Fitch Rates State of Texas Veterans Bonds Ser 2010C 'AAA/F1+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a rating of 'AAA/F1+' to the State of Texas veterans bonds, series 2010C. The Rating Outlook on the long-term rating is Stable.

The 'AAA' long-term general obligation (GO) bond rating reflects the state's low debt, conservative financial operations and an economy that has expanded and diversified, despite recent recessionary conditions. Financial pressures arise from the demands that rapid growth places on the state's consumption-based tax system, as well as from longer-term transportation needs and an increased state commitment to education. Recessionary conditions have led to weakened sales and natural resource tax collections, although the state maintains a sizable budget reserve. The enacted fiscal 2010-2011 budget achieved balance by lowering spending from the prior biennium and relying on federal stimulus. Tax collections have underperformed since then, prompting the state to implement spending cuts to ensure balance. A sizable structural gap is forecast for the fiscal 2012-2013 biennium, expected to be addressed in the next legislative session.

The short-term 'F1+' rating is based on the liquidity support in the form of a Standby Bond Purchase Agreement (SBPA) provided by Lloyds TSB Bank plc (currently rated 'AA-F1+' by Fitch). The SBPA provides for the payment of the principal component of purchase price plus an amount equal to 34 days of interest calculated at a maximum rate of 15%, based on a year of 365 days for tendered bonds during the weekly rate mode in the event that the proceeds of a remarketing of the bonds are insufficient to pay the purchase price following an optional or mandatory tender. The SBPA will expire on Aug. 20, 2012, the expiration date of the SBPA, unless such date is extended, conversion to a fixed rate mode, or upon the occurrence of certain other events of default which result in a mandatory tender or other termination events related to the credit of the bonds which result in an automatic and immediate termination. The short-term 'F1+' rating will expire on the expiration or prior termination of the SBPA. The short-term rating may be adjusted upward or downward in conjunction with the long-term rating of the bonds or the short-term rating of the bank. The remarketing agent for the bonds is Morgan Stanley & Co., Incorporated. The bonds are expected to be delivered on or about Aug. 20, 2010.

The bonds will be issued in the weekly rate mode, but may be converted to a fixed rate. While bonds bear interest in the weekly rate mode, interest is paid on the first business day of each month, commencing Sept. 1, 2010. Holders of bonds bearing interest in the weekly rate mode may tender their bonds for purchase with the requisite prior notice. The tender agent is obligated to make timely draws on the SBPA to pay purchase price in the event of insufficient remarketing proceeds, and in connection with the expiration or termination of the SBPA, except in the case of the credit-related events permitting immediate termination or suspension of the SBPA.

Funds drawn under the SBPA are held uninvested, and are free from any lien prior to that of the bondholders. The bonds are subject to mandatory tender: (1) upon conversion of the interest rate; (2) upon expiration, substitution or termination of the SBPA; and (3) following the receipt of written notice from the bank of an event of default under the SBPA, directing such mandatory tender. Optional and mandatory redemption provisions also apply to the bonds.

Bond proceeds will be deposited in the State of Texas Veterans' Housing Assistance Fund II, a fund administered by the Veterans' Land Board of the State of Texas (the 'Board') and be made available to make home loans to eligible Texas veterans in accordance with guidelines establish by the Board for the Veterans' Housing Assistance Program.

Applicable criteria available on Fitch's website at www.fitchratings.com:

--'U.S. Municipal Structured Finance Rating Criteria', dated Dec. 17, 2009;

--'Rating Guidelines for Variable-Rate Demand Obligations Issued with External Liquidity Support', dated May 29, 2009.

Additional information is available at www.fitchratings.com.

Related Research:

U.S. Municipal Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492084

Rating Guidelines for Variable-Rate Demand Obligations Issued with External Liquidity Support

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=443146

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