Fitch Ratings assigns its 'AAA' rating to the following Iowa Finance Authority's (IFA) outstanding bonds:
--$111 million state revolving fund (SRF) bonds, series 2013.
The series 2013 bonds are expected to price via negotiation during the week of May 27. Bond proceeds will be used to fund new loans to local government borrowers for clean water and drinking water system improvements, to reimburse the program equity fund for prior loan disbursements and pay costs of issuance.
In addition, Fitch affirms its 'AAA' rating on the following IFA outstanding debt:
--$945 million revolving fund revenue bonds.
The Rating Outlook is Stable.
The series 2013 bonds and the previously issued 2010A, 2010B, and 2011 bonds (together the MTA bonds) are secured by loan principal and interest amounts pledged under the restated and amended master trust agreement (MTA), account investment earnings, and, if necessary, amounts held in the pledged equity fund.
The series 2003, 2007, 2008 and 2009 bonds (or the pre-2010 bonds) are secured by each series' pledged loan principal and interest amounts, investment earnings, debt service reserve funds, deficiency funds, and revenues pledged to the MTA bonds.
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that IFA's clean water and drinking water state revolving fund (CWSRF and DWSRF) program can continue to pay bond debt service even if there were portfolio loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's portfolio stress calculator (PSC).
LARGELY UNRATED POOL: Over 60% of borrowers are assumed to be small and are not rated entities by Fitch. However, loan provisions are strong with virtually all loan principal secured by senior lien water, sewer, or general obligation pledges, or some combination of the three.
CROSS-COLLATERALIZATION ENHANCES POOL STRUCTURE: The deficiency fund (with respect to bonds issued prior to 2010) and the pledged equity fund provide for cross-collateralization, meaning surplus amounts in each respective fund allocated to the clean water accounts can be used to cure shortfalls in drinking water accounts and vice versa.
SOLID PROGRAM MANAGEMENT/UNDERWRITING: IFA and the Iowa Department of Natural Resources (DNR) jointly manage the program, following underwriting and loan monitoring procedures set forth by the MTA. Strong program performance is exhibited by the fact that the program has yet to experience a local government borrower default.
REDUCTION OF STRUCTURAL ENHANCEMENT: A measurable decline in program enhancement such as a significant reduction in pledged resources could pressure the rating. The Stable Rating Outlook reflects Fitch's view that structural enhancement and program credit quality will be sufficiently maintained.
Iowa's SRF program follows guidelines established by the Environmental Protection Agency under the Drinking Water and Clean Water Acts, wherein federal capitalization grants and a 20% state match are used to provide subsidized loans to eligible borrowers. Such loans are used to provide below-market financing for water pollution and drinking water infrastructure projects within the state.
PLEDGED RESOURCES PROVIDE STRONG ENHANCEMENT AND PROJECTED ASSET COVERAGE RATIOS
With the issuance of the 2010 bonds, the indenture was amended and restated and is now referred to as the MTA, allowing for all loan repayments to be pledged to the MTA instead of dedicated loan repayments specifically securing each outstanding series of program bonds. All future bonds are expected to be issued under the amended and restated MTA and secured by the program's open indenture. The MTA strengthened an already strong structure.
IFA's significant pledged resources enable the program to continue to pay bond debt service even with hypothetical loan defaults of 100% (the default tolerance rate) over any four-year period. This is in excess of Fitch's 'AAA' liability default hurdle of 59.9% as produced by the PSC. The default hurdle is based on overall pool credit quality as measured by the ratings of underlying borrowers, size, loan term, and concentration. Borrower loan repayments are made two months prior to bond payments, which allow time for the authority to intervene before each bond payment date if needed.
IFA's scheduled borrower repayments, plus available pledged funds, provide strong annual debt service coverage. Excess cash flow coverage or overcollateralization after paying debt service is projected to be a minimum of 3.3x.
In addition to pledged revenues, bonds issued prior to 2010 are secured by a trustee-held deficiency fund, which is used to prevent any shortfalls of debt service payable. After debt service is paid in full, remaining amounts in the deficiency fund are transferred to the MTA equity fund on each payment date. Amounts available in the equity fund provide additional security for all outstanding bonds (both from the restated and prior MTA).
Senior or first lien loans are required to be covered by pledged net revenues of at least 1.1x annual parity debt service, while any junior lien loans must be covered by 1.05x maximum annual debt service. Senior lien loans account for more than 90% of all program loans. MTA funds can be transferred out of the program, as long as an officer's certificate report reflects that such withdrawals would not cause the projected asset coverage ratio to drop below 1.2x.
Additional parity bonds can be issued provided that, after such issuance, all-in debt service coverage is at least 1.05x. In calculating such coverage, all expected pledged revenues, funds, accounts and subaccounts can be used, excluding amounts in the rebate fund. Given IFA's demonstrated commitment to maintain the highest credit quality on the SRF program, Fitch expects that the authority will sustain coverage levels and borrower loan default tolerance levels that will continue to pass Fitch's 'AAA' stress test scenarios.
CROSS-COLLATERALIZATION ENHANCES BONDHOLDER SECURITY
The deficiency fund (with respect to the pre-2010 bonds only) and equity fund provide for cross-collateralization. This increases the diversity of the loan pool and lessens the risk of any one borrower's default eroding reserve balances and threatening bondholder payments. After the issuance of the 2013 bonds, the unencumbered equity fund balance stood at approximately $164 million. Program reserves, which total approximately $35 million, are primarily invested in money market funds, U.S. agency securities, highly rated municipal bonds and one fully collateralized investment agreement.
ADEQUATE PORTFOLIO CHARACTERISTICS
The combined MTA consists of approximately 432 obligors. Although there is a large number of individual borrowers, concentration is moderate for a municipal bond pool, with the top 10 representing approximately 50% of the aggregate loan pool. Single-obligor concentration is high, with the largest obligor, the Wastewater Reclamation Authority, representing 17% of the total pledged loan pool.
Fitch estimates that approximately 27% of the pool exhibits investment-grade characteristics. However, strong underlying loan provisions provide security of loan principal from water, sewer, general obligation pledges, or some combination of the three.
STRONG PROGRAM MANAGEMENT REFLECTED IN UNDERWRITING AND LOAN MONITORING PROCESS
IFA is ultimately responsible for the arrangement of financing for borrowers. This includes the review, processing, underwriting, and approval of program-eligible loans that meet the minimum coverage requirements. The IFA board consists of nine members appointed by the governor, with the approval of two-thirds of the members of the state Senate.
Management of the program is supplemented by the state Department of Natural Resources (DNR). DNR is responsible for performing ongoing SRF program operations, monitoring project progress, and providing technical support to participants. DNR provides technical assistance to loan participants and monitors all projects to ensure conformity with SRF and DNR rules and regulations.
The authority has established a set of administrative rules to evaluate loan applications, focusing on applicant needs, ability to complete construction within the necessary time frame, and ability to repay the loan. Loan participants that pledge system revenues on parity with outstanding debt are required to establish and maintain utility rates that produce 1.1x debt service coverage prior to the release of loan funds. Subordinate lien pledges are also permitted if utility rates produce 1.05x coverage on combined senior and subordinate-lien bonds. These parameters are in addition to pool-level coverage requirements mentioned above.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
Adrienne M. Booker, +1-312-368-5471
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Major Parkhurst, +1-512-215-3724
Amy Laskey, +1-212-908-0568
Elizabeth Fogerty, +1-212-908-0526