Fitch Rates Rhode Island's $50MM Drinking Water Rev SRFs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Rhode Island Clean Water Finance Agency's (RICWFA) safe drinking water revolving fund (DWSRF) revenue bonds:

--Approximately $35 million series 2013A (pooled loan issue).

The bonds are scheduled to sell via negotiated sale the week of April 29. Bond proceeds will be used to fund loans which will be used to finance or refinance portions of the cost of certain drinking water projects, fund the state matching funds, and pay costs of issuance.

In addition, Fitch affirms the rating on following DWSRF bonds:

--$138.9 million in outstanding revolving fund revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The series 2013A and outstanding parity bonds are secured by borrower loan repayments, debt service reserve funds, reserve account earnings and scheduled reserve deallocations.

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 85% of RICWFA's loan portfolio is determined to be investment grade. Loan provisions are also 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 20 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 trust has never experienced a borrower default.

CROSS INVESTMENT ABILITY STRENGTHENS PROGRAM: The agency's ability to invest in its Clean Water State Revolving Fund (CWSRF, pooled loan program revenue bonds rated 'AAA' by Fitch Ratings) or DWSRF 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 100.0% 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 42%, 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 DWSRF LIST fund balance totals $26 million, or about 19% 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 DWSRF loan pool is small and highly concentrated comprising only 20 borrowers, with the top 10 obligors representing approximately 98% of the aggregate loan pool. With this debt issuance, Newport will be the agency's largest borrower, representing 33% of the pool. Newport'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 85% of the pool's loans held by investment-grade borrowers. The program's loan security is also solid, with approximately 97% of loan principal backed by net system revenue pledges and the remaining 3% 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 DWSRF portfolio carries an interest rate of approximately one-quarter off 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=790108

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Rating, Inc.,
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst, +1-512-215-3724
Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Rating, Inc.,
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst, +1-512-215-3724
Director
or
Committee Chairperson
Karen Krop, +1-212-908-0661
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com