CHICAGO--()--Fitch Ratings affirms its 'AAA' rating on the following state revolving fund (SRF) general bond resolution (GBR) program bonds for the state of Connecticut (the state):
--$935 million in outstanding general revenue bonds.
The Rating Outlook is Stable.
The program's loan repayments, debt service fund and support fund are legally pledged to bondholders. In addition, the state is required under the resolution to make sufficient transfers to the debt service fund from all available moneys in the revolving fund, which includes program equity, if necessary.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that pledged program resources can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The clean water SRF (CWSRF) and drinking water (DWSRF) are cross-collateralized with one another, which allow shortfalls in one fund to be covered by surpluses in the other, further enhancing bondholder security.
PRUDENT PROGRAM INVESTMENT PRACTICES: Program investment practices are generally strong as assets are invested in highly rated and/or fully collateralized investment agreements or in cash and money market funds.
SOUND BORROWER QUALITY: Approximately 85% of all outstanding loan principal exhibits investment-grade characteristics. In addition, approximately 83% of the aggregate loan principal is secured by unlimited tax general obligation pledges.
SOLID PROGRAM MANAGEMENT AND UNDERWRITING: Connecticut maintains sound formal program underwriting and loan monitoring guidelines exhibited by the fact that there have been no borrower defaults to date.
PLEDGED RESOURCES CAN WITHSTAND RATING STRESS HURDLE
Connecticut issues SRF bonds and uses the proceeds to provide subsidized loans to local entities throughout the state for clean water and drinking water fund projects or to reimburse its SRF for loans made with program equity. The bonds are issued pursuant to a GBR and separate series resolutions. Fitch evaluates the CWSRF and DWSRF and as a single program given the cross-collateralization feature, whereby debt service deficiencies in one fund may be cured by surpluses in the other.
While all program funds are held in the SRF (including SRF federal capitalization moneys, required state matching funds and pledged loan repayments), the program's legally pledged resources are limited to the debt service and support funds. Pledged resources alone allow the bonds to perform even if loan defaults were 43% over the first four years of the bonds life and 100% over the middle and last four years, assuming 90% recoveries per Fitch's criteria. This is in excess of the Fitch's PSC stress hurdle of 25%, which is derived from the pool's overall credit quality as measured by the ratings of underlying borrowers, size, loan terms, and concentration.
The program also maintains monies in its equity fund which would be available to pay bondholders in the event of a shortfall from pledged funds. As of Sept. 1, 2012, the equity balance totaled $422 million. Under the GBR, the state is obligated to transfer to the debt service fund any available moneys in the SRF (including equity monies) in an amount sufficient to make debt service payments. Connecticut's incorporation of this obligation in the GBR provides additional bondholder protection and is unique among traditional SRF programs, which typically exclude such a covenant. Fitch acknowledges this structural enhancement but notes that equity monies were not included in Fitch's current program model primarily because equity balances could diminish over time if they are recycled into new loans. However, some portion of these balances may be included in future models.
SOLID INVESTMENT PRACTICES
Connecticut's program assets are invested in investment agreements, with providers that are highly rated and/or fully collateralized by direct U.S. Treasury or Agency securities. Certain assets are also invested in the state treasurer's short-term investment fund (STIF), which is an investment pool of high-quality, sort-term money market instruments. The sustained credit quality of the SRF program's asset investments is important to sustaining the current rating.
FAVORABLE PORTFOLIO CHARACTERISTICS The loan pool consists of 98 borrowers, with the largest, the Metropolitan District Commission (MDC), accounting for approximately 20% of outstanding obligations. The largest 10 borrowers account for approximately 57% of outstanding obligations. The portfolio's credit quality is strong, with approximately 85% of total outstanding obligations estimated to exhibit investment-grade characteristics. Loan security is also strong as the loan portfolio is secured entirely by general obligation pledges, local utility revenue pledges or a combination of both.
STRONG UNDERWRITING AND LOAN MONITORING PROCEDURES
Connecticut requires that program borrowers evidence its ability to repay loans and provide relevant documentation such as financial statements, capital budgets and economic data. Management monitors monthly loan repayments and works with its loan servicing contractor, the program's trustee bank. In the event of a late payment, a policy is in place to implement immediate collection procedures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Counterparty Criteria for Structured Finance Transactions