Fitch Rates Maine Municipal Bond Bank's $81MM Revs 'AAA'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following Maine Municipal Bond Bank (the bond bank) general resolution bonds:

--$81 million 2011 series A tax exempt bonds.

The bonds are scheduled to sell via negotiation during the week of Jan. 3, 2011. Proceeds will be used to purchase local bonds from local governments throughout the state.

In addition, Fitch has affirmed the following ratings:

--$1.15 billion general tax-exempt fund group bonds at 'AAA'.

The Rating Outlook is Stable.

RATING RATIONALE:
--The program's pledged reserves allow the bonds to pay debt service on a timely basis even if the loan portfolio is stressed to a level consistent with an 'AAA' rating.
--The program's underlying loan credit quality is strong, and the ability of the program to intercept state aid payments of potential delinquent borrowers further increases borrower credit quality. Fitch estimates that participant borrowers of at least 71% of outstanding loan principal exhibit investment-grade characteristics. Fitch does not express an opinion as to the credit quality of the remaining underlying loans.
--The loan portfolio is large and well diversified, with low single borrower concentration.
--The program's loan security is strong with over 90% of outstanding loan principal backed by general obligation (GO) pledges. In addition, no obligor has defaulted in the bond bank's 30-year history.
--Maine's state law provides for but does not legally require the state (GO bonds rated 'AA+', Stable Outlook) to replenish the reserve fund if it falls below its minimum specified level.
--The program maintains prudent investment practices.

KEY RATING DRIVERS:
--Credit quality of the bonds is linked to repayment performance on the program's loan portfolio and credit quality of investments in the reserve fund.
--Sustained state financial commitment to school funding and strong reserves are important to preserving the 'AAA' credit rating.

SECURITY:
The bonds are secured by repayments of municipal bonds issued by local government units, reserves funds and a State Moral Obligation pledge to replenish the reserve.

CREDIT SUMMARY:
The bond bank's general tax-exempt fund group, which first issued bonds under a general resolution adopted in 1973 and under which the 2011 series A are being sold, issues tax-exempt bonds that fund loan obligations to local government units.

The bonds are primarily secured by repayments of municipal bonds issued by roughly 280 local government units. Approximately 62% of the outstanding municipal bonds are backed by GO pledges of school districts, 30% by other local government general obligations, 7% by revenue pledges, and approximately 1% by hospital revenues. The borrower pool is naturally diversified with the largest obligor, Maine School Administrative District #22, accounting for approximately 4.9% of total outstanding bonds with this issuance. The top 10 borrowers account for 29% of total outstanding bonds in the portfolio.

A reserve for all parity debt, funded by bond proceeds at 100% of maximum annual debt service (MADS), is available to make up shortfalls that could potentially occur due to any missed local bond debt service payments.

As of Nov. 30, 2010, the pledged debt service reserve fund totaled approximately $141.8 million. Approximately $7 million of 2011 series A bond proceeds will be used to add to the reserve fund. Pledged reserves will then total $148.6 million or approximately 12% of bonds outstanding. In addition, the bank maintains approximately $8.5 million in supplemental reserves and $18 million in special discretionary reserves, both of which are not pledged to bondholders but may be used if a deficiency occurs. While the supplement reserve would be used only for general resolution bonds, the nonpledged special discretionary reserve account may be used at the board's discretion for any purposes of the bank, including any of the bank's outstanding bond resolutions.

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 by the state, albeit not a legal requirement, 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 19.4% for the next four years, and no action is taken by the state to replenish the reserve fund. A repayment shortfall this severe is consistent with what Fitch would expect to occur in an 'AAA' stress scenario, given the characteristics of the bond bank's portfolio.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in Fitch's State Revolving Fund and Municipal Loan Pool Rating Guidelines, this action was additionally informed by information from the Underwriter.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Aug. 16, 2010);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
State Revolving Fund and Municipal Loan Pool Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150

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