CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following bonds issued by the Colorado Water Resources and Power Development Authority (CWRPDA):
--$14.9 million clean water revenue bonds, 2015 series A.
The bonds are expected to sell via competitive bid on May 20, 2015. Bond proceeds will be used to help fund two local government loans (the cities of Louisville and LaJunta) for eligible state revolving fund (SRF) clean water projects and to pay cost of issuance.
In addition, Fitch affirms its 'AAA' rating on the following CWRPDA outstanding debt:
--$138.6 million senior lien drinking water revenue bonds;
--$14.5 million subordinate lien drinking water revenue bonds;
--$262.8 million senior lien clean water revenue bonds;
--$63.1 million wastewater revolving fund refunding revenue bonds.
The Rating Outlook is Stable.
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).
CROSS-COLLATERALIZATION ENHANCES PROGRAM: The drinking water SRF (DWSRF) and clean water SRF (CWSRF) are cross-collateralized. These allow shortfalls in one fund to be covered by surpluses in the other. This feature in effect creates one program for modeling purposes.
LARGELY UNRATED POOL: Approximately 64% of the loan portfolio consists of unrated entities. The largest borrower, the city of Englewood (sewer system), represents a manageable 4.2% of the combined pool. The largest 10 borrowers represent approximately 36% of the total pool.
STRONG LOAN SECURITY: Underlying loan provisions for the pool are strong. Virtually all loan principal is secured by water and/or wastewater revenue pledges or general obligation pledges.
SOUND RESERVE INVESTMENTS: CWRPDA maintains sound investment practices, as the program's reserve investments are held in collateralized repurchase agreements or U.S. treasury and agency securities.
SOLID PROGRAM MANAGEMENT: Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for borrowers and reserve requirements. Over the past 17 years, there have been no loan defaults in the CWRPDA's SRF programs.
RATING SENSITIVITIES
REDUCTION IN MODELED STRESS CUSHION: 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
CWRPDA issues bonds to provide subsidized financing to governmental entities throughout Colorado for its clean water and drinking water SRFs. The bonds are issued pursuant to separate series bond resolutions and master wastewater and drinking water surplus matching account trust agreements. Over the last two years, CWRPDA has continued to transition to a hybrid (cash flow/reserve) program model, whereby federal capitalization grants and recycled loan repayments are used along with bond proceeds to fund loans. Over the long term, the new structure will result in overcollateralization of bonds with loan repayments instead of the overfunding of reserves held in matching accounts, which is characteristic under the traditional reserve fund structure.
FINANCIAL STRUCTURE EXHIBITS STRONG 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 strong at approximately 1.8x - consistent with Fitch's 'AAA' median. Despite CWRPDA's migration to a hybrid program structure, Fitch expects that program leverage will remain consistent with the current rating due to continued federal capitalization grant funding and management's ability to balance program leveraging with pledged resources.
Because of the strong enhancement, Fitch's 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 40.1% 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.
Under CWRPDA's hybrid program structure, loans are funded through bond proceeds, federal capitalization grants, and program equity. The interest on equity-funded loans is used to provide the 30% interest subsidy for borrowers. In the event that loan repayments are insufficient to meet debt service, the reserves held in separate series matching accounts will be used to cover the deficiency. Historically, reserve requirements vary by series, but in aggregate totalled $185 million (approximately 47% of senior bonds outstanding) prior to the current issuance.
As the loans/bonds amortize, reserves are released from each series' dedicated reserve account to surplus accounts. For prior CWRPDA bond series, the remaining reserves will continue to be maintained at the stated reserve requirements (typically equal to 30%-35% of bond principal outstanding). Excess reserves are released and recycled to make or secure new loans. Under the hybrid structure, the series 2015A (clean water) reserve requirement will equal maximum annual debt service and will be funded from program equity. Bond debt service payments are due semiannually on March 1 and Sept. 1, beginning on Sept. 1, 2015. Excess moneys are released (de-allocated) to non-pledged equity after the Sept. 1 payment.
STRUCTURE ENHANCED BY CROSS-COLLATERALIZATION
Surplus accounts provide additional security by establishing the pool mechanism. This allows for the separate CWSRF and DWSRF to supply the other with available funds to cure loan defaults and meet timely bond debt service payments. After meeting deficiencies on senior lien bonds, surplus funds may flow to subordinated bonds and bonds of the other SRF before becoming available to make or secure new loans.
SOUND LOAN SECURITY AND POOL CHARACTERISTICS
The combined CWSRF and DWSRF loan pool is currently composed of over 200 obligors. Fitch estimates that approximately 64% of the obligors are small, nonrated entities, which Fitch conservatively assumes to be of speculative-grade credit quality in its analysis. In lieu of this and in accordance with its criteria, Fitch has assigned internal credit opinions to certain credits in its practice of targeting to have ratings on a minimum of 33% of the loan pool.
There is a moderate degree of portfolio concentration, with the top 10 obligors accounting for 36% of the loan pool. Single obligor concentration is low to moderate, with the city of Englewood representing the largest borrower at 4.2% of the total pledged loan pool. Underlying loan provisions are strong with over 90% of the pool's loan principal secured by water and/or wastewater revenue pledges or general obligation pledges. Overall pool strength is reflected by the fact that there has not been a default in the program in the past 17 years.
FAVORABLE INVESTMENT PRACTICES
A portion of the program's reserve funds are currently invested in repurchase agreements with eligible counterparties (subject to minimum rating requirements). Cases in which minimum rating requirements are not met require such counterparties to post additional collateral in excess of 100% (requirements vary based on each series but currently average 109%). Other reserve investments include U.S. Treasury securities in the form of State and Local Government Series, the state's investment pool, and the Federal Home Loan Bank. As the repurchase agreements mature, the program purchases other eligible securities.
PROGRAM MANAGEMENT AND UNDERWRITING REMAIN STRONG
Established in 1981, CWRPDA has a strong record in managing Colorado's CWSRF, DWSRF, and small water-resources project programs. CWRPDA, Colorado Department of Public Health and Environment (CDPHE), and Colorado Department of Local Affairs (DOLA) share responsibility for administering the state's SRF programs through an interagency arrangement typical for SRFs nationwide. A nine-member board of directors, consisting of gubernatorial appointees subject to state senate confirmation, governs the CWRPDA.
CWRPDA provides loans for approved projects, purchases and refinances debt, provides for bond debt service payments, and covers SRF administrative costs. CDPHE establishes eligibility lists for SRF loans and examines technical aspects of particular projects, while DOLA executes detailed analyses of local financial needs and credit quality. An interagency committee reviews loan applications before execution.
CWRPDA maintains a formal underwriting process, which involves loan applications being submitted by borrowers and internal credit analysis conducted by CWRPDA staff. The analysis includes a review of the borrowers' general, economic, and financial information, utility system data, sources of debt repayment, and detailed project information. Borrowers are generally required to maintain a 1.1x rate covenant and reserves equal to three months of operation and maintenance expenses.
CWRPDA's financial committee makes a recommendation of funding to the full board. The full board votes on the approval of the loan funding recommendation. CWRPDA annually reviews each borrower's system rate covenants and financial information, and a group of smaller borrowers are tracked more frequently.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria'(Oct. 22, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research:
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
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=984526
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