CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to bonds issued by the Virginia Resources Authority (the VRA, authority):
--$5.7 million clean water state match bonds, series 2014A, 'F1+';
--$162.4 million clean water state revolving fund revenue bonds, series 2014B, 'AAA'.
The bonds are expected to price via competitive sale during the week of Sept. 15. Series 2014A bond proceeds will be used to fund the program's 20% state match requirement for federal fiscal 2014 and pay related costs of issuance. Series 2014B proceeds will also be used to refund certain outstanding bonds for debt service savings.
In addition, Fitch affirms its 'AAA' rating on the following VRA outstanding debt:
--$836.3 million in outstanding revenue and refunding debt
The series 2014A state match bonds are secured by interest amounts payable from loans issued directly from the revolving program and a dedicated reserve funded at 100% of bond principal and interest. The series 2014B and outstanding bonds issued under the indenture are secured primarily by pledged loan repayments and reserve funds, which are derived from federal grants and state match requirements.
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that VRA's clean water state revolving fund (CWSRF) program can continue to pay bond debt service even if there were portfolio loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's portfolio stress calculator (PSC).
SOLID RESERVE INVESTMENTS: VRA maintains sound investment practices as the program's reserve investments are held in U.S. Treasury securities and guaranteed investment contracts (GICs), which are primarily collateralized.
STATE MATCH COVERAGE: The series 2014A bonds benefit from sound coverage provided by a senior lien on interest payments from direct loans and a dedicated, liquid reserve fully funded at close.
HIGHLY RATED LOAN POOL: Underlying borrower credit quality is relatively strong in comparison to similar programs, with at least 44% of the pool exhibiting 'AA' or higher credit characteristics. The strong credit quality is due primarily to the protection afforded by a state-aid intercept mechanism.
SOLID PROGRAM MANAGEMENT AND UNDERWRITING: VRA maintains formal underwriting and loan monitoring guidelines. The program has never experienced a local government borrower default to date.
REDUCTION OF QUALITY AND STRUCTURAL ENHANCEMENT: Fitch believes that the program has several layers of protection that would make a rating revision unlikely.
VRA's CWSRF program issues bonds to provide below-market-rate loans to local governments throughout the Commonwealth that are predominately for wastewater quality improvement projects. The program is made up of 125 borrowers, with the largest borrower representing approximately 15% of the total loan balance.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
VRA's scheduled borrower repayments, derived from SRF bond proceeds and direct loans derived from the program's recycled funds plus interest income, are projected to provide strong annual debt service coverage over the next several years. Projected minimum coverage including annual releases from the reserve fund totals approximately 1.5x. Reserves that secure the bonds are maintained at a specified minimum balance as required by each outstanding series of bonds. The combined program reserve balance stands at $196.7 million, or approximately 23.5% of outstanding par.
The authority's pledged resources enable the program to continue to pay bond debt service even with hypothetical loan defaults of all participants (the default tolerance rate) over any four-year period. This is in excess of Fitch's 'AAA' liability default hurdle of 53.9% as produced by the PSC, which is derived based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Borrower loan repayments are made one month prior to bond payments, which allow time for the authority to intervene before each bond payment date if there is a problem.
SOUND RESERVE INVESTMENT PRACTICES ENHANCE PROGRAM
Program reserve investment practices are generally sufficient for the rating category. Assets totaling $142 million (or 72% of total reserves) are invested primarily in U.S. Treasury securities in the form of State and Local Government Series (SLGS). In addition, reserves totaling approximately $3 million (2%) are invested in cash and cash equivalents. The remaining reserves ($52 million or 26%) are held in two GICs, with Assured Guaranty as guarantor (which Fitch does not rate). One of the two GICs (totaling $40 million) is collateralized at 105%, which qualifies the investment to be included in this analysis under Fitch's counterparty criteria. However, the other GIC with Assured ($11 million or 5% of reserves) is not collateralized and therefore does not meet Fitch's counterparty criteria. Fitch therefore fully discounts the non-collateralized GIC in its stress analysis, which does not materially affect the program's cash flow performance results.
SOLID STATE MATCH SECURITY
At closing, VRA will fund a debt service reserve fund equal to $5.8 million (full principal and interest), which will secure the series 2014A state match bonds along with state match reserve interest earnings and interest repayments from the direct loans. While the federally required state match could be funded with direct loan repayments or program equity outright, the federal Environmental Protection Agency prohibits the use of VRA's direct loan moneys derived from federal capitalization grants toward meeting the state match requirement. However, the issuance of bonds to fund the state match is allowed, but can only be repaid from interest on loan repayments and earnings.
STATE AID INTERCEPT PROVISION CONTRIBUTES TO STRONG POOL QUALITY
Credit quality of the program participants is high in comparison to those in similar pools. Fitch estimates that at least 44% of the outstanding loans exhibit 'AA' or higher credit characteristics. This includes consideration by Fitch of loans that are backed by a state-aid intercept program, where historical state aid covers the borrowers' debt service by over 175%.
The program is made up of 125 borrowers, with the largest borrower, Arlington County (whose utility revenue bonds Fitch does not rate but whose GO bonds are rated 'AAA'), representing approximately 15% of the total loan balance. Underlying loan security is strong, with pool loans secured primarily by utility revenue pledges, general obligation pledges, or a double-barreled pledge. The pool is concentrated with the 10 largest borrowers accounting for approximately 65% of loan principal. Fitch views the concentration risk as somewhat mitigated given the overall credit quality of the pool participants and the high default tolerance levels exhibited by the financial structure.
PROGRAM MANAGEMENT AND UNDERWRITING ARE SOUND
The VRA maintains stringent loan underwriting and monitoring practices. Each loan goes through multiple levels of review before final approval, and the VRA collects and reviews annual financial information on all borrowers. To date, the program has experienced no local government payment defaults and there are currently no delinquencies.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 3, 2013);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (April 28, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'Rating Guidelines for State Credit Enhancement Programs' (April 18, 2013).
Applicable Criteria and Related Research:
Rating Guidelines for State Credit Enhancement Programs
Counterparty Criteria for Structured Finance and Covered Bonds
State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)
Revenue-Supported Rating Criteria