The Rating Outlook is Stable.
The bonds are secured by loan repayments, interest earnings and common reserves funds.
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 in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
SOUND LOAN SECURITY: The program's underlying borrower credit quality is sound, with approximately 60% of all outstanding principal exhibiting investment-grade characteristics. Fitch does not express an opinion as to the credit quality of the remaining underlying loans but the corporation requires borrowers to maintain rates to cover repayment by 1.15x. In addition, the vast majority of all loan principal is secured by water and/or wastewater pledges.
MODERATE SINGLE BORROWER CONCENTRATION: The loan pool of 79 participants is moderately diverse.
SOUND RESERVE INVESTMENTS: The corporation maintains sound investment practices as all of the program's reserve investments are held in
STRONG PROGRAM MANAGEMENT: Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for borrowers. To date, there have been no pledged loan defaults in the corporation's SRF programs.
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 liability default 'AAA' hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.
The corporation is a conduit bond issuer for the
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
The CWSRF program's hybrid structure uses bond proceeds and recycled loan repayments to make sewer system related loans to local governmental entities throughout the state. Minimum annual debt service coverage provided by loan repayments is a strong 1.7 times (x). In addition, there are common reserves equal to approximately
Fitch calculates the program's asset strength ratio (PASR), to be a strong 2x, and higher than Fitch's 'AAA' median of 1.6x. The PASR includes total scheduled loan repayments plus any reserve balances divided by total scheduled bond debt service. Fitch expects program leverage will remain consistent with the current rating due to moderate borrower demand, continued federal capitalization grant funding and management's ability to balance program leveraging with pledged resources.
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. This is in excess of Fitch's 'AAA' liability stress hurdle 40.4% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
Fitch's criteria also applies a 90% recovery to the cash flow model when determining default tolerance.
SOUND LOAN SECURITY DESPITE BORROWER CONCENTRATION
The loan portfolio consists of 79 borrowers representing a mix of local water and wastewater utility systems. At least 60% of all pledged loans are estimated to be investment grade quality. The loan portfolio has moderate single borrower concentration, with the largest borrower (
There is also concentration amongst the pool's 10 largest borrowers, which account for approximately 50%. However, concentration concerns are somewhat mitigated by the strong credit quality of many of these borrowers. In addition, underlying loan provisions are strong with approximately 92% of the pool's loan principal secured by water and/or wastewater revenue pledges.
SOLID INVESTMENT PRACTICES
Program reserves are required to be maintained at the least of 10% of the combined original bond principal amount, maximum annual debt service (MADS), or 125% of the average annual debt service on the bonds. The reserves are currently invested in
FAVORABLE PROGRAM MANAGEMENT AND UNDERWRITING
The corporation was established during the 2000 state legislative session and is a nonprofit public benefit organization. The board of directors consists of the state's chief financial officer, the governor's budget director, and the secretary of FDEP. Pursuant to a service contract with the corporation, FDEP approves and prioritizes eligible projects and funding amounts. FDEP also performs loan application reviews and monitoring.
Borrowers are required to maintain rates sufficient to provide pledged revenue above 1.15x loan repayments and its other outstanding obligations. Other typical underwriting provisions include the requirement that no free or competing service exists within the prospective borrower's customer area and that the borrower covenants to budget other available funds, if necessary.
FDEP's monitoring process includes annual audits and borrower certification of coverage requirements and that pledged accounts contain required funds. In addition, FDEP receives reports notifying them of any significant changes. To date, there have been no loan defaults or missed payments from borrowers within the pledged portfolio.
Additional information is available at 'www.fitchratings.com'.
--'Revenue-Supported Rating Criteria', dated
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria', dated
Revenue-Supported Rating Criteria
Source: Fitch Ratings
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