CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following bonds issued by the state of Ohio (the state) through its state transportation infrastructure general revenue fund bond fund program (GRF program):
--$2.94 million Transportation Project Revenue Bonds Series 2014-2 (City of Cincinnati-Keystone Parke Project).
The bonds are scheduled to price during the week of August 18. Bond proceeds will be used to finance a portion of the costs of acquiring, constructing, equipping and installing street improvements, a 240-space public parking facility and other public infrastructure associated with the Keystone Parke Development (a medical building) located in the City of Cincinnati, and to pay for the cost of issuance.
In addition, Fitch has affirmed the following rating:
--$21.4 million outstanding parity bonds at 'AA-'.
The Rating Outlook is Stable.
The series 2014-2 bonds and other parity bonds are secured by loan repayments made from the State Transportation Infrastructure GRF Program (GRF Program), pledged loan repayments made directly from State Infrastructure Bank (SIB), plus amounts in certain pledged funds and accounts.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch Ratings' cash flow modeling demonstrates that the general revenue fund (GRF) 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).
RECOVERY PROSPECTS LIMIT RATING: While coverage levels are strong, if any defaults were to occur, recoveries are not expected to be as high as those for traditional federally regulated state revolving fund programs, whose loans are secured by tax-backed or utility system pledges.
FUTURE LEVERAGING: The rating also reflects Fitch's expectation of additional leveraging to fund loans to political subdivisions throughout the state for transportation projects and uncertainty as to the credit quality of those loans. This risk is somewhat mitigated by minimum bond debt service coverage and reserve balance requirements.
HIGHLY CONCENTRATED LOAN POOL: The combined pledged loan pool, which includes loans made directly from GRF program funds and loans made from bond proceeds, is highly concentrated in comparison to similar programs.
DETERIORATION IN PROGRAM QUALITY AND FINANCIAL STRUCTURE
Significant reduction in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AA' liability default hurdle would put downward pressure on the rating. The Stable Rating Outlook reflects Fitch's view that these events are not likely to occur over the next review cycle.
The state's GRF program is an investment fund used to make loans and to provide other forms of credit assistance to public and private entities for the purpose of carrying out highway construction and transit capital projects including highway, transit, intermodal, rail, airports, and waterways. The current bond issuance (2014-2) will be used to finance the acquisition, construction, equipping, and installation of a 240-space public parking facility and other public infrastructure associated with the Keystone Parke Development (a medical building) located in the City of Cincinnati (the borrower).
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch considers the program's asset strength ratio very strong at approximately 2x versus Fitch's 2013 sector median of 1.7x; the ratio is calculated by dividing the total scheduled loan repayments plus any reserve balances and account earnings by total scheduled bond debt service. 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 (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 55.1% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the ratings of underlying borrowers, loan size and term, and concentration.
ENHANCEMENT PROVIDED BY OVER-COLLATERALIZATION AND RESERVES
The program benefits from credit enhancement provided both by pledged revenues in excess of debt service (over-collateralization [OC]) plus amounts and earnings held in program reserves. Minimum annual debt service coverage from OC alone is strong at more than 2.0x over the next eight years. After this period, coverage begins to decrease but is expected to be supplemented by future direct GRF program loans.
The program reserve fund, which is required to be maintained at the greater of $5 million or 10% of outstanding bonds, provides additional structural security. The current balance of the program reserve fund is $5 million, or approximately 23% of outstanding bonds.
Bondholders are also secured by amounts totaling $20.8 million held in the GRF. However, these amounts are expected to be loaned (recycled) to future borrowers and therefore may not be immediately available for bondholders. If bond debt service shortfalls were to occur, amounts held in the GRF will be utilized prior to reserves. In addition, in the event pledged loan revenues are insufficient to cover debt service or if the reserve balance falls below the required amount, the state provides a moral obligation to replenish such amounts.
BORROWER POOL HIGHLY CONCENTRATED
The combined loan pool consists of 22 loans placed with 21 borrowers. The top 10 borrowers represent a very high 90% of the program pool, versus Fitch's median level of 52%. The largest participant, the Toledo-Lucas County Port Authority (security not publicly rated by Fitch), represents approximately 19% of the total pool. The remaining top 10 borrowers range from 2.4% to 13% of the pool.
Based on the characteristics described above, Fitch views the loan pool as having very high concentration in comparison to other municipal loan pool programs. Pool credit quality is below average, with approximately 76% of the loans not rated. Non-rated borrowers are assessed a 'BB' rating in Fitch's PSC in accordance with its criteria.
Revenue pledges include, but are not limited to, motor vehicle taxes, local government tax pledges, toll proceeds, tax increment financing payments, property assessments, license plate and registry fees, and other forms of taxes and fees. These are viewed by Fitch as potentially having lower recovery prospects than traditional federal state revolving fund programs, whose loans are secured by tax-backed or utility system pledges. The program's high concentration and lower recovery prospects are major factors in Fitch's 'AA-' program rating.
SOLID PROGRAM MANAGEMENT AND UNDERWRITING
Program loans follow a formal underwriting process requiring a review by the Division of Finance within the Department of Transportation. Loans then receive approval from both the State Infrastructure Bank Loan Committee and the state's Director of Transportation. Loans must also meet certain criteria, including possessing a revenue stream from one or more of the following: motor vehicle gas taxes, local government taxes, toll proceeds, tax increment financing payments, property assessments, license plate and registration fees, certain local government funds, or other user payments or fees.
Since its inception, the State Infrastructure Bank Loan Program has had two defaults of $2.4 million and $615,000, both made to the same private issuer in 1998. These loans were liquidated in 2002. Due to these defaults, the state implemented a policy requiring future loans to be made and guaranteed by a public entity. No defaults have occurred since this policy change.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (April 28, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria