Fitch Rates Connecticut's SRF General Revenue Bonds, Series 2015A 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the state of Connecticut (the state):

--Approximately $250 million state revolving fund (SRF) general revenue bonds, series 2015A.

The bonds are expected to sell via negotiation during the week of April 20. Bond proceeds will be used to provide loans to governmental entities in the state for SRF wastewater and drinking water projects.

In addition, Fitch has affirmed its rating on the following outstanding bonds:

--Approximately $642.2 million SRF general revenue bonds.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by program loan repayments, the debt service fund and the support funds. In addition, under the 2002 general bonds resolution (GBR), the state is required to make sufficient transfers to pay bond debt service from all available moneys in the revolving fund, which includes program equity, if necessary.

KEY RATING DRIVERS

SOUND FINANCIAL STRUCTURE: 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 rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

HIGHLY-RATED BORROWER POOL: Approximately 97% of the state's combined SRF loan pool consists of entities carrying investment-grade ratings. Overall, pool credit quality is higher than average in comparison to other SRFs rated by Fitch.

PLEDGED GBR EQUITY: Under the GBR, the state is obligated to transfer to the debt service fund any available moneys in the SRF (including equity monies) in an amount sufficient to make debt service payments. Connecticut's incorporation of this obligation in the GBR provides additional bondholder protection and is unique among traditional SRF programs, which typically exclude such a covenant.

ABOVE-AVERAGE BORROWER CONCENTRATION: The state's loan pool is somewhat small with only 97 borrowers. The top 10 borrowers constitute approximately 58% of the pool total and the largest borrower represents 22% of the total pool. These metrics are slightly weaker than Fitch's comparable 'AAA' medians. Concentrated pools are assessed at higher stresses in Fitch's modeling.

SOLID PROGRAM MANAGEMENT: Connecticut maintains sound formal program underwriting and loan monitoring guidelines exhibited by the lack of pledged borrower defaults to date.

RATING SENSITIVITIES

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 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.

CREDIT PROFILE

Connecticut's state revolving funds provide subsidized loans to local entities throughout the state for eligible clean water and drinking water projects. Fitch evaluates the separate clean water and drinking water SRFs as a single program given the cross-collateralization feature, whereby debt service deficiencies in one fund may be cured by surpluses in the other.

SOUND FINANCIAL STRUCTURE, DEFAULT TOLERANCE

Fitch measures financial strength of the combined SRFs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments, support fund balance, and account earnings divided by total scheduled bond debt service. The state's PASR is 1.3x, which is below Fitch's 2014 'AAA'-median level of 1.8x but is considered sound by Fitch.

Excluding amounts in the equity fund, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 89% in the first four year and 100% in the middle and last four-year period over the outstanding bonds' expected life (per Fitch criteria, a 90% recovery is applied in its cash flow model when determining default tolerance). These results are in excess of Fitch's 'AAA' liability rating stress hurdle of 14%, as produced by the PSC. The liability rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size and term, and concentration.

The program's low PSC stress hurdle is reflective of the higher than average borrower credit quality. Although Fitch's calculation of the first four-year default rate has slightly decreased since last review (from 94%), inclusion of available and pledged equity funds in its model analysis would have resulted in a default tolerance of 100% in each stress period.

ENHANCEMENT PROVIDED PRIMARILY BY SUPPORT AND EQUITY FUNDS

The state's SRF loan pools are primarily protected from losses by surplus pledged loan amounts and investment earnings in excess of debt service, and amounts in the support and equity funds. The support fund was initially funded with the issuance of certain previous series of bonds in amounts required under such bonds' supplemental resolutions and is not expected to be funded as part of the 2015 issue. As these bonds amortize, amounts are released in accordance with a set schedule and are then available to pay for bond debt service. As of March 2015, the combined clean water and drinking water support fund balance was $72 million, or 8% of outstanding principal (including the series 2015A bonds). Inclusive of the support fund releases, minimum annual debt service coverage (DSC) is low at approximately 1.0x versus an 'AAA' median level of 1.4x but is also considered sufficient given the amounts available in the equity fund as described herein.

As mentioned previously, the program's equity fund is also available and pledged to bondholders in the event of a debt service shortfall. However, equity monies were not included in Fitch's analysis primarily because equity balances could diminish over time if they are recycled into new loans. As of March 2015, the equity balance totaled $273.5 million.

HIGH-QUALITY LOAN POOL WITH SOME CONCENTRATION

At 97 borrowers, the current loan pool is somewhat small and concentrated. However, the large majority of borrowers are highly rated. The Metropolitan District Commission (unrated by Fitch but assessed to be of high credit quality) is the pool's largest borrower, accounting for 22% of the total. The remaining top 10 borrowers account for a slightly elevated 58% of the pool, though all are also assessed to be investment grade. The program's loan security is favorable, with each borrower backed by general obligation pledges (68%), net utility system revenues (25%), or a combination of the two (7%). Overall pool attributes have remained similar over the past several years.

SOLID PROGRAM MANAGEMENT AND UNDERWRITING

The state treasurer's office and Connecticut's department of energy and environmental protection (DEEP) jointly manage the clean water SRF program, while the drinking water program is jointly managed by the state treasurer's office and the department of public health (DPH). Among other duties, DEEP and DPH are responsible for the preparation of the state's annual SRF priority lists, approval of construction disbursement requests, and the inspection of projects to ensure compliance.

Connecticut requires that program borrowers evidence their ability to repay loans and provide relevant documentation such as financial statements, capital budgets and economic data. Management monitors monthly loan repayments and works with its loan servicing contractor, the program's trustee bank. In the event of a late payment, a policy is in place to implement immediate collection procedures.

LIBERAL ADDITIONAL BONDS REQUIREMENT

Fitch views negatively the absence of a minimum coverage provision in the GBR as it could result in less than sum-sufficient coverage of debt service from pledged loan repayments and account earnings alone. However, the program's ample available funds sufficiently mitigate the risk of loss at the current rating level, as demonstrated in Fitch's cash flow modeling.

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 (2014 Peer Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=806628

Revenue-Supported Rating Criteria -- Effective June 12, 2012 to June 3, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=792908

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982602

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Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1 512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Kathy Masterson
Senior Director
+1 512-215-3730
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Major Parkhurst
Director
+1 512-215-3724
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Eva Rippeteau
Associate Director
+1 212-908-9105
or
Committee Chairperson
Kathy Masterson
Senior Director
+1 512-215-3730
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com