The Rating Outlook is Stable.
Local school district bonds approved under the program are guaranteed by the corpus and income of the PSF. By law, a school district must notify the Commissioner of Education at least five days before a maturity date if it will be unable to pay debt service. Funds would then be transferred from the appropriate PSF account of the state treasury to the paying agent in an amount sufficient to pay debt service.
KEY RATING DRIVERS
RELATIVELY LOW-RISK BOND PORTFOLIO: The credit quality of the participants in the guaranteed bond portfolio remains strong. Nearly all of the bonds are backed by the districts' unlimited ad valorem tax pledge. However, the PSF has marginally increased some risk to the program by providing guarantees for certain charter school districts.
DISCOUNTED ASSETS PROVIDE STRONG COVERAGE: Under Fitch's stress scenarios, the discounted asset portfolio is sufficient to cover potential bond defaults for several years at a level that Fitch would expect from a 'AAA' guaranteed portfolio.
SOLID STATUTORY AND OPERATING PROVISIONS: Leverage limitations set by the state and federal governments enhance the program's guarantee.
STRINGENT PROGRAM OVERSIGHT: The state's oversight of
DECLINE IN QUALITY OF GUARANTEED BOND PORTFOLIO: A material deterioration in the aggregate quality of the guaranteed bond portfolio could result in negative rating action.
DETERIORATION IN FUND ASSET QUALITY: Significant declines in asset quality due to market losses or changes in asset allocations toward securities to which Fitch gives little to no credit (e.g. land, alternative investments) could cause negative rating pressure.
INCREASE IN LEVERAGE: A material increase in the amount of guaranteed obligations relative to PSF assets as discounted by Fitch could cause negative pressure on the rating. However, Fitch believes that the program's current leverage limitations make this unlikely.
The PSF is a perpetual endowment that was established in 1854 to support
RATING FACTORS CONSIDERED IN PSF ANALYSIS
Fitch's evaluation of the Texas PSF BGP considers three quantitative areas: the guaranteed portfolio's expected default risk, available PSF assets after discounting/liquidation stress, and the trend of leverage capacity. Fitch reviews the ability of the PSF to pay school district debt under stress scenarios consistent with an 'AAA' rating that would affect both the PSF's guaranteed debt and its asset portfolio. Fitch's review also considers three qualitative areas: guaranteed bond portfolio underwriting and monitoring, PSF investment policy, and fund distributions to schools.
GUARANTEED PORTFOLIO CREDIT RISK
Fitch does not expect a significant concentration of charter school district bonds guaranteed under the program due to current capacity limits and stringent application requirements. However, the inclusion of charter school district debt, which is not supported by ad-valorem taxes like that of public school districts, marginally increases the risk of the BGP.
In analyzing the credit risk of the guaranteed portfolio, Fitch uses its Portfolio Stress Calculator (PSC). The PSC derives program rating default stresses based on overall pool credit quality as measured by the rating of issuers, size, bond term, and concentration. For the PSF, Fitch's 'AAA' liability rating stress hurdle is 51.9% This means that based on the credit quality of the portfolio, Fitch would expect program enhancement to be greater than 51.9% to attain an 'AAA' rating. In its stress analysis, Fitch also assumes a standard recovery rate of 90%, which would result in the portfolio's total loss of 5.19% for four years, or 1.3% annually.
AVAILABLE PSF ASSETS AFTER DISCOUNTING/LIQUIDATION STRESS:
In analyzing the sufficiency of asset coverage of PSF's investment portfolio relative to guaranteed bond obligations, Fitch relies on its market value methodology ('Rating Closed-End Fund Debt and Preferred Stock Criteria' published
As a baseline, Fitch used published asset discount factors based on the 45-60 business day liquidation window in an 'AAA' scenario. Under such stress, the invested asset portfolio, which had a market value of
ANALYZING THE STRESS RESULTS
Fitch applied the guaranteed bond portfolio's stressed yearly loss of 1.3% and discounted portfolio values (
PROGRAM LEVERAGE CAPACITY:
The BGP's leverage capacity is restricted by both state statute and
The BGP's future capacity will be dependent upon the fund's investment performance, school district bond issuance and the state and federal limits. Fitch views positively the requirement that SBOE annually adjust the limit if the credit quality of the program is threatened.
DISTRIBUTIONS TO SCHOOLS:
In accordance with a constitutional amendment, the PSF makes annual distributions to school districts to support their operations based on a percentage approved by SBOE. The distribution comprises all dividend and interest income earned by the PSF, including unrealized gains/losses. Between 2006 and 2013, distributions averaged approximately 3% of the fund's market value annually. Fitch believes that the risk that distributions will hinder the PSF's ability to guarantee program debt is small because
GUARANTEE PORTFOLIO UNDERWRITING AND MONITORING:
BGP approval by the Commissioner of Education (Commissioner) is restricted to bonds that are voter-approved and backed by a property tax levy from an accredited school district, with the exception of certain charter districts. Approval is granted to districts issuing new money bonds for capital facilities; districts issuing refunding bonds which produce debt service savings; and districts with less than
The PSF's financial assets, with a fair market value of
Given that one of the SBOE's objectives is to grow the balance of the fund, approximately 40% is allocated to a mix of domestic and international equities, with another 41% allocated to alternative investments and the remainder to fixed income securities (mostly U.S. treasuries, government agency, and high-grade corporate obligations). Land, real assets and minerals, which had a fair value of
Additional information is available at 'www.fitchratings.com'.
--'Revenue-Supported Rating Criteria' (
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (
--'Rating Closed-End Fund Debt and Preferred Stock' (
Revenue-Supported Rating Criteria
Rating Closed-End Fund Debt and Preferred Stock
Fund and Asset Management
Source: Fitch Ratings
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