Fitch Affirms Florida Water Pollution Control Fin Corp's Clean Water SRFs at 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has affirmed its 'AAA' rating on the following outstanding Florida Water Pollution Control Financing Corporation (the corporation) state revolving fund (SRF) bonds related to the corporation's clean water SRF (CWSRF) program:

--$365.1 million water pollution control revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by loan repayments, interest earnings and common reserve funds.

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).

SOUND LOAN SECURITY: The program's underlying borrower credit quality is sound, with approximately 59% of all outstanding principal exhibiting investment-grade characteristics. Fitch does not express an opinion as to the credit quality of the remaining underlying loans but the corporation requires borrowers to maintain rates to cover repayment by 1.15x. In addition, the vast majority of all loan principal is secured by water and/or wastewater pledges.

MODERATE SINGLE BORROWER CONCENTRATION: The loan pool of 76 participants is moderately diverse. Miami-Dade County (water and sewer revenue bonds rated 'A+') is the program's largest borrower accounting for 13% of the total portfolio's loan par.

STRONG PROGRAM MANAGEMENT: Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for borrowers. To date, there have been no pledged loan defaults in the corporation's SRF programs.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the Florida Water Pollution Control Financing Corporation's clean water state revolving fund program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. Fitch views these events as unlikely to occur.

CREDIT PROFILE

The corporation is a conduit bond issuer for the Florida Department of Environmental Protection (FDEP), who is responsible for administering the CWSRF program. Bonds are issued to provide subsidized financing to governmental entities throughout Florida.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

The CWSRF program's hybrid structure uses bond proceeds and recycled loan repayments to make sewer system related loans to local governmental entities throughout the state. Minimum annual debt service coverage provided by loan repayments is a strong 1.7x. In addition, there are common reserves of approximately $48.3 million that equal 13% of the outstanding bonds.

Fitch calculates the program's asset strength ratio (PASR), to be a strong 2x, higher than Fitch's 'AAA' median of 1.9x. The PASR includes total scheduled loan repayments plus any reserve balances divided by total scheduled bond debt service. Fitch expects program leverage will remain consistent with the current rating due to moderate borrower demand, continued federal capitalization grant funding and management's ability to balance program leveraging with pledged resources.

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. This is in excess of Fitch's 'AAA' liability stress hurdle of 33.3% as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Since the last review, the stress hurdle was reduced due to a decrease in the weighted average life of the underlying loans and generally improved credit quality of the portfolio.

Fitch's criteria also apply a 90% recovery to the cash flow model when determining default tolerance.

SOUND LOAN SECURITY DESPITE BORROWER CONCENTRATION

The loan portfolio consists of 76 borrowers representing a mix of local water and wastewater utility systems. At least 59% of all pledged loans are estimated to be investment-grade quality. The loan portfolio has moderate single borrower concentration, with the largest borrower (Miami-Dade County, water and sewer revenue bonds rated 'A+') comprising about 13% of pledged loan principal.

There is also concentration among the pool's 10 largest borrowers, which account for approximately 52%. However, concentration concerns are somewhat mitigated by the strong credit quality of many of these borrowers. In addition, underlying loan provisions are strong with approximately 92% of the pool's loan principal secured by water and/or wastewater revenue pledges.

SOLID INVESTMENT PRACTICES

Program reserves are required to be maintained at the least of 10% of the combined original bond principal amount, maximum annual debt service (MADS), or 125% of the average annual debt service on the bonds. The reserves are currently invested in U.S. Treasury and Agency securities.

FAVORABLE PROGRAM MANAGEMENT AND UNDERWRITING

The corporation was established during the 2000 state legislative session and is a nonprofit public benefit organization. The board of directors consists of the state's chief financial officer, the governor's budget director, and the secretary of FDEP. Pursuant to a service contract with the corporation, FDEP approves and prioritizes eligible projects and funding amounts. FDEP also performs loan application reviews and monitoring.

Borrowers are required to maintain rates sufficient to provide pledged revenue above 1.15x loan repayments and the corporation's other outstanding obligations. Other typical underwriting provisions include the requirement that no free or competing service exists within the prospective borrower's customer area and that the borrower covenants to budget other available funds, if necessary.

FDEP's monitoring process includes annual audits and borrower certification of coverage requirements and that pledged accounts contain required funds. In addition, FDEP receives reports notifying them of any significant changes. To date, there have been no loan defaults or missed payments from borrowers within the pledged portfolio.

Additional information is available at 'www.fitchratings.com'.

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. 29 Oct 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=872307

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005964

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005964

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Julie Garcia Seebach, +1-512-215-3743
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Tim Morilla, +1-512-813-5702
Associate Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Julie Garcia Seebach, +1-512-215-3743
Director
Fitch Ratings, Inc.
111 Congress Avenue, Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Tim Morilla, +1-512-813-5702
Associate Director
or
Committee Chairperson:
Dennis Pidherny, +1-212-908-0738
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com