AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'AAA' rating on the following Kansas Development Finance Authority (KDFA) revenue bonds:
--Approximately $286.7 million in outstanding revolving fund revenue bonds;
--Approximately $194.6 million in outstanding public water supply (PWS) revolving loan fund bonds.
The Rating Outlook is Stable.
Revolving fund revenue bonds issued under the 2010 master financing indenture (MFI) are secured primarily by pledged loan repayments, excess PWS and Kansas Water Pollution Control (WPC) loan repayments, interest earnings on all funds and accounts established under the MFI, and Build America Bond interest subsidy payments. The outstanding PWS bonds are secured by pledged loan repayments, debt service reserve funds (DSRFs), and interest earnings from the DSRFs.
KEY RATING DRIVERS
SOLID 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 default hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
QUALITY LOAN POOL: Approximately 71% of KDFA's combined loan portfolio consists of entities with at least investment grade ratings, with the remaining 29% unrated. Additionally, loan provisions are very strong, with 78% secured by both water and/or wastewater revenue and general obligation pledges (double barrel) and the remaining secured by water and/or wastewater revenue pledges.
MODERATE POOL DIVERSITY: KDFA's borrower pool is large and moderately diverse in comparison to similar municipal loan pools. The pool consists of more than 300 obligors, with only one exhibiting concentration greater than 7%. The largest borrower, representing 11% of the total loan pool, is the city of Topeka.
CROSS-COLLATERALIZATION FEATURE: The cross-collateralization features of the separate clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) accounts within the MFI and between the prior resolutions enhance bondholder security, allowing reserves and excess loan repayments within and between each structure to be available for use by the other.
STRONG DEFAULT TOLERANCE
Cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults of 35%, 47% and 100% during the first, middle and last four years of the bonds life, respectively. This is consistent with Fitch's 'AAA' liability default hurdle of 26.1%, as produced using the PSC. Liability default hurdles, derived by the PSC, are calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
AMENDMENT TO 2010 MFI SHOULD STRENGTHEN PROGRAM STRUCTURE
The stressed cash flows incorporate a proposed amendment to the 2010 MFI via the Third Supplemental Financing Indenture, which is expected to be executed by November 2012 after adoption by KDFA, the Kansas Department of Health and the Environment (KDHE) and the trustee. The amendment allows portions of excess funds in the interest and principal revenue accounts to be retained to meet debt service on the next payment date prior to being swept to the equity account. This amendment should improve DWSRF debt service coverage levels and prevent any loan repayment shortfalls due to higher than expected loan prepayments. Currently, excess funds immediately flow to the equity account and debt service shortfalls are covered by cross-collateralization from the CWSRF.
ABOVE AVERAGE CREDIT QUALITY POOL
The MFI, PWS and WPC loan pools combined include more than 300 borrowers. The city of Topeka is the largest borrower, representing approximately 11% of the pool, up from 9.7% in 2011. The remainder of the loan pool is mostly diverse, with no one borrower making up more than 7% of the portfolio. Concentration of the top 10 largest obligors is about 44% of the total portfolio, with each carrying ratings in the 'A' to 'AAA' range. Overall, approximately 71% of KDFA's loan portfolio consists of entities with at least investment-grade ratings, with the remaining 29% unrated. Pool loan provisions are very strong, with 78% secured double barrel pledges and the remaining secured by water and/or wastewater revenue pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
KDHE, the Kansas Department of Administration, and KDFA handle administration of the various state revolving funds. Underwriting standards are conservative, requiring system revenues and/or an unlimited ad valorem tax pledges (if a tax pledge is not possible, bond insurance may be required). In addition, some borrowers are required to meet minimum coverage levels and contribute to local borrower reserve accounts. The programs have not experienced a loan default to date.
KDFA issues bonds to fund KDHE loans to municipalities throughout Kansas, which provide subsidized financing for water supply and sewer system improvements. Funds are disbursed to borrowers to pay eligible project costs or to reimburse the KDFA for projects previously funded.
The 2010 MFI combined the financing functions of the PWS and WPC programs and gradually replaces the prior clean water and drinking water bond resolutions associated with these programs. In 2010, the KDFA also amended the prior PWS and WPC bond resolutions, which include covenants not to issue any additional bonds or other indebtedness; all future bonds are being issued under the 2010 MFI, which is primarily structured as a cash flow program. The amended resolutions also redirect the flow of each program's recycled loan accounts, which captures excess loan repayments, interest earnings and de-allocated reserves, to the 2010 MFI if the moneys are not needed for debt service.
While the prior resolutions and 2010 MFI are separately secured, Fitch analyzes the programs as one combined structure due to the cross-collateralization features between the original programs and the excess releases into the 2010 indenture.
RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT
While the 2010 MFI provides for a DSRF, it has not been funded in connection with recent issues. DWSRF loans under the prior PWS indenture required DSRF minimums at the greater of 1.0x MADS or 25% of outstanding bonds. CWSRF loans under the prior WPC indenture required DSRF minimums at the lesser of 1.0x MADS or 10% of original bond principal. Currently, combined reserves under the PWS and WPC programs total approximately $43 million, or 7.8% of all outstanding bonds.
Prior to any transfers to the non-pledged general fund, KDFA must certify that a 1.20x debt service coverage test is met on the leverage bonds and a 1.0x coverage test must be met on the state match portion of the bonds. Under the prior PWS and WPC indentures, prior to releasing money to the 2010 MFI, a projected revenue certificate must be filed showing 1.0x coverage for the DWSRF and 1.25x coverage for the CWSRF. Additional bonds tests are required at 1.05x and 1.0x for senior and subordinate bonds, respectively.
PROGRAM BENEFITS FROM CROSS COLLATERALIZATION
The cross-collateralization features of the separate CWSRF and DWSRF accounts within the 2010 MFI and between the prior resolutions enhance bondholder security, allowing reserves and excess loan repayments within and between each structure to be available for use by the other.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012);
--'Rating Guidelines for State Credit Enhancement Programs' (June 19, 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
Rating Guidelines for State Credit Enhancement Programs
Counterparty Criteria for Structured Finance Transactions
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Source: Fitch Ratings