Fitch Rates Maine HHEFA's Revs 'AA'; Outlook Stable

CHICAGO & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the $41 million Maine Health and Higher Educational Facilities Authority (HHEFA or the authority) revenue bonds, series 2008D. In addition, Fitch affirms its rating on approximately $1.4 billion of the authority's outstanding reserve fund resolution bonds at 'AA'. The series 2008D bonds are scheduled to price via negotiation during the week of Nov. 10. Bond proceeds will be used to fund or refinance loans to five educational and medical institutions in Maine. The Rating Outlook is Stable.

The 'AA' rating and Stable Outlook reflect the diversity, low credit risk, and security of loans within the Maine HHEFA's loan pool, a debt service reserve funded at maximum annual debt service (MADS) and backed by the state's moral obligation, a state-aid intercept mechanism to assure loan repayments, and a sizable supplemental operating fund.

Virtually all of the state's eligible health care and higher education institutions use Maine HHEFA as their primary borrowing vehicle because it offers participants the lowest cost of capital.

Maine HHEFA's loan pool consists of 66 borrowers, with moderate single-borrower concentration; the largest, the Maine Health System, represents 15% of the total outstanding portfolio, and the top 10 borrowers account for approximately 62% of the outstanding loan balance. Approximately 53% of the outstanding loan balances are to hospitals; 32% to higher education institutions; with the remaining 15% outstanding loans spread among mental health facilities, nursing homes, and community care retirement communities.

Borrowers in the pool generally do not have public ratings. Among the largest nine borrowers, Fitch estimates that two would be rated in the 'AA' category, three in the 'A' category, and four in the 'BBB' category. In addition to a senior lien on gross revenues and a mortgage on most property and/or financed projects, the loans are backed by a state-aid intercept.

A debt service reserve for all parity debt is funded by bond proceeds at 100% of MADS. After this issue, the debt service reserve will total $130.5 million, or 9% of total bond principal outstanding. The debt service reserve is also backed by a state moral obligation make-up provision if it falls below MADS. Neither the intercept nor the reserve replenishment has ever been utilized. The reserves are currently invested in money market funds and investment agreements which, pursuant to the reserve fund resolution, must be with institutions rated at least 'AA' by rating agencies. To date, certain investment agreement provider ratings have fallen below the required 'AA' rating level; these providers include American International Group, Inc., MBIA Insurance Corp. and Ambac Assurance Corp. In such instances, the providers have either posted or plan to post collateral in excess of 100%, or have permitted the trustee to withdraw invested funds.

The operating fund balance, while not pledged, totals approximately $33 million and may be used instead of the debt service reserve, in the event of loan delinquencies. The operating fund, which is primarily invested in U.S. treasury or agency securities, has grown steadily due to strong revenues from administrative fees. Combined, debt service reserves and operating fund balances will total $163 million, or approximately 11% of bond principal outstanding, after this issue.

Fitch analyzes the default tolerance of Maine HHEFA's portfolio using a stress test that considers loan credit quality, single-risk concentration, debt service reserves and operating funds, loan payments, and historical default and recovery rates for health care and higher educational facilities. Where the debt service reserve is funded through investment agreements by providers that have been downgraded, but not yet posted collateral, Fitch will review and consider the planned remedies in its rating analysis.

Maine HHEFA's reserves and operating funds are sufficient to pay bondholders if scheduled loan repayments fall short by as much as 32% for four consecutive years, even assuming no action is taken by the state to replenish the reserve fund.

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