Fitch Ratings has assigned an 'AAA' rating to following Indiana Finance Authority's (IFA) state revolving fund (SRF) program bonds:
-- Approximately $137.55 million, series 2012B.
The bonds are scheduled to sell via negotiation during the week of Aug. 6, 2012. Bond proceeds used to finance certain water and wastewater system projects in the state and to pay for the cost of issuance.
In addition, Fitch has affirmed the following rating:
-- $1.83 billion outstanding parity bonds at 'AAA'.
The Rating Outlook is Stable.
The bonds are secured by loan repayments, debt service reserve funds, and other accounts pledged under the series and master trust indentures.
KEY RATING DRIVERS
HIGH DEFAULT TOLERANCE: In accordance with Fitch's newly released 'State Revolving Fund and Leveraged Municipal Loan Pool Criteria', 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).
STRONG LOAN SECURITY: Loan provisions are strong with the majority of loan principal secured by net utility system revenue pledges (95%) and the remaining amount secured by general obligation (GO) or lease obligation pledges. Nevertheless, the majority of the combined portfolio is composed of small, non-rated entities.
CROSS COLLATERALIZATION ENHANCES PROGRAM: The cross-collateralization features of the separate clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) accounts within the indentures enhance bondholder security allowing reserves and excess loan repayments within and between each program to be available for use by the other.
CONSERVATIVE UNDERWRITING PRACTICES: The IFA adheres to consistent, conservative underwriting policies across both the CWSRF and DWSRF programs, requiring borrowers to demonstrate minimum coverage of 1.25x average annual debt service (AADS) and to also create a local debt service reserve fund (DSRF) equal to 1.0x maximum annual debt service (MADS). Management and underwriting strength is exhibited by the fact that the program has never experienced a default.
STRONG DEFAULT TOLERANCE ASSESSMENT
Fitch calculates that all in debt service coverage, or total program revenues including reserves divided by scheduled bond debt service, to be approximately 1.2x. Cash flow modeling demonstrates that the program can continue to pay bond debt service based on Fitch's 'AAA' liability default hurdle with approximately a 50% cushion. Liability default hurdles are derived by Fitch's PSC, which are calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.
MODERATELY DIVERSE LOAN POOL
IFA provides loans to local entities for wastewater and drinking system improvements. The combined CWSRF and DWSRF loan pool includes over 330 borrowers. The largest participant, the city of Fort Wayne, represents approximately 5.7% of the loan pool. In addition, approximately 13.5% of the loan pool is composed of escrow funds held to defease loans initially made to the Indianapolis Local Public Improvement Bond Bank (ILPIB).
The top 10 borrowers represent 45% of the total combined loan pool. Loan provisions are strong with the majority of loan principal secured by system revenue pledges (95%) and the remaining amount secured by GO or lease obligation pledges. Roughly 25% of the portfolio is estimated to be investment grade.
ESTABLISHED UNDERWITING POLICIES
IFA manages both the CWSRF and DWSRF programs using consistent underwriting practices. In its assessment IFA takes into consideration the creditworthiness of the borrower and environmental goals of the SRF program, among other factors. Loans secured by system revenue pledges (the primary source of loan security) must demonstrate minimum coverage of 1.25x AADS and are also required to create a local DSRF equal to 1.0x MADS; the DSRF can be funded over the first five years after issuance. Currently, approximately $120 million of local borrower reserves are held with the trustee. Loans are typically limited to 20 years and are structured with level annual payments. Annual loan monitoring is conducted on outstanding borrowers, and includes verification of local reserves and a review of financial statements. No loan defaults have been reported within the program to date.
FAVORABLE STRUCTURAL CHARACTERISTICS
Under the SRF program's reserve fund structure, each bond series is secured by borrower loans and separately secured debt service reserves funded from IFA's federally capitalized CWSRF and DWSRF. As series bonds amortize, released reserves, excess loan repayments and interest earnings are deposited into a deficiency fund, which is available to make debt service payments on any bonds issued under the master trust indenture. The method by which excess amounts are deposited to the deficiency fund allows for cross collateralization between CWSRF and DWSRF programs, increasing pool diversity and potentially lowering total loss amounts.
SIZEABLE PROGRAM RESERVES
As of July 2012, program reserves totaled approximately $495 million, or roughly 27% of total outstanding bonds. Reserves provide significant protection, along with excess loan repayments and interest earnings, from borrower loan defaults. Program reserve investment practices are generally strong. Currently, assets are only invested in U.S. Treasury and Agency securities (54.1%), State and Local Government Series (12.1%), and Cash (33.37%).
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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