AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating on the following bonds issued by the Illinois Finance Authority (IFA) under its 2013 Master Trust Agreement (MTA):
--Approximately $108.3 million State of Illinois clean water initiative revolving fund (CWIRF) revenue bonds, series 2013.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by pledged loan repayments and certain account interest earnings.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the CWIRF program (the program) can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
LARGELY UNRATED POOL: Approximately 71% of IFA's CWIRF loan portfolio consists of unrated entities. In lieu of this and in accordance with its criteria, Fitch has assigned internal credit opinions to three credits based on its practice to have ratings on a minimum of 33% of the loan pool. Also in accordance with Fitch's criteria, the remaining unrated portion of the pool is conservatively assumed to be of speculative-grade credit quality ('BB').
MODERATE POOL DIVERSITY: The CWIRF loan portfolio pool is large and more diverse than similar programs rated by Fitch. The pool consists of about 380 borrowers, with the top 10 participants representing approximately 44% of the total portfolio.
STRONG PROGRAM MANAGEMENT: Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for most borrowers and reserve requirements for subordinate lien pledges. To date, there have been no pledged loan defaults in any of the Illinois Environmental Protection Agency (IEPA) state revolving fund (SRF) programs.
RATING SENSITIVITIES
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AAA' liability rating stress hurdle likely would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.
CREDIT PROFILE
The CWIRF was announced in February 2012 as part of the state's initiative to provide $1 billion of affordable loans to local governments for qualified water and wastewater capital projects. The CWIRF is operated by the IEPA under the state's Water Revolving Fund, which includes both the state's clean water program (CWSRF) and drinking water program (DWSRF).
The series 2013 bonds are the first and only series issued thus far under the 2013 MTA. As there have been no new issues, program credit metrics including those of the financial structure and pool credit quality have not significantly changed.
SOUND FINANCIAL STRUCTURE
Fitch measures financial strength of the CWIRF program and similar SRFs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments divided by total scheduled bond debt service. The CWIRF's PASR is 7.7x, which is very strong in comparison to Fitch's 2014 'AAA' median PASR of 1.8x. The high PASR is partially reflective of the somewhat new indenture and will likely decrease over time as the program is further leveraged. However, Fitch expects program leverage to remain sufficient for the current rating.
Cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four years of the program's life (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 rating stress hurdle of 35% as produced by the PSC. The rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION
The 2013 MTA is structured as a cash flow-style model, wherein bond enhancement is provided exclusively by pledged loan repayment revenues in excess of bond debt service (overcollateralization). Cash flow projections demonstrate that the minimum semi-annual coverage on the bonds is a very healthy 4.9x on the leveraged bonds.
Similar to many other SRFs, the CWIRF program includes a cross-collateralization feature wherein excess funds from the CWSRF are available to cover deficiencies in the DWSRF and vice-versa. The ability for the two funds to cross-collateralize helps to minimize losses if defaults were to occur. Because of this feature, Fitch combines both programs in its models.
LOAN POOL MODERATELY DIVERSIFIED YET LARGELY UNRATED
The combined DWSRF and CWSRF loan pool is composed of about 380 borrowers. The Metropolitan Water Reclamation District of Greater Chicago (MWRD; general obligation debt rated 'AAA' with Stable Outlook by Fitch) is the largest participant, representing about 19% of the pool. While somewhat significant, Fitch does not expect MWRD's concentration to increase much further, as participant concentration is targeted to be less than 20% of the pool. Additionally, MWRD's high rating helps to mitigate some of the single-obligor concentration risk.
In aggregate, the top 10 borrowers represent approximately 44% of the loan pool versus Fitch's 2014 'AAA' median level of 53%. Excluding MWRD, each remaining program participant accounts for 3% or less of the total pool. Overall, Fitch views the loan pool as having above-average diversity in comparison to other similar 'AAA' programs.
The majority of pledged pool loans do not carry a public rating. Therefore, Fitch has assigned credit opinions to the three of the largest unrated credits. Although these opinions are not made publically available by Fitch, each credit was assessed to be at or above the 'A' rating category.
Given the largely unrated nature of the loan pool, the resulting 'AAA' liability hurdle is somewhat high at 35% versus an 'AAA' median of 30%. However, in addition to the exceptional cash flow coverage, the strong loan security pledges somewhat mitigate the nature of the (unrated) pool risk, as approximately 75% is backed by water and/or sewer system revenues and the remaining backed by GO pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
The Illinois SRF programs, including the CWIRF, are jointly managed by the IFA and the IEPA through a memorandum of agreement. Program loans are chosen by the IEPA following an established set of administrative policies and procedures to evaluate loan applications.
Favorably, loan reserves are required for subordinate revenue liens as are minimum coverage requirements, which are set at the same level as senior obligations. Additionally, the IEPA has tax intercept authority and the ability to require borrowers to raise rates to meet coverage requirements. Reflecting the strength of management and underwriting, there have been no pledged loan defaults to date.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993205
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993205
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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