Fitch Ratings downgrades the Summit County Port Authority, Ohio (SCPA) bond fund's outstanding $40.2 million development revenue bonds to 'BBB-' from 'BBB+'. Fitch maintains the ratings on Rating Watch Negative; they were first placed on Rating Watch Negative on Nov. 26, 2008 in conjunction with the initiation of a review by Fitch of its default and recovery assumptions and the methodology by which it applied these in assigning ratings to this and similar economic development bond fund programs.
The 'BBB-' program rating reflects available pledged resources to offset modeled loan losses, as well as qualitative considerations (see 'Municipal Economic Development Bond Funds Rating Criteria' dated Oct. 26, 2009). Fitch considered in its quantitative analysis a number of stress scenarios, including ones where recovery rates on defaulted loans were significantly lower than historical levels. A positive qualitative credit factor is the ongoing support of the bond fund by the SCPA through its supplemental unpledged reserves. Negative qualitative considerations include the relatively small number of borrowers and lack of diversification in the loan pool, the high concentration of loans originated in the 2005-2008 time period, which raises concerns regarding loss in the event of default, and the below-average quality and timeliness of the bond fund borrowers' financial disclosure.
The Negative Watch reflects significant uncertainty with regards to the current value of collateral backing the loans and financial strength of some of the borrowers. During the period while the ratings are on Rating Watch Negative, Fitch will review any updated independent collateral valuations and additional or updated financial information on the borrowers that management may provide. Fitch will also consider in its analysis any additional funds that may be added or committed to reserves during this period, as well as updated plans on future leveraging of the bond fund's reserves.
The authority established the bond fund in 2004 to promote economic development efforts primarily in Summit County, as well as various counties throughout the state. Currently, the bond fund has 13 participants. All of the bonds are secured by lease or loan payments by the pool participants and reserves. Digestive Disease Consultants, a participant related to the fund's series 2008B bonds, is the largest borrower comprising 14.9% of the portfolio.
The bond fund's combined reserves total $14.6 million, or 36.4% of the bonds outstanding. There is also $1.3 million in loan-specific additional reserves. Based on its review of legal opinions from bond counsel, Fitch's analysis considers that cash reserves will be fully available in the event of a borrower bankruptcy.
Additional information is available at 'www.fitchratings.com'.
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