AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Rhode Island Infrastructure Bank (RIIB, formerly the Rhode Island Clean Water Finance Agency):
--Approximately $50 million water pollution control refunding revenue bonds, series 2016A.
Bond proceeds will be used to refund certain previously issued senior lien water pollution control (WPC) revenue bonds and to pay for the cost of issuance. The bonds are scheduled to sell via negotiation on April 26th.
In addition, Fitch affirms its 'AAA' rating on the following:
--Approximately $509.2 million senior and subordinate lien WPC revolving fund revenue bonds.
The Rating Outlook is Stable.
The series 2016A and outstanding senior lien bonds are secured primarily by pledged loan repayments and debt service reserve funds ('LIST' funds).
The outstanding subordinated revenue bonds are secured by moneys released from the senior lien bonds including surplus loan repayments, interest earnings, and de-allocated LIST funds after senior debt service is paid in full.
KEY RATING DRIVERS
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the RIIB's WPC revolving fund program (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).
HIGHLY RATED BORROWER POOL: Approximately 88% of the program's loan portfolio is measured to be investment grade. Loan provisions are strong with the majority of loan principal secured by borrowers' net system revenue or general obligation pledges.
SIGNIFICANT BORROWER CONCENTRATION: The program's loan portfolio has a high level of concentration risk as the pool consists of only 28 borrowers, with the top 10 representing a significantly high 87% of the pool total (Fitch's 'AAA' median for top 10 borrowers is 55%). To account for this risk, concentrated pools are assessed at higher stress levels in Fitch's PSC.
STRONG PROGRAM MANAGEMENT: RIIB's management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that the trust has never experienced a borrower default.
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in the Water Pollution Control Revolving Fund Program's aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in its 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 not likely to occur.
Through the program, the RIIB provides subsidized financing to governmental entities throughout the state for eligible wastewater infrastructure projects. Bond proceeds and program equity are combined with federal grants and a state matching requirement to provide loans for such projects.
Under the program's combined reserve/cash flow (or 'hybrid') structure, bondholders are protected from losses by LIST funds and pledged loans made in excess of bond debt service (overcollateralization), as further described below.
Most of the program's credit metrics, including those of the financial structure and pool credit quality, have remained stable over the past several years. Like many state revolving funds (SRFs), the program is in the process of transitioning from primarily a reserve-fund structure, wherein loss protection is provided by reserves, to a cash flow structure, or one in which loss protection is provided by available surplus cash flows (or overcollateralization).
SOUND FINANCIAL STRUCTURE
Fitch measures the financial strength of SRFs by calculating each program's asset strength ratio (PASR). The PASR includes the sum of the total scheduled pledged loan repayments, account interest earnings, and reserves divided by total scheduled bond debt service. The WPC SRF's PASR is 1.4x, which is lower than Fitch's 2015 'AAA' rating category median of 1.9x, but still indicative of a sound financial structure.
Fitch's 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 also applied in its cash flow model when determining default tolerance). This is in excess of the program's 'AAA' liability rating stress hurdle of approximately 32%, as produced by Fitch's PSC. The rating stress hurdle is calculated based on overall program credit quality as measured by the ratings of underlying borrowers, borrower size, loan term and concentration.
LOSS PROTECTION PROVIDED BY RESERVES AND OVERCOLLATERALIZATION
Loss protection to senior lien bondholders is provided by the program's LIST funds, which were initially funded with federal capitalization grants and the required state match amounts. As bonds amortize, LIST funds are released, at which point they can be used to cover debt service shortfalls on the subordinate lien bonds before being released from program pledge. LIST funds total $85 million (approximately 17% of bonds outstanding).
In addition to the LIST funds, bondholders are also protected from losses by overcollateralization. On an annual basis, pledged cash flows excluding scheduled reserve deallocations overcollateralize both the senior and junior lien bonds' debt service by a minimum of 1.3x. This compares well with Fitch's 'AAA' median minimum annual loan-to-bond debt service coverage, which is also 1.3x. Surplus loan repayments are held for one year, and thus available to cover debt service shortfalls, before being released from program pledge.
Although an option under the cross-investment agreement, unlike most SRFs rated by Fitch the RIIB SRF programs do not have a legal cross-collateralization requirement. Consequently, each program is analyzed on a separate, stand-alone basis which presents greater pool concentration risk than might otherwise occur.
HIGHLY RATED POOL WITH SIGNIFICANT CONCENTRATION
The WPC SRF program's pledged loan pool is composed of only 28 separately secured obligors, with the top 10 representing a very high 87% of the total. The Narragansett Bay Commission ('NBC', sewer system revenue obligations not rated by Fitch but assessed to be of high credit quality) is the program's largest borrower, representing 48% of the total pledged portfolio. The remaining top-10 borrowers range in size from 2.5%-6.8% of the pool total. These numbers compare unfavorably to Fitch's 2015 'AAA' medians which show top 10 concentration at 55% and single-borrower concentration at 18%. Concentrated portfolios are stressed at higher levels in Fitch's PSC.
Pool credit quality is strong with approximately 88% of the pool's loans held by investment-grade borrowers, which is better than Fitch's 'AAA' median of 70%, thereby serving to mitigate some of the concentration risk. The program's loan security is solid as well, with approximately 96% of loan principal backed by net system revenue pledges, general obligation pledges or a combination of both, and the remaining 4% backed by airport revenues.
STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING
RIIB maintains a formal underwriting process involving extensive review of pool-participant eligibility and security. The agency requires all prospective borrowers to maintain a minimum of 1.25x debt service coverage on loans and covenant to raise rates if such coverage margins are not met. Loan repayments are tracked closely by the RIIB staff. All borrowers must submit annual financial information to the agency. In addition, the agency reviews borrower credit quality on a regular basis.
The WPC program's portfolio carries an interest rate of approximately two-thirds of the borrower's market rate. However, in the event of a borrower default, RIIB is authorized to require all pool borrowers to pay higher interest rates up to the borrower's market rate, thereby creating a step-up provision, which provides additional bondholder security. To date, there have been no defaults on borrower loans.
In addition to the WPC SRF program, the RIIB also administers the state's drinking water SRF (DWSRF) program. The RIIB's DWSRF revenue bonds are also rated 'AAA'/Outlook Stable by Fitch.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 29 Oct 2015)
Dodd-Frank Rating Information Disclosure Form