Fitch Rates Virginia Resources Authority's $179.5MM SRF Clean Water Revs 'AAA'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the Virginia Resources Authority's (VRA) $179.5 million clean water state revolving fund (CWSRF) revenue bonds, subordinate series 2008. The bonds are scheduled to price on July 30, 2008 via negotiation. Bond proceeds will be used to provide loans at below-market rates to ten local governments for wastewater quality improvement projects in the commonwealth of Virginia. Fitch has also affirmed the 'AAA' ratings on VRA's outstanding debt as follows:

--$405.2 million subordinate CWSRF bonds;

--Series 2004 $149.8 million senior CWSRF bonds.

The Rating Outlook is Stable.

The 'AAA' rating on the senior and subordinate CWSRF bonds is based on ample coverage from multiple layers of security, VRA's strong management of the CWSRF program, and adequate protection against excessive leveraging. Unlike the outstanding CWSRF senior series 2004 bonds, the subordinate bonds are not directly secured by allocated reserves capitalized by federal grants and state matching moneys. De-allocated senior lien reserves, excess loan repayments from the senior lien, certain pledged subordinate lien loan repayments, and interest earnings provide the primary security for the subordinate bonds. The bonds are also secured by a subordinate lien debt service reserve fund totaling $64.5 million or 11% of par, including the 2008 bonds. A portion of the reserves is scheduled to be released from the subordinate lien indenture as the bonds amortize.

With this issue, VRA enhances senior and subordinate lien bond security by pledging an existing portfolio of direct loan repayments. The pledge of the direct loans, which have an outstanding principal amount totaling $709.8 million, significantly increases borrower participation to 132 from 35 one year ago. In addition, the direct loans reduce the portfolio's single borrower risk. While Arlington County remains the largest borrower, concentration of its total loan balance decreases to 15% of the portfolio from 31% last year.

Overall credit quality remains strong with 81.6% of outstanding loan principal to borrowers, which are estimated to have investment-grade characteristics. Underlying loan security is also strong, with all loans secured by wastewater revenue pledges, general obligation pledges, or a double-barrel pledge. A state-aid intercept feature, allowing the VRA to intercept the state aid of borrowers that have defaulted on general obligation or revenue-backed debt, provides additional bondholder protection.

Senior lien bond reserves are ample, funded at $64.1 million, or 43% of outstanding principal of the underlying loan agreements associated with the 2004 bonds, well above the 25% minimum required. The senior 2004 reserves are currently invested in a guaranteed investment contract (GIC) meeting Fitch's 'AAA' rating guidelines. Additional bondholder protection is provided by a senior 2004 sinking fund totaling approximately $71.8 million. The sinking fund, which holds the corpus allocations for certain previously refunded bonds, is pledged to the senior 2004 bonds and is also invested in a GIC. Regularly scheduled GIC principal releases and earnings will pay a portion of the series 2004 debt service.

The VRA's ample reserves, leveraged and direct loan repayments, and interest earnings allow the senior and subordinate lien bonds to withstand borrower defaults of 51%-72% for various four-year periods, exceeding Fitch's 'AAA' stress test requirements given the size and credit quality of the loans.

The CWSRF program's additional bonds test for future senior and subordinate lien debt requires 1.0 times (x) net revenue coverage of debt, not including reserves. Additional program debt is prohibited if it would result in a rating downgrade.

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