CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following California Infrastructure and Economic Development Bank (CIEDB) state revolving funds (SRF) revenue bonds issued under the 2012 master trust indenture (MTI) for the benefit of the California State Water Resources Control Board (SWRCB):
--Approximately $68.8 million clean water SRF refunding revenue bonds, series 2012.
The bonds are expected to price via negotiation during the week of Oct. 29. Bond proceeds will be used to refund all of the CIEDB's outstanding bonds (series 2002) under a prior indenture to provide cost savings. The original proceeds were used to finance eligible clean water SRF projects throughout California.
The Rating Outlook is Stable.
The series 2012 bonds are secured by pledged borrower loan repayments.
KEY RATING DRIVERS
STRONG PROGRAM ENHANCEMENT: Loan repayments provide significant overcollateralization. This enables borrower obligations issued under the 2012 MTI program to perform even if there is a high level of loan defaults.
SOLID LOAN SECURITY: All loans are secured by the obligors' utility system revenue pledges.
HIGH BORROWER CONCENTRATION: The loan portfolio has a high level of concentration risk as the pool currently consists of only 16 borrowers. However, concentration risks are largely mitigated by expected diversification over time as well as by the strong credit quality of the pool's largest borrower, the Orange County Water District, CA (OCWD, rated 'AAA' by Fitch).
RELATIVELY WEAK LEGAL COVENANTS: Certain legal covenants are weaker than in some other SRF programs, including the 1.05 times (x) additional bonds and coverage tests. However, Fitch expects the CIEDB to maintain high coverage levels and loan quality.
POOL FUNDS WASTEWATER PROJECTS
The 2012 MTI is an open indenture with bonds issued under separate supplemental series indentures. The program bonds are structured using a traditional cash flow model. The bonds are secured by borrower loan repayments. Bond proceeds will be used to fund loans to local governments and other public entities throughout the state for clean water SRF projects. With this issue, SWRCB will pledge certain loan repayments from its existing loan portfolio totaling approximately $3.1 billion in principal outstanding.
SIGNIFICANT ABILITY TO WITHSTAND RATING STRESS HURDLE
The program achieves significant excess coverage for the 2012 MTI bonds by pledging loan repayments from a pool of 16 borrowers with principal outstanding totaling approximately $395 million. Program resources greatly exceed Fitch's Portfolio Stress Calculator stress hurdle of 39.9% at the current rating level. The overcollateralization from pledged loan repayments would allow the bonds to perform, even given loan defaults of 100% over the first, middle and last four years of the bonds life.
While the program's aggregate debt service coverage is currently a high 2.05x (total program resources divided by total debt service), additional program leverage is expected. However, given SWRCB's significant pool of non-pledged loans and additional loans that may be pledged from future bond proceeds, Fitch does not anticipate that management would leverage below a level that would be commensurate with the current rating.
HIGH BORROWER CONCENTRATION
The portfolio's concentration risk is high with OCWD, the largest borrower, representing approximately 28% of the total portfolio. However, the program should continue to diversify as additional bonds are expected to be issued under the 2012 MTI.
UNDERLYING BORROWER CREDIT QUALITY FAVORABLE
The 2012 MTI pool's loan credit quality is strong. Fitch estimates that at least 61% of all loan principal is of 'A+' credit quality or higher. Furthermore, underlying loan security is solid, with loan repayments primarily secured by each borrower's utility system revenues.
BELOW-AVERAGE LEGAL STRUCTURE
The program's legal structure contains certain covenants that are relatively weaker than some other similarly rated SRF programs. No debt service reserve will be funded for the series 2012 bonds. Also, the additional bonds test, established under the supplemental indenture, requires only 1.05x coverage on outstanding debt. In addition, the program's coverage requirement, which allows pledged assets to be released from the MTI, is 1.05x. Nevertheless, Fitch believes that management will continue to keep coverage at levels that protect the program's high credit quality given historical performance in other SWRCB revolving fund programs as well as existing management policies.
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);
--'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 Transactions
Adrienne M. Booker, +1-312-368-5471
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Major Parkhurst, +1-512-215-3724
Doug Scott, +1-512-215-3725
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Source: Fitch Ratings