Fitch Rates Maine Municipal Bond Bank's $11.2MM Revs 'AAA'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to Maine Municipal Bond Bank's (the bond bank) $11.2 million 2009 series A general bond resolution bonds. The bonds are expected to sell during the week of Feb. 9 via negotiation. In addition, Fitch has affirmed the ratings on approximately $989 million of the bond bank's outstanding general tax-exempt fund group bonds at 'AAA'. The Rating Outlook is Stable.

The bond bank's general tax-exempt fund group, which first issued bonds under a general resolution adopted in 1973 and under which the 2009 series A bonds are being sold, issues tax-exempt bonds that fund loan obligations to local government units. The 'AAA' rating is based on the high credit quality and diversification of the pledged local bond portfolio and various structural enhancements, i.e. a state aid intercept to assure local bond repayments, a reserve funded at maximum annual debt service (MADS) and backed by a moral obligation make-up provision, and a sizable discretionary reserve.

The bonds are primarily secured by repayments of municipal bonds issued by 290 local government units. Approximately 61% of the outstanding municipal bonds are backed by general obligation pledges of school districts, 30% by other local government general obligations, 8% by revenue pledges, and approximately 1% by hospital revenues. The borrower pool is naturally diversified, with the largest obligor, the Maine School Administrative District #3, accounting for 4% of the total outstanding municipal bonds, and the top 10 borrowers accounting for only 27% of the pool.

A reserve for all parity debt, funded by bond proceeds at 100% of MADS, is available to make up shortfalls that could potentially occur due to any missed local bond debt service payments. As of Dec. 31, 2008, the debt service reserve fund totaled $153 million. In addition, the bond bank maintains a $20 million discretionary reserve, which is not pledged to bondholders but may be used if a deficiency occurs. The combined $173 million in reserves and discretionary funds equals approximately 17% of principal on bonds outstanding, including the series 2009A bonds.

Additional credit enhancement is provided by a state intercept, whereby in the event a borrower defaults on a local bond payment, the bond bank has the ability to intercept any funds held by the state treasurer that are payable to the borrower. This protection is particularly effective for school districts, which receive a large percentage of their revenues in the form of state aid. Finally, there is a moral obligation, albeit not a legal requirement, by the state to replenish the debt service reserve if it falls below its minimum specified level. Neither the intercept nor the debt service reserve make-up provision has ever been utilized because the bond bank has never had a borrower default.

Fitch analyzed the default tolerance of the general tax-exempt fund group's portfolio using a stress test it also applies to state revolving funds and other municipal loan pools. The stress test considers a portfolio's credit quality, diversification, and single risk concentration. The bond bank's reserves are sufficient to pay bonds even if scheduled repayments on the local bonds fall short by 29% for the next four years, and no action is taken by the state to replenish the reserve fund. A repayment shortfall this severe is in excess of what Fitch would expect to occur in an 'AAA' stress scenario, given the characteristics of the bond bank's portfolio.

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