Fitch Rates $105MM Pennsylvania Industrial Dev Auth Rev Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the Pennsylvania Industrial Development Authority's (PIDA) economic development revenue refunding bonds series 2015 (federally taxable).

In addition, Fitch has affirmed the 'A' rating on PIDA's outstanding revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority, payable solely from revenues of PIDA consisting primarily of loan repayments and investment income.

KEY RATING DRIVERS

AUTHORITY IS KEY ARM OF THE COMMONWEALTH: The authority is a key economic development arm of the commonwealth. There is a history of resource transfers between the authority and the commonwealth, with additional transfers proposed in the fiscal 2016 executive budget. PIDA's board membership includes executive and legislative appointments, thereby building broad support for the organization.

SOLID COVERAGE AND LEGAL PROVISIONS: Debt service coverage has been solid and ahead of forecasts. PIDA's leverage is limited by the required satisfaction of 1.5x coverage tests for both additional bonds and loans and an enhanced 3x coverage test governing transfers to the commonwealth.

LOAN DEFAULT RATES REMAIN LOW: Authority loans have typically experienced low default rates. The loan pool is diverse and borrowers are geographically dispersed throughout the commonwealth of Pennsylvania.

RATING SENSITIVITIES

LOAN ACTIVITY AND PERFORMANCE DECLINES: Significant deterioration in loan performance, or a sustained decline in new loan activity, could weaken debt service coverage and exert negative rating pressure.

SIGNIFICANT CHANGE IN COMMONWEALTH ROLE: A substantial weakening of the commonwealth's support of PIDA's role in economic development initiatives could trigger rating concern. Fitch does not anticipate such a change, particularly given the new governor's proposal to recapitalize certain PIDA loan programs (outside of this indenture).

CREDIT PROFILE

The 'A' rating reflects the authority's well-established record as one of the key economic development arms of the commonwealth with close state oversight. Additional support is derived from the 1.50x tests for both the issuance of additional bonds or additional loans, the record of sound debt service coverage, and broad geographic distribution and low default rates for PIDA's loan programs. The series 2015 bonds will refund the outstanding series 2008 and a portion of the 2012 bonds and allow PIDA to make several indenture amendments. In Fitch's view, the amendments have no material effect on the rating.

SIGNIFICANT AVAILABLE RESOURCES

The bonds are limited obligations of the authority, payable from its revenues, including loan repayments and investment income. PIDA's substantial unrestricted cash and investments ($165 million at June 30, 2014) are held by the trustee and available to bondholders. These resources are subject to transfers out to the commonwealth's general fund, or for use as additional loans, both subject to coverage tests specified in the indenture. One proposed indenture amendment enhances the transfer test to 3x projected annual coverage from net revenues, from 2x. The indenture continues to mandate a minimum $35 million balance following any transfers.

The authority's additional loans test provides that no loans shall be made if net revenues would decline below 1.50x current debt service requirements. One of the proposed indenture amendments modifies this test to allow the authority to include an estimated amortization of unrestricted cash balances in net revenues. This proposal does not affect the additional bonds test which does continues to not incorporate any cash balances in its calculation of net revenues.

Additional bonds also require 1.50x projected annual coverage from net revenues. Authority net revenues as calculated by Fitch (cashflow operating revenues net operating expenses) for fiscal 2014 covered outstanding debt service for the same year by 2.21x, ahead of projected 1.75x coverage at the time of the authority's last bond sale in 2012. Fiscal 2014 revenues covered pro-forma maximum annual debt service (MADS) of $43.1 million (occurring in fiscal 2022) by a solid 1.7x. This excludes the anticipated use of the series 2008 debt service reserve fund (approximately $19.4 million) in that year, the final year of maturity for the series 2012 bonds. It also excludes any use of the trustee-held unrestricted cash and investments noted earlier ($165 million at fiscal year-end 2014).

KEY ECONOMIC DEVELOPMENT ARM OF COMMONWEALTH

The authority was created in 1956 with the ability to make loans throughout all areas of the state to all industrial classifications, at subsidized rates. Act 161 of 2014 consolidates various commonwealth economic development programs within PIDA and enhances the authority's position in Pennsylvania' economic development efforts. The authority is not the sole lender for projects it supports, as other sources of financing must be obtained by projects. One provision of Act 161 removes a requirement that local entities share in certain loan losses, which has the potential of weakening the protections for PIDA and bondholders. Offsetting this, the statute also enhances and standardizes the process for certifying local entities to participate in the program. PIDA also anticipates offering financial incentives and penalties to encourage local entities to bring higher quality borrowers to PIDA for loans.

The portfolio at Dec. 31, 2014 contained 538 loans with an outstanding principal balance of $290 million. The average original loan amount was $989,487 and the weighted average annual interest rate was 3.19%. The number and amount of outstanding loans are down significantly over the past several years, which PIDA attributes to decreased loan writing activity since the start of the last recession and increased competitiveness of private sector lenders. PIDA's board lowered its interest rates to 2.25% last year and, in conjunction with the Act 161 changes, anticipates increased loan activity. Delinquency rates as a percentage of outstanding loan balances, at just over 5% as of Dec. 31, 2014, are in line with recent years.

The authority is closely aligned with the commonwealth and is staffed through Pennsylvania's department of community and economic development (DCED). There have been no fiscal transfers between the commonwealth and PIDA in recent years, though from inception in 1956, the authority has received a total of $616.7 million from the commonwealth, as well as the Sunny Day loan portfolio inherited from the commonwealth in 1996. The governor's fiscal 2016 budget proposes $100 million infusion of state resources for certain PIDA loan programs, outside of the indenture for the bonds. Transfers to the commonwealth from the authority require satisfaction of a 3x debt service coverage test (proposed indenture amendment) and that the authority's retained earnings following such transfer equal at least $35 million.

The authority's board consists of 16 members, including the commonwealth's Secretary of Community and Economic Development, who serves as Chairman, and the Secretaries of Agriculture, Banking, and Labor and Industry. Additionally, eight members are appointees of the governor with the advice and consent of the commonwealth's Senate, who serve seven year terms. Further, four members are respective appointees of the Majority and Minority Leaders of the House & Senate, and each serve at the discretion of the official making the appointment. The commonwealth's DCED provides staffing for the authority including a dedicated analyst that monitors the portfolio and a collections attorney that manages delinquencies.

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

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981160

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eric Kim
Director
+1-212-908-0241
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1-212-908-0575
or
Committee Chairperson
Douglas Offerman
Senior Director
+1-212-908-0889
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com