AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA' rating on the following bonds issued by the Virginia Resources Authority (VRA):
--Approximately $42.5 million in outstanding airports revolving fund revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by loan repayments, investment earnings, and debt service reserve funds (DSRFs).
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). However, due to the high single-borrower concentration, the limited number of borrowers, and reduced recovery prospects, the rating is limited to 'AA'.
SIGNIFICANT POOL CONCENTRATION: Pool concentration is significant, with the Capital Region Airport Commission (CRAC; airport revenue bonds rated 'A-' with Stable Outlook by Fitch) accounting for 60% of the pool. The risk associated with CRAC is somewhat mitigated by the moral obligation (MO) pledge of the commonwealth of Virginia (the commonwealth), as specified below.
REDUCED RECOVERY PROSPECTS: The majority of the loans in the fund are secured by airport revenue pledges. If any defaults were to occur, recoveries are expected to be lower than those for traditional federally regulated state revolving fund programs, which typically consist of loans secured by tax-backed or utility system pledges.
PROFICIENT PROGRAM MANAGEMENT: VRA maintains solid loan underwriting guidelines and loan monitoring procedures, reflected by the fact that the program has not suffered a default to date.
REDUCTION OF STRESS CUSHION: Significant reduction in aggregate borrower credit quality, increased pool or single-borrower concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AA' liability default hurdle could put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur over the next review cycle.
The commonwealth of Virginia (the commonwealth) established its airports revolving fund program as a vehicle for local governments to access capital at below-market rates to fund infrastructure needs for aviation facilities. The revolving fund is meant to spur economic development through transportation improvements, specifically geared toward primary use and general aviation airports within the commonwealth.
FINANCIAL STRUCTURE EXHIBITS SOLID DEFAULT TOLERANCE
Fitch calculates the pool program's asset strength ratio (PASR), which includes total scheduled loan repayments, account earnings and reserves divided by total scheduled bond debt service, to be adequate at 1.3x. The PASR is somewhat weaker than the 1.6x median level for comparable municipal pools rated by Fitch. On an annual basis, debt service coverage is projected to fluctuate between a low of 1.2x and high of 2.1x.
Due to the program's available enhancement provided by reserves, account earnings, and surplus loan repayments, as described herein, cash flow modeling demonstrates that the 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 outstanding bonds' life. This is in excess of Fitch's 'AAA' liability stress hurdle of 27%, 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. Per Fitch criteria, a 90% recovery is applied when determining default tolerance. Fitch notes that it ran additional recovery sensitivities in its modeling analysis due to the potential lower recover prospects as discussed herein.
Although the program passes Fitch's 'AAA' liability stress hurdle, because of the program's high concentration and reduced recovery prospects, the rating has been limited to 'AA'.
LOSS PROTECTION PROVIDED PRIMARILY BY RESERVES
Bondholders are protected from losses primarily by a DSRF established for each borrower. Reserves are required to be maintained at the greater of 25%-40% of outstanding loans or maximum annual debt service. As of September 2014, the combined balance in the DSRFs currently totals about $14.2 million or 33% of outstanding bonds. Additional loss protection is also provided by loans made directly from program equity and pledged to bondholders ('direct' loans). Direct loan payments currently amount to approximately 3% of aggregate remaining bond debt service.
As bonds amortize, reserves in excess of the required amount for each participant are released to a general reserve fund (GRF), which may be used to finance any potential deficiency caused by another borrower's loan default. The GRF is maintained at the difference between the actual balance in each DSRF and the current aggregate DSRF requirements. Any excess is recycled back into the airport revolving fund and may be used for additional (direct) loans.
POOL EXHIBITS SIGNIFICANT BORROWER CONCENTRATION
The loan portfolio is composed of only 20 participants; approximately 91% of the portfolio consists of loans secured by general airport revenues with the remaining 9% backed by general obligation or other pledge types. The largest borrower, CRAC, which operates Richmond International Airport, accounts for about 60% of total outstanding loan principal. CRAC's obligations benefit from a MO commitment from the commonwealth to make up any deficiencies in the capital reserve account portion of CRAC's DSRF.
The Charlottesville-Albemarle Airport Authority is the pool's second largest borrower at just under 9%, while the pool's next eight largest borrowers range in size from 1.9% to 5.3% of total pool principal. In aggregate, the top 10 borrowers represent 91% of the total pool, which Fitch considers high in comparison to similarly structured programs. The pool's high concentration is largely a result of the limited number of potential airport borrowers within the commonwealth.
Overall, due mostly to a somewhat shorter weighted-average life, credit quality is stronger than that of similar municipal pools rated by Fitch, as reflected by an 'AAA' PSC liability stress hurdle of 27% versus Fitch's median of 33% (lower liability stresses correlate to stronger credit quality).
PROFICIENT PROGRAM MANAGEMENT AND UNDERWRITING
VRA administers and manages the airport revolving fund. Eligibility for projects must first be determined by the Virginia Department of Aviation and then be placed on a priority list before being brought to the VRA for credit analysis and loan approval. The VRA also conducts annual reviews of pool participants to ensure compliance with all loan agreements. Loan monitoring efforts also include monitoring payment receipts and identifying borrowers with potential cash flow problems. To date, the program has not experienced a default.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (April 28, 2014);
--'State Revolving Fund and Leveraged Municipal Loan Pool 2013 Peer Review' (Oct. 31, 2013);
--'Revenue-Supported Rating Criteria' (June 16, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool (2013 Peer Review)
State Revolving Fund and Leveraged Municipal Loan Pool Criteria