the master indenture.
In addition, approximately $106 million in outstanding loan principal is pledged directly to the MI. While these loan repayments are also deposited into the CCA and pledged on a parity basis to cure defaults on any series of bonds under the MI, management anticipates that the certain loans pledged under the MI will eventually be de-pledged and used to separately secure additional series of bonds.
Fitch analyzed the default tolerance of the ISRF portfolio using a stress test it also applies to state revolving funds and other municipal loan pools. The stress test considers credit quality, single-risk concentration, and debt service requirements. Collateralization from amounts available in the CCA, excluding loan repayments pledged directly to the MI ($106 million), allows the bonds to perform, even if scheduled loan repayments fall short by 41% over the next four years. This is consistent with what Fitch would expect to occur in an 'AA' stress scenario, given the pool's size, quality and diversity.
CIEDB's MI includes a weak additional bonds test of 1.20x, which allows leveraging that could ultimately erode debt service coverage. However, management has set an internal coverage target at the program's current level of 1.30x and the availability of $106 million in principal loan repayments pledged directly to the master indenture (MI) increases current coverage.
ISRF's pledged portfolio currently contains 84 loans from 67 borrowers, many of which are estimated to be of low investment-grade quality. Given the nature of the program, this composition is expected to continue.
The ISRF pool has exhibited incremental growth and moderate diversification expanding to 67 borrowers from 47 in 2005. The largest borrower, the city of San Bernardino, accounts for approximately 8.5% of the portfolio loan balance, and the top 10 borrowers account for 38% of the total outstanding loan balance. Loans are typically secured by pledges of tax increment revenue, water and sewer enterprise revenue, other enterprise revenue, and lease/leaseback payments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
State Revolving Fund and Municipal Loan Pool Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150
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