AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the Indiana Finance Authority (IFA):
--Approximately $18.2 million state revolving fund (SRF) program bonds, series 2014A;
--Approximately $71.4 million SRF program refunding bonds, series 2014B.
Series 2014A bond proceeds will be used to finance certain water and wastewater system projects in the state and to pay for the cost of issuance. Series 2014B bond proceeds will be used to refund and/or legally defease certain series of outstanding bonds previously issued by the IFA and to pay for the cost of issuance. The bonds are expected to price via negotiation the week of March 24.
In addition, Fitch has affirmed the following rating:
--$1.5 billion outstanding parity bonds at 'AAA'.
The Rating Outlook is Stable.
The bonds are secured by loan repayments, debt service reserve funds and/or releases from such funds, and other accounts pledged under the series and master trust indentures.
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).
AVERAGE POOL CREDIT QUALITY: Approximately 58% of IFA's loan portfolio consists of unrated entities, which Fitch conservatively assumes to be of speculative grade credit quality in its analysis. The remaining portion of the pool is rated 'A-' or better.
MODERATE POOL DIVERSITY: IFA's borrower pool is large with around 340 borrowers. The largest borrower, the Terre Haute Sanitation District, represents a manageable 8.5% of the combined pool. The largest 10 borrowers represent approximately 42% of the total pool.
STRONG PROGRAM MANAGEMENT: The IFA adheres to consistent, conservative underwriting policies. Management and underwriting strength is exhibited by the fact that the program has never experienced a default.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's liability default 'AAA' hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.
IFA's clean water SRF (CWSRF) and drinking water SRF (DWSRF) programs (the programs) were created to provide loans to local entities for wastewater and drinking system improvements. The IFA is responsible for administration and management of the SRF programs. Like many SRF programs, the IFA is in the process of transitioning the program from primarily a reserve fund structure, wherein loss protection is provided by reserves, to a cash flow structure, or one in which loss protection is provided by available surplus cash flows.
FINANCIAL STRUCTURE EXHIBITS ADEQUATE 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 below average but adequate at approximately 1.3x versus Fitch's 'AAA' median of 1.6x.
Because of this available enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 79% in the first four years and 100% in the middle and last four years of the bonds' expected life (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 stress hurdle of 45% 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.
Fitch notes that as a result of expected reserve releases associated with the refunding and defeasance of certain bonds (further described below) the default tolerance during the first four years of the programs' scheduled debt service has declined from a strong 100% at Fitch's last rating in February 2013 to a lower but still sufficient 79%. Minimum annual debt service coverage is calculated to also be below average but adequate at about 1.1x.
LOAN POOL MODERATELY DIVERSE
The combined loan pool is composed of about 340 borrowers. Excluding The Indianapolis Local Public Improvement Bond Bank, which was defeased via an escrow agreement in 2011, Terre Haute Sanitation District (pledged utility revenue bonds not rated by Fitch) is the largest participant, representing about 8.5% of the pool. Each remaining program participant accounts for 6% or less of the total pool. Overall, Fitch views the loan pool as having above average diversity in comparison to other similar 'AAA' programs. In aggregate, the top 10 borrowers represent approximately 42% of the loan pool versus Fitch's 'AAA' median level of 52%.
Approximately 58% of the loan pool does not carry a public rating. In accordance with its criteria, the unrated portion of the pool was conservatively estimated to be of speculative grade credit quality ('BB') in Fitch's analysis. The remaining rated portion of the pool carries ratings at or above 'A-'.
Given the concentration of unrated entities, the resulting 'AAA' liability hurdle is above average at 45% versus an 'AAA' median of 33%. However, the strong loan security pledges somewhat mitigate the nature of the pool risk, as nearly the entire combined pool is backed by water/sewer system revenues and GO pledges.
FAVORABLE STRUCTURAL CHARACTERISTICS
Under the SRF programs' structure each bond series is secured by borrower loans and, in certain series, separately secured debt service reserves funded initially from IFA's federally capitalized CWSRF and DWSRF. As series bonds amortize, released reserves, excess loan repayments and interest earnings are deposited into a deficiency fund, which is available to make debt service payments on any bonds issued under the master trust indenture. The method by which excess amounts are deposited into the deficiency fund allows for cross-collateralization between CWSRF and DWSRF programs, increasing pool diversity and potentially lowering total loss amounts. Due to the cross-collateralization feature, Fitch combines the programs in its cash flow modeling.
SERIES 2014 LOSS PROTECTION PROVIDED PRIMARILY FROM SURPLUS CASH FLOWS
No dedicated reserve fund is expected to be funded with the series 2014 bonds. However, the series 2014 bonds benefit from excess reserve deallocations released from previous series' reserves, as described in the preceding paragraph. At the direction of the authority, funding of dedicated reserves for the series 2014A or 2014B bonds may be initiated by delivering written notice to the trustee.
Combined reserve balances are decreasing with this issue as the authority anticipates releasing approximately $210 million of reserves previously allocated to certain refunding bonds which will be legally defeased with this issue. Remaining reserves total approximately $249 million, or roughly 17% of total outstanding bonds.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
IFA manages both the CWSRF and DWSRF programs using consistent underwriting practices. In its borrower assessment, IFA takes into consideration the creditworthiness of the borrower and environmental goals of the SRF program, among other factors. Loans secured by system revenue pledges (the primary source of loan security) must demonstrate minimum coverage of 1.25x annual debt service coverage and are also required to create a local DSRF equal to 1.0x maximum annual debt service (MADS). Local borrower reserves provide additional security of $190 million.
Loans are typically limited to 20 years and are structured with level annual payments. Annual loan monitoring is conducted on outstanding borrowers, and includes verification of local reserves and a review of financial statements. No loan defaults have been reported within the program to date.
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 Criteria
State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)
Revenue-Supported Rating Criteria