AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA+' rating on the following bonds issued by the California Infrastructure and Economic Development Bank (CIEDB) under its 2004 Master Indenture (MI):
--Approximately $102.4 million infrastructure state revolving fund (ISRF) revenue bonds.
The Rating Outlook is Stable.
With the issuance of CIEDB's series 2014A ISRF revenue bonds (under the 2014 MI), the outstanding series 2004 and 2005 are to be refunded in full leaving only the series 2008 bonds outstanding under the 2004 MI. Information within this release pertains to the 2004 MI program structure post-refunding.
The bonds are secured by pledged loan repayments, reserves and account interest earnings.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program 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).
CREDIT QUALITY, RECOVERY PROSPECTS LIMIT RATING: The initial intention of the CIEDB ISRF program was to provide financing to participants with limited market access. Hence, many of the borrowers do not carry a public rating. In its cash flow modeling, Fitch assumes these borrowers have below investment grade credit quality.
NARROW PLEDGES: Security pledges for more than one-third of the portfolio consists of tax increment finance, special assessment and other revenue pledges, which Fitch believes results in lower recoveries than those backed by tax-backed or utility system pledges.
PROGRAM IN RUNOFF: Future ISRF loans are expected to be made via the 2014 MI. Therefore, the 2004 MI is considered to be in 'runoff' mode. This presents additional credit risks as the program shrinks, such as increased pool concentration and potential reductions in coverage.
CONCENTRATED LOAN POOL: The ISRF's series 2008 borrower pool is small at about 26 borrowers, largely a result of the refunding. The largest borrower, the city of San Bernardino (unrated by Fitch), represents a high 22.5% of the pool. The largest 10 borrowers represent approximately a high 78% of the total pool.
STRONG PROGRAM MANAGEMENT: Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for most borrowers. To date, there have been no pledged loan defaults in the ISRF program.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in pool credit quality, increased pool concentration, or increased bond leveraging resulting in the program's inability to pass Fitch's 'AA' liability default hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.
CIEDB created the ISRF program in 1999 to provide low-cost loans for several different categories of eligible public infrastructure projects throughout the state.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch calculates the program's asset strength ratio (PASR), which includes total scheduled loan repayments plus any reserve balances and account earnings divided by total scheduled bond debt service, to be very strong at approximately 2.4x versus Fitch's 'AAA' median of 1.6x. Additionally, projected minimum annual coverage excluding reserves is very strong at 2.0x versus Fitch's 'AAA' median of 1.2x.
Because of this strong coverage, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over any four-year period (per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability stress hurdle of 72% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
Although the program is able to pass Fitch's 'AAA' stress test, the rating assigned has been limited to 'AA+' due to Fitch's concerns regarding the pool credit quality and lower recovery prospects for some of the loans. Additionally, as the program is closed and therefore considered to be in runoff mode, other credit risks are increased such as pool concentration and the potential for additional leveraging.
LOAN POOL LARGELY UNRATED, HIGHLY CONCENTRATED
Given the largely unrated nature of the loan pool, the resulting 'AAA' liability hurdle is high at 72% versus an 'AAA' median of 33%. Fitch's model assumes unrated borrowers have below investment grade credit quality. Lower recovery prospects are also possible due to the narrow security pledges of loans backed by tax increment finance, special assessment and other revenue pledges (which, in aggregate, represent nearly one-half of the pool).
After the refunding, the ISRF loan pool under the 2004 indenture will consist of only 26 borrowers. At 22.5%, the largest loan is secured by water utility fee revenue from the city of San Bernardino (parity bonds not rated by Fitch). In aggregate, the top 10 borrowers represent a high 78% of the loan pool versus Fitch's 'AAA' median level of 52%.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
The ISRF program is separate from other state revolving fund (SRF) programs, such as the Clean Water and Drinking Water SRFs. Pursuant to loan agreements, underwriting criteria generally include covenants requiring each borrower to collect tax revenues or charge sufficient enterprise rates to meet all debt service requirements. Rate charges may also include a minimum coverage requirement.
To date, there have been no loan payment defaults from ISRF program borrowers. However, two credits in the ISRF program have declared bankruptcy, including the city of San Bernardino in August 2012 and the Los Osos Community Service District in August 2006. To date, both participants have made loan obligation payments in full and on time. Fitch notes that although these cities have filed for chapter 9 bankruptcy proceedings, substantial protections are available for special revenue obligations.
DEBT SERVICE RESERVE FUND
The 2008 bonds are additionally secured by a reserve fund subject to a requirement equal to the least of (a) 10% of the initial bonds, (b) 1.0x maximum annual debt service, and (c) 1.25x average annual debt service. Aggregate reserves total $3 million or about 8% of outstanding bonds.
ADDITIONAL BONDS TEST
Additional bonds may only be issued if, upon receipt of a certificate by the trustee from the issuer, revenues pledged under both the master indenture and any supplemental indentures provide a minimum of 1.20x debt service coverage. While this coverage is significantly lower than the current 2.0x minimum currently forecast for all outstanding series of bonds, management has established an internally targeted minimum of approximately 1.3 - 1.4x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 17, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool 2013 Peer Review' (Oct 31, 2013);
--'Revenue-Supported Rating Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)
Revenue-Supported Rating Criteria