Fitch Affirms Wisconsin's $764MM Clean Water Rev Bonds at 'AA+'; Outlook Stable

CHICAGO--()--Fitch Ratings affirms its 'AA+' rating on the following outstanding bonds issued by the state of Wisconsin (the state):

--$764 million clean water revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged loan repayments, amounts in the reserve and subsidy funds, and other pledged amounts.

KEY RATING DRIVERS

SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the state's Clean Water Fund Program (CWFP) can continue to pay bond debt service even if there were loan defaults in excess of Fitch's stress test without causing bond payment interruptions.

STATE OF WISCONSIN EXPOSURE: Significant portions of CWFP's bond debt service are subsidized by general obligation (GO) bond repayments issued by the state of Wisconsin (GOs rated 'AA' with a Stable Outlook by Fitch) and are required to provide 1.0x coverage. This structural reliance on the state to provide subsidies limits the program's rating to 'AA+'.

STRONG PORTFOLIO QUALITY WITH INTERCEPT: Borrower loan provisions are strong, with most of loan principal secured by general obligation or water/sewer system revenue pledges. Approximately 67% of the CWFP's 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. The state aid intercept reduces the risk of program debt service shortfalls.

HIGH SINGLE-BORROWER CONCENTRATION REMAINS: The pledged pool consists of 187 borrowers, with the top 10 participants representing approximately 73% of the total portfolio. The largest participant, Milwaukee Metropolitan Sewer District (MMSD), represents a significant 31% of the total portfolio. MMSD's high credit rating (GO debt rated 'AAA' with a Stable Outlook) mitigates this concentration risk.

RATING SENSITIVITIES

SIGNIFICANT REDUCTION IN PROGRAM ENHANCEMENT: A measurable decline in pledged resources including quality of invested reserves and loan subsidy from the state could pressure the rating. The Stable Outlook reflects Fitch's view that these events are not likely to occur.

CREDIT PROFILE

The state issues revolving fund revenue bonds under its leveraged portfolio to fund clean water loans for various governmental entities throughout the state. In addition, the state, through the Department of Administration (DOA), operates separate direct and proprietary loan portfolios for loans also made to governmental entities for clean water projects. The direct loan portfolio is funded from federal capitalization grants, required state match amounts, and recycled loan repayments while the proprietary portfolio is funded from state GO bond proceeds as well as recycled payments. Only loan repayments from the leveraged portfolio are pledged to CWF bondholders. Fitch considers a credit strength the DOA's ability to sell or exchange loans between portfolios to avoid delinquencies in the leveraged portfolio.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

The CWFP's scheduled loan repayments are projected to provide minimum debt service coverage of 1.0x, which does not include approximately $105 million in pledged reserves. Overall, Fitch calculates the program's asset strength ratio (PASR) to be 1.2x, which is slightly weaker than Fitch's median for the state revolving fund (SRF) sector of 1.8x. The PASR includes total scheduled loan repayments and all other pledged resources divided by total scheduled bond debt service.

Fitch's cash flow modeling demonstrates that the SRF program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four-year period of the bonds' life. This is in excess of Fitch's 'AAA' liability stress hurdle of 30% produced by the portfolio stress calculator. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, and loan term. Despite the ability of the program to meet Fitch's 'AAA' liability default hurdle, structural reliance on state subsidies currently limits the program rating to an 'AA+'.

The state subsidizes approximately 22% of the CWFP's debt service costs in the form of state GO debt service payments of outstanding bonds purchased for the program. The purchased bonds (and repayments) are held in the subsidy fund by the trustee. This contribution reduces local borrowing costs by allowing a lower yield on the underlying loans than the yield on the bonds. The corpus of the subsidy fund GOs currently totals approximately about $161 million, or about 21% of outstanding bonds, and is available to cure debt service deficiencies if reserve funds are insufficient.

The program's loan credit reserve fund is sized based on the estimated credit quality of the loan portfolio and is available to cure debt service deficiencies. The state must cure reserve fund shortfalls before additional loan disbursements or bond issuances. In addition, defaulting borrowers must replenish any reserve draws. As of Jan. 28, 2015, the loan credit reserve fund totaled approximately $105.6 million (14% of outstanding bonds), which is slightly greater than the current minimum requirement of $102.3 million.

The reserves are invested in the state's investment pool, forward-delivery agreements providing for the delivery of U.S. treasury securities, a collateralized repurchase agreement and Wisconsin GO bonds. Pursuant to the CWFP documents, the reserves must be invested with institutions or instruments that are rated at least as high as the rating category on the clean water revenue bonds at the time the funds were initially invested.

STATE AID INTERCEPT PROVISION CONTRIBUTES TO STRONG POOL QUALITY

Fitch estimates that at least 67% of the pool's loans are to investment-grade borrowers, including borrowers rated off 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 uses an assumed 'AA-' rating for borrowers meeting Fitch's state aid intercept criteria in determining the composite portfolio stress hurdle.

The program's loan security is solid with approximately 64% of loan principal backed by GO pledges and remaining loans backed by water/sewer system revenue 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.

LOAN POOL EXHIBITS MODERATE-TO-HIGH CONCENTRATION

The combined pledged loan pool is composed of approximately 187 loans, with the top 10 obligors representing approximately 73% of the aggregate loan pool. MMSD, the largest borrower, represents about 31% of the total pledged portfolio. Fitch views overall pool concentration as moderate to high. Each of the remaining pool participants represents no more than approximately 4% of the total pool.

The state also presents a degree of concentration risk to the program structure because of its reliance on state subsidies to cover debt service in the form of state GO bond repayments. As of Jan. 28, 2015, expected state subsidy amounts totaled approximately 22% of total debt.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (Oct. 22, 2014) .

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=792908

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979478

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Contacts

Fitch Ratings
Primary Analyst
Adrienne M. Booker
Senior Director
+1-312-368-5471
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Adrienne M. Booker
Senior Director
+1-312-368-5471
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Major Parkhurst
Director
+1-512-215-3724
or
Committee Chairperson
Jessalynn Moro
Managing Director
+1-212-908-0608
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com