AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating on the following bonds issued by the Texas Water Development Board (TWDB):
--Approximately $725 million state revolving fund (SRF) revenue bonds.
The Rating Outlook is Stable.
Bonds are secured primarily by pledged loan repayments and available amounts held in certain pledged accounts.
KEY RATING DRIVERS
SOUND 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 rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
HIGH-QUALITY BORROWER POOL: Approximately 94% of the TWDB's SRF loan portfolio is calculated to be investment grade, resulting in strong overall pool credit quality. Loan security is also strong, with all pool loans backed by utility or general obligation pledges.
SIGNIFICANT BORROWER CONCENTRATION: The largest single and top 10 borrowers represent a very high 27% and 75% of the pool total, respectively. The above-average credit quality of these borrowers helps to mitigate some of the concentration risk.
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 default hurdle would put downward pressure on TWDB's rating. The Stable Rating Outlook reflects Fitch's view that these events are not expected to occur.
Through its clean water SRF (CWSRF) program, the TWDB provides at or below-market-rate loans to governmental entities within the state for eligible wastewater treatment and pollution control projects. The TWDB also manages the state's drinking water SRF (DWSRF), although the DWSRF does not currently utilize revenue-bond financing.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Cash flow modeling demonstrates that the CWSRF program can continue to pay bond debt service even with hypothetical loan defaults of 100% in the first, middle and last four years of the program's 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 rating stress hurdle of 21% as produced by the PSC. The rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
As an additional measure of financial strength, Fitch calculates each SRF program's asset strength ratio (PASR). The PASR calculation for the TWDB's CWSRF includes total scheduled pledged loan repayments plus pledged account funds divided by total scheduled bond debt service. The CWSRF's PASR is 3.2x, which is considered very strong in comparison to Fitch's 2014 'AAA'-median PASR of 1.8x. The PASR has improved slightly since Fitch's last review of the CWSRF in 2013.
SUBSTANTIAL LOSS PROTECTION
TWDB's CWSRF program benefits from loss protection provided both by pledged loan revenues in excess of bond debt service due (overcollateralization) and by amounts held in certain accounts pledged to bondholders. On an annual basis, loan repayments alone overcollateralize bond debt service by a minimum of 1.5x, which is similar to Fitch's median level of 1.4x. Amounts held in pledged accounts total $278 million, or about 38% of bonds outstanding. Combined, these forms of loss protection contribute to the strong default tolerance of the financial structure.
HIGH QUALITY YET CONCENTRATED BORROWER POOL
TWDB's CWSRF loan pool exhibits strong credit quality, with approximately 94% of the loans held by investment-grade borrowers, including 79% rated at or above 'AA-'. The program's loan security is also strong, with 86% of aggregate loan principal backed by net system revenue pledges and the remaining 14% backed by either general obligation or a combination of revenue/general obligation pledges.
At nearly 190 borrowers, the loan pool is somewhat larger than average but is still highly concentrated. However, the high ratings of many of the larger borrowers mitigate some of the concentration risk. For example, senior lien water/wastewater bonds issued by Trinity River Authority (27% of the total pool), the city of Houston (22% of the total), and the San Antonio Water system (10% of the total) are rated 'AA' or higher by Fitch. Each remaining borrower in the pool's top 10 ranges from 1.5% - 4.6% of the total pool and all carry investment-grade or better ratings. Concentrated portfolios are subject to higher stresses in Fitch's PSC.
SOUND PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING
The TWDB establishes the financial terms of the loans. In doing so, the board determines that an eligible borrower has the financial capability to ensure payment of debt service. TWDB's staff is also responsible for monitoring borrowers' compliance with covenants and their overall financial profiles. If a borrower's payment is three days late, the collection process begins with calls to the borrower and negotiations continue until payment is received. To date, no payments have been more than 30 days late and no defaults have occurred.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 22
Dodd-Frank Rating Information Disclosure Form