Fitch Ratings affirms the following rating of the Tennessee Local Development Authority (TLDA) State Loan Program revenue bonds:
-- $8.845 million in outstanding TLDA State Loan Program revenue bonds at 'AA'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
-- The bonds enjoy the protection of the withholding, if necessary, of state-shared taxes allocated to local governments. A bond reserve fund funded at maximum annual debt service provides further bondholder protection.
-- The loan program is carefully managed, following conservative practices. There has never been a local delinquency.
-- State management of its own debt and oversight of local government borrowing is closely linked. The authority is an agency of the State of Tennessee (the state) and its board incorporates the members of the state funding board, which includes the state's highest elected officials.
WHAT COULD TRIGGER A RATING CHANGE
-- A change in the program's record of timely payment by program participants, or a material change in the state's willingness to provide adequate funds for intercept.
The bonds are limited special obligations of the authority, payable from certain authority revenues, including local government payments made under loan agreements and, if such payments are not made, from state-shared taxes when they have been withheld and become property of the authority. A bond reserve fund sized at maximum annual debt service is also pledged.
TLDA's program revenue bonds are secured by loan repayments of local government units and backed by the withholding of state-shared taxes, if needed. In addition, a bond reserve fund sized to maximum annual debt service provides further bondholder protection. Revenue bonds, of which only $8.8 million were outstanding as of June 30, 2011, were issued originally to refund associated bond anticipation notes, all of which have been defeased. TLDA program revenue bonds benefit from the state's conservative and centralized oversight of debt. TLDA is a state agency and its board incorporates the members of the state funding board, which includes the state's highest elected officials. The state's general obligation bonds are rated 'AAA' by Fitch.
Loans from TLDA have been used by local governments to fund water and sewer utility improvements. Underwriting standards are conservative. Committed local sources to pay loans must provide at least 1.10 times coverage of debt service when underwritten. The loan agreements also include a pledge of localities' allocations of state-shared taxes, including gas, sales, investment income, and mixed drink taxes, as well as certain Tennessee Valley Authority payments to the state. Withholding of state shared taxes would occur upon failure of the borrower to make a required payment. The allocation of state-shared taxes may be changed by statute, although no changes have been made since 2004.
Although Fitch's state enhancement program criteria outline a coverage margin well in excess of 1x by interceptable resources, the presence of reserves and close state oversight support the 'AA' rating on the bonds. State-shared taxes in the aggregate have slipped annually in recent years, including by 3.9% in fiscal 2011. As a result, several borrowers' coverage of annual debt service by their state-shared tax allocation is now below one times (x). A separate bond reserve fund, fully funded at maximum annual debt service ($1.6 million as of June 30, 2011) is also pledged to bondholders, and would ensure timely payment of debt service in the unlikely event of both a delinquent loan payment and insufficient state-shared taxes.
A separate statutory reserve must be funded for any borrower whose allocation of state-shared taxes does not achieve full coverage of annual debt service at the time the loan is made; TLDA has held funding of this reserve at approximately $3 million, although it is only required to be funded at approximately $200,000 to comply with program requirements. Excess resources in the statutory reserve could be applied to a deficiency by any borrower, although are outside the resolution's pledge to bondholders.
A key credit consideration for the program has been the state's active, ongoing oversight of borrowers and centralized, conservative approach to debt management. The state comptroller oversees both the state's own debt issuance and local governments' participation in the program. Payments by local units have always been made as scheduled, and there has been no need for recourse to either the state-shared taxes or the reserves. For more information on the State of Tennessee's GO bond rating, please see the February 7, 2012 press release, 'Fitch Rates Tennessee's $385MM Rfdg GOs 'AAA'; Outlook Stable' available on Fitch's website at www.fitchratings.com.
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:
-- 'Tax-Supported Rating Criteria' (Aug. 15, 2011);
-- 'U.S. State Government Tax-Supported Rating Criteria' (Aug. 15, 2011);
-- 'Rating Guidelines for State Credit Enhancement Programs' (July 29, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Rating Guidelines for State Credit Enhancement Programs
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