AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA+' rating on the following bonds issued by the Ohio Water Development Authority (OWDA or the authority) through its community assistance program (CAP):
--Approximately $84.3 million water development revenue bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by borrower loan repayments as well as a debt service reserve fund, surplus fund, construction fund, and interest earnings. In addition, OWDA covenants to use available moneys in its unrestricted account of the cross-collateralization fund (CCF) to cure program deficiencies, on a subordinate basis, if necessary.
KEY RATING DRIVERS
SUFFICIENT DEFAULT TOLERANCE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults in line with Fitch's 'AA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
MODERATELY DIVERSE POOL: The combined pledged loan pool is moderately diverse in comparison to similar municipal pools rated by Fitch. The pool consists of about 190 borrowers. The largest participant, Ottawa County (water and sewer system debt not rated by Fitch), represents 6.8% of the total loan pool.
BORROWERS MOSTLY WEAKER CREDITS: Fitch's analysis considered the nature of the program which functions primarily to service communities for which it would be an economic hardship to finance projects at market interest rates. To account for the likely lower credit quality of the borrowers, Fitch assumed unrated borrowers to be in the 'B' category in its model analysis as opposed to its base assumption of 'BB' for standard water/sewer system borrowers.
STRONG PROGRAM MANAGEMENT: OWDA's established loan underwriting criteria and solid portfolio monitoring efforts have contributed to the strong loan performance despite the speculative credit quality of the borrowers. To date, only one pledged borrower has experienced a default and was subsequently de-pledged from the portfolio.
RATING SENSITIVITIES
LOWER STRESS PERFORMANCE: Deterioration in structural enhancement resulting in default tolerance levels below Fitch's 'AA' liability stress hurdle could put downward pressure on the rating. The Stable Outlook reflects Fitch's view that such deterioration is unlikely to occur.
CREDIT PROFILE
The OWDA was created in 1968 and administers other revolving loan programs similar to the CAP, including clean water, safe water, pure water, and fresh water programs. The CAP, formerly known as the 'hardship program' because of its service to communities unable to finance projects at market interest rates, was established in 1983. As of 2014, OWDA elected to utilize its fresh water program for future CAP-type borrowers. Therefore, it is expected that the CAP will be used only for refundings.
SOLID FINANCIAL STRUCTURE, SUFFICIENT DEFAULT TOLERANCE
Fitch measures financial strength of pooled programs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments plus reserves divided by total scheduled bond debt service. The trust's PASR is 1.9x, which is slightly better than Fitch's 2014 sector median PASR of 1.8x. Fitch's calculation of the PASR excludes additional amounts available from releases to the unrestricted CCF as described below.
Because of the available program enhancement, 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. This is consistent with Fitch's 'AA' rating stress hurdle as produced by the PSC, which is derived from the overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Fitch's high PSC rating stress hurdle is reflective of the CAP's below-average loan quality.
LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION AND RESERVES
Loss protection is provided by both loan payment revenue in excess of bond debt service (overcollateralization) and reserves. On an annual basis, loan debt service overcollateralizes bond debt service by a minimum of 1.1x, which is slightly below Fitch's median level of 1.3x. Hybrid or reserve fund-type structures such as OWDA's typically have lower annual coverage as some enhancement is provided by reserves.
On each bond payment date, loan repayments exceeding the amounts needed to pay debt service and fund the debt service reserve will be deposited in the CAP surplus fund. If amounts are insufficient to pay CAP debt service, surplus fund deposits will first be used to cure such deficiencies. After two years, proceeds may be used by the authority for any lawful purpose. The surplus fund balance currently stands at $2.6 million.
Additional bondholder protection is provided by the CAP debt service reserve fund (DSRF). The DSRF is required to be maintained at maximum annual debt service (MADS) on all parity bonds. Amounts in the DSRF will be drawn upon depletion of the surplus fund. The DSRF balance currently stands at $12.7 million or approximately 15% of outstanding bonds.
CROSS-COLLATERALIZATION FUND ADDS TERTIARY PROTECTION
Security enhancement is also provided by a subordinate lien on surplus revenues released from the authority's unrestricted account of the CCF established under OWDA's 1995 fresh water program. The CCF is now supplied with moneys released after two years from the authority's CAP, pure water, safe water, clean water, and fresh water surplus funds. If moneys from the unrestricted CCF are not needed to cure deficiencies in any senior or parity fresh water programs, the CCF is available to make up deficiencies in the CAP debt service and debt service reserve funds. Excess moneys in the unrestricted CCF are released annually on Dec. 1.
Approximately $5.8 million of unrestricted reserves is available in the CCF fund. Although this is pledged on a subordinate basis to the CAP, Fitch has not applied credit to these amounts in its model analysis although it recognizes it as an added strength.
BORROWER POOL IS MODERATELY DIVERSE
The overall composition of the CAP loan portfolio has been mostly consistent over the past three years. The portfolio now has 190 borrowers, up from 132 borrowers in 2007. The top 10 borrowers represent 29% of the pledged loan pool, down from 45.6% in 2005 and 58.6% in 1997. Ottawa County, the largest borrower in the portfolio, represents 6.8% of the pledged loan principal, down from 12.4% in 2007 and 7.7% in 2013. Fitch views the changes in portfolio diversity over time as a credit positive, as diverse portfolios tend to spread credit risk and therefore reduce portfolio loss and volatility over time.
Most of the CAP borrowers' water or sewer system debt obligations are not publically rated. Also, CAP loans provided to borrowers are generally secured by water and/or wastewater utility revenue pledges, which are generally considered strong pledges. However, due to the hardship nature of the program, such revenue pledges may not be as stable in comparison to publically rated utilities. Nevertheless, the loan portfolio is well seasoned, with a strong repayment history.
In accordance with its criteria, Fitch assigned internal credit opinions to approximately 33% of the borrower pool and used the results in its PSC model. Fitch assumed other unrated borrowers to be in the 'B' category, which was roughly consistent with the average credit opinions it assigned. Fitch's criteria states that the floor rating for unrated borrowers will be assessed at 'BB' unless program borrowers are perceived to have a lower average credit rating, which is the case with the CAP pool.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
The authority is governed by eight board members, five of whom are gubernatorial appointees, subject to state senate confirmation for staggered eight-year terms. The current executive director has served in this position since 1988.
The authority underwrites subsidized loans generally with interest rates in the 1%-2% range. Certain criteria must be met to secure financing under the program, including: borrowers must prove that conventional financing for public water supply projects would result in economic hardship to the community; borrowers must meet Safe Drinking Water or Clean Water Act requirements; and the projected annual cost per residential utility system user must be over certain Ohio Environmental Protection Agency affordability criteria.
Since program inception in 1983, only one pledged borrower (the city of Sparta, which represented less than 1% of the portfolio) has defaulted on a loan payment. Sparta's loan has since been de-pledged from the CAP portfolio as allowed under the trust agreement. The solid performance of the pool is attributable to OWDA's established loan underwriting criteria and portfolio monitoring efforts.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (Oct. 22, 2014);
--'State Revolving Fund and Leveraged Municipal Loan Pool 2014 Peer Review' (Nov. 10, 2014);
--'Revenue-Supported Rating Criteria' (June 16, 2014).
Applicable Criteria and Related Research:
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=792908
State Revolving Fund and Leveraged Municipal Loan Pool (2014 Peer Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=806628
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981878
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