Fitch Rates Rhode Island's $54MM Clean Water Rev SRFs 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings assigns an 'AAA' rating to the following Rhode Island Clean Water Finance Agency's (RICWFA) water pollution control revolving fund revenue bonds:

--Approximately $54.1 million series 2014A (pooled loan issue).

The bonds are scheduled to sell via negotiation the week of February 17. Bond proceeds will be used to fund loans which will be used to finance or refinance portions of the cost of certain water pollution control projects, and pay costs of issuance.

In addition, Fitch affirms the rating on the following revenue bonds:

--$401 million in outstanding senior lien water pollution control revolving fund revenue bonds at 'AAA';

--$64.4 million in outstanding subordinate lien water pollution control refunding revenue bonds, series 2010A at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The series 2014A and outstanding senior bonds are secured by borrower loan repayments, debt service reserve funds, reserve account earnings and scheduled reserve de-allocations.

The series 2010A outstanding subordinated revenue bonds are secured by moneys released from the senior lien including excess loan repayments, interest earnings, and de-allocated reserves after senior debt service is paid.

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 equal to Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

HIGHLY-RATED BORROWER POOL: At least 89% of RICWFA's clean water state revolving fund (CWSRF) loan portfolio is determined to be investment grade. Loan provisions are strong with the majority of loan principal secured by borrowers' net system revenue pledges.

SIGNIFICANT BORROWER CONCENTRATION: The loan portfolio has a high level of concentration risk as the pool consists of only 44 borrowers. To account for this, programs with higher concentration are assessed at higher stress levels in Fitch's PSC.

STRONG PROGRAM MANAGEMENT: RICWFA's management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that the trust has never experienced a borrower default.

CROSS-INVESTMENT ABILITY STRENGTHENS PROGRAM: The agency's ability to invest in its drinking water state revolving fund (DWSRF, pooled loan program revenue bonds rated 'AAA', Outlook Stable by Fitch) or CWSRF reserves in either pool should any of the borrowers default is a positive credit factor. However, the agency is not legally obligated to use this cross-investment feature.

RATING SENSITIVITIES

REDUCTION OF STRUCTURAL ENHANCEMENT: A significant deterioration in loan repayment performance and/or a measurable reduction in pledged reserves could put downward pressure on the rating. The Stable Outlook reflects Fitch's view that such deterioration is unlikely to occur.

CREDIT PROFILE

RICWFA issues bonds to provide subsidized financing to governmental entities throughout Rhode Island for its DWSRF and CWSRF projects. In association with its bond issues, RICWFA makes loans to eligible borrowers from bond proceeds and the state's required 20% matching funds for the federal capitalization grants.

PLEDGED RESOURCES WITHSTAND FITCH'S 'AAA' RATING STRESS

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 good at approximately 1.4x versus Fitch's 'AAA' median of 1.6x. Additionally, projected minimum annual coverage excluding reserves is solid at 1.2x versus Fitch's 'AAA' median of 1.2x.

Because of this strong coverage and available remaining reserves, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100.0% over any four-year period (as 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 default hurdle of 30%, as produced by the PSC, which is derived based on the overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.

Reserves (or 'LIST' funds) are maintained at a level sufficient to generate funds to cover the borrower interest rate subsidies. Reserves are released from the fund annually as bonds amortize, at which point they can back additional bonds or be used to fund pledged or non-pledged federal direct loans. RICWFA's CWSRF LIST fund balance totals $83.4 million, or about 15% of outstanding and proposed series 2014A bonds.

CONCENTRATED, ALBEIT HIGHLY-RATED LOAN POOL

The CWSRF loan pool is small and highly concentrated comprising only 44 borrowers, with the top 10 obligors representing approximately 84% of the aggregate loan pool. Narragansett Bay Commission (NBC) remains the agency's largest borrower, representing 33% of the pool. NBC's loans are secured by system revenues. Concentrated portfolios are stressed at higher levels in Fitch's PSC to account for concentration risk.

Pool credit quality is strong with approximately 89% of the pool's loans held by investment-grade borrowers. The program's loan security is also solid, with approximately 97% of loan principal backed by net system revenue pledges, general obligation pledges or a combination of both, and the remaining 3% backed by airport revenues.

STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING

RICWFA maintains a formal underwriting process involving extensive review of pool participant eligibility and security. The agency requires all prospective borrowers to maintain a minimum of 1.25x debt service coverage (DSC) on loans and covenant to raise rates if DSC is not met. All projects must be listed on the Intended Use Plan Project Priority List (a requirement for CWSRF funding).

Loan repayments are tracked closely by the RICWFA staff. All borrowers must submit annual financial information to the agency. In addition, the agency reviews borrower credit quality on a regular basis.

The CWSRF portfolio carries an interest rate of approximately two-thirds of the borrower's market rate. However, in the event of a borrower default, RICWFA is authorized to require all pool borrowers to pay higher interest rates up to the borrower's market rate, thereby creating a step-up provision, which provides additional bondholder security. To date, there have been no defaults on borrower loans.

CROSS-INVESTMENT AGREEMENT PROVIDES ADDITIONAL SUPPORT

As additional security the agency could invest its CWSRF or DWSRF reserves in either pool should any of the borrowers default. This mechanism is permitted under the 2004 cross-investment agreement as long as there are no defaults in the pool that is providing the support. It is important to note that while the ability to cross invest exists, the agency is not legally obligated to use this feature.

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:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719991

State Revolving Fund and Leveraged Municipal Loan Pool Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707257

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820170

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Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst, +1-512-215-3724
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Julie G. Seebach, +1-512-215-3740
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Major Parkhurst, +1-512-215-3724
Director
or
Committee Chairperson
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com