AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the state of Wisconsin (the state):
--Approximately $42.9 million environmental improvement fund revenue obligations, series 2015A at 'AAA'.
The bonds are expected to sell via negotiation the week of Nov. 9, 2015. Bond proceeds will be used to make new loans to municipalities for construction or improvement of their wastewater treatment facilities, for current state matching requirements, and to pay costs of issuance.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by all pledged loan repayments, moneys received by the state upon a loan default, investment earnings and amounts on deposit in the loan fund, revenue fund, and redemption fund, and any other revenues pledged to secure the bonds by a supplemental resolution.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the state's Clean Water Fund Program (CWFP) direct loan portfolio can continue to pay bond debt service even with hypothetical loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle without causing bond payment interruptions.
STRONG PORTFOLIO QUALITY WITH INTERCEPT: Borrower loan provisions are strong, with most of loan principal secured by general obligation (GO) or sewer system revenue pledges. Approximately 90% of the direct loan portfolio is estimated to be investment grade by Fitch. This is due in part to the program's ability to intercept state aid payments otherwise due to delinquent borrowers.
HIGH SINGLE-BORROWER CONCENTRATION: The pledged pool consists of 199 borrowers, with the top 10 participants representing approximately 69% of the total portfolio. The largest participant, Milwaukee Metropolitan Sewer District (MMSD), represents a significant 36% of the total portfolio. However, MMSD's high credit rating (GO debt rated 'AAA' with a Stable Outlook) mitigates some of the overall concentration risk.
STRONG PROGRAM MANAGEMENT: The Department of Administration (DOA) management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that no outstanding loan made from the pledged loan portfolio has ever experienced a payment delay.
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 not likely to occur.
CREDIT PROFILE
The series 2015A bonds are the first series of bonds to be issued under the 2015 State of Wisconsin Building Commission Resolution 10 (program resolution) adopted by the Building Commission on Oct. 7, 2015. The program resolution establishes a new framework for the issuance of bonds to provide financing for the state's CWFP.
The direct loan portfolio is one of three CWFP loan portfolios administered by the state. Direct loans were previously funded with capitalization grants and the required state match, and repayments on those loans. Future direct loans will include pledged loans financed with the series 2015 bond proceeds, and all existing direct loans (for a total of about $1.1 billion in principal outstanding) in the portfolio are expected to be pledged to the repayment of the bonds. Proceeds will not fund loans in the other two CWFP loan portfolios (leveraged or proprietary) and repayments of the loans in those portfolios will not be pledged to the repayment of the bonds. Fitch rates CWFP revenue bonds issued under the prior general resolution 'AA+', Outlook Stable.
SOUND FINANCIAL STRUCTURE
Fitch measures financial strength of state revolving funds (SRFs) by calculating each program's asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments and reserves divided by total scheduled bond debt service. The program's PASR is 2.0x, which is above average in comparison to Fitch's 2014 sector median PASR of 1.8x. At approximately 11.5x for the current debt issuance, or 1.7x including debt service for potential debt issuances through 2020 totaling roughly $575 million, minimum annual debt service coverage (DSC) is also well above-average versus the overall sector median of 1.3x.
Cash flow modeling demonstrates that the program can continue to pay bond debt service with hypothetical loan defaults of 100% over the first four years, and 100% in the middle and last four years of the program's life (as per Fitch criteria, a 90% recovery is also applied in our cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability rating stress hurdle of 17% as produced by the portfolio stress calculator (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.
LOAN POOL EXHIBITS HIGH CONCENTRATION
The combined pledged loan pool is composed of approximately 199 borrowers, with the top 10 representing approximately 69% of the aggregate loan pool. MMSD, the program's largest borrower, represents about 36% of the total pledged portfolio. These numbers compare unfavorably to Fitch's 'AAA' medians, which show top 10 concentration at 53% and single-borrower concentration at 19% in 2014. Each of the remaining pool participants represents no more than approximately 9% of the total pool.
Because of the high top 10 and single-borrower concentration, Fitch views overall pool concentration as high. However, the 'AAA' rating of the pool's largest participant mitigates some of the concentration risk.
STATE AID INTERCEPT PROVISION CONTRIBUTES TO STRONG POOL QUALITY
Fitch estimates that at least 90% of the pool's loans are to investment-grade borrowers, including borrowers based on the state's GO rating by virtue of state aid credit enhancement. In the event a borrower becomes delinquent, the DOA must intercept that entity's state aid payments - including state-shared revenues paid to cities, villages, and towns - and transportation aid, where available. The CWFP currently asserts priority over other agencies for intercepted funds, which is viewed by Fitch as a structural positive for bondholders. Fitch conservatively uses an assumed 'AA-' rating for borrowers meeting our state aid intercept criteria in determining the composite portfolio stress hurdle.
The program's loan security is solid with approximately 50% of loan principal backed by GO pledges, 37% by sewer system revenue pledges, and most of the remaining backed by a combination of GO/utility pledges. A minimum coverage ratio of 1.1x is required for new revenue-backed loans. Final loan maturity generally does not exceed 20 years, and level debt service schedules are typical, with principal amortization beginning one year after project completion.
Unpaid system fees must be added by municipalities as a special charge to the property tax bill of the delinquent user. Under the individual loan agreements, the DOA may appoint receivers to take over troubled projects. An internal database is used to track compliance. Additionally, each borrower's audited financials are monitored on an annual basis. To date, there has not been a permanent loan default.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 22 Oct 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=792908
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992786
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992786
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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