Fitch Rates Kentucky Infrastructure Auth.'s Ser. 2015A SRF Bonds 'AAA'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Kentucky Infrastructure Authority (KIA):

--Approximately $75.8 million wastewater and drinking water revolving fund revenue refunding bonds, series 2015A.

The bonds are expected to sell via negotiation during the week of April 20. Bond proceeds will be used to refund certain previously issued series 2010A bonds.

In addition, Fitch has affirmed its rating on the following outstanding bonds:

--Approximately $261.2 million wastewater and drinking water revolving fund revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged loan repayments, pledged funds and accounts, and investment earnings on such funds and accounts.

KEY RATING DRIVERS

STRONG 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 rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

SOLID BORROWER POOL: On a weighted-average basis, approximately 76% of KIA's state revolving fund (SRF) loan pool consists of borrowers exhibiting investment-grade ratings. Loan security is very strong as borrowers are secured by net utility system revenue pledges.

SOMEWHAT ELEVATED POOL CONCENTRATION: The loan portfolio has slightly above-average borrower concentration with the top 10 borrowers representing approximately 58% of the loan pool. At 19% of the total pool, Sanitation District No.1 is the largest borrower.

EFFECTIVE PROGRAM MANAGEMENT: KIA's SRF program serves many small cities and towns which are exposed to risks associated with limited economic diversity. As a result, a limited number of KIA's borrowers have experienced payment hardships. Management has effectively worked with such borrowers to prevent permanent program defaults.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.

CREDIT PROFILE

KIA provides financing to certain governmental entities within the state for eligible clean water and drinking water SRF infrastructure projects. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects. KIA's SRF program bondholders are primarily protected from losses by pledged loan repayments made in excess of bond debt service.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Fitch measures the financial strength of the combined SRFs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments divided by total scheduled bond debt service. The state's PASR is 2.2x, which is higher than Fitch's 2014 'AAA'-median level of 1.8x and is therefore considered to be strong.

Due to the program's available enhancement, 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 program's life (per Fitch criteria, a 90% recovery is applied when determining default tolerance). These results are in excess of Fitch's 'AAA' liability rating stress hurdle of 25%, as produced by the PSC. The liability rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size and term, and concentration. The program's moderately low PSC stress hurdle is reflective of the slightly better than average borrower credit quality.

LOSS PROTECTION PROVIDED PRIMARILY BY OVERCOLLATERALIZATION

KIA's SRF utilizes a cash-flow based program structure, wherein program bonds are primarily protected from losses by overcollateralization, or excess annual loan repayments made in excess of bond debt service. Fitch calculates the minimum annual debt service coverage to be a very solid 1.8x, compared to Fitch's 'AAA' median of 1.4x. Additional enhancement is provided from the program's $311 million in available surplus funds. While not legally pledged, these resources would likely be used if available and needed to meet payment deficiencies.

SOLID BORROWER POOL WITH ABOVE-AVERAGE CONCENTRATION

Fitch estimates that approximately 76% of the program exhibits investment-grade credit quality. In aggregate, pool credit quality is slightly better than similar municipal pools, as reflected by a 'AAA' PSC liability rating stress hurdle of 25%, which is slightly lower than Fitch's median of 30% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very good with more than 95% of loans secured by water and/or wastewater system revenue pledges.

The pool program consists of 137 borrowers, the top 10 of which comprise approximately 58% of outstanding loan obligations. Consistent with Fitch's last review, Sanitation District No.1 (not rated by Fitch but assessed to be of very strong credit quality) remains the largest borrower, representing 19% of outstanding pool loan principal. The remaining top 10 borrowers range in size from 2.0% to 7.6% of the total pool and all are assessed to be of investment-grade quality. Overall, the pool is slightly more concentrated than other 'AAA'-rated SRFs monitored by Fitch.

CROSS-COLLATERALIZATION PROVIDES ADDITIONAL PROTECTION

On each payment date, debt service shortfalls originating from KIA's DWSRF can be covered from excess CWSRF revenues and vice versa. Because of this cross-collateralization, Fitch combines both pools in its modeling analyses.

EFFECTIVE PROGRAM MANAGEMENT AND OVERSIGHT

The authority maintains effective loan underwriting policies consisting of review of historical audited financial statements, cash flow projections, and rate affordability. Monitoring procedures include annual review of audited financial statements.

The program has never experienced a permanent loan default but has had a limited number of stressed borrowers. This is likely due to the below-average socioeconomic makeup of portions of the state and, in particular, the fact that many of the smaller borrowers are exposed to risks associated with limited economic diversity. Currently, one borrower representing less than 1% of total pool principal is experiencing a payment hardship and is expected to be removed from the pledged pool.

Unlike most SRF programs, the General Assembly of Kentucky, which established the authority, has authorized KIA to directly impose service charges on any borrowers pursuant to its loan agreement and adjust and increase such service charges, if necessary. Under certain circumstances, an increase in service charges may be subject to approval by the Public Service Commission of Kentucky.

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

Applicable Criteria and Related Research:

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

--'State Revolving Fund and Leveraged Municipal Loan Pool 2014 Peer Review' (Nov. 10, 2014);

--'Revenue-Supported Rating Criteria' (June 16, 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

State Revolving Fund and Leveraged Municipal Loan Pool (2014 Peer Review)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=806628

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982867

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Major Parkhurst, +1-512-215-3724
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Adrienne Booker, +1-312-368-5471
Senior Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Elizabeth Fogerty, +1-212-908 0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Major Parkhurst, +1-512-215-3724
Director
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst:
Adrienne Booker, +1-312-368-5471
Senior Director
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Elizabeth Fogerty, +1-212-908 0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com