Fitch Ratings has assigned an 'AA' rating to the following Virginia Resources Authority's (VRA) airports revolving fund revenue bonds:
--$16.4 million, refunding series 2011A (Tax Exempt Non-AMT);
--$17.4 million, refunding series 2011B (Tax Exempt AMT).
The series 2011A and 2011B bonds are scheduled for negotiated sale during the week of August 9. Proceeds from the sale will be used to refund certain series of outstanding program bonds for debt service savings.
In addition, Fitch affirms its 'AA' rating on the following outstanding debt.
--$61.8 million revenue bonds.
The Rating Outlook is Stable.
KEY RATING DRIVERS
-- The VRA's airport revolving fund program's strong overcollateralization and reserve funds provide for a loan default tolerance of up to 84% over the next four-year period, exceeding Fitch's 'AA' stress scenario for a pool of VRA's size and credit quality.
-- There is significant pool concentration from the Capital Region Airport Commission (the commission, revenue bonds rated 'A-' with a Stable Outlook by Fitch), which operates Richmond International Airport (RIA) and accounts for 60% of the pool.
-- The commission's bonds carry a moral obligation (MO) pledge from the Commonwealth of Virginia and the commonwealth has demonstrated past commitment to the program through its MO disclosure and state aid intercept provisions.
-- VRA maintains solid loan underwriting guidelines and loan monitoring procedures.
-- Reserve investments are strong at a combined total of $19.7 million or 31.8% of outstanding bonds and are invested in guaranteed or collateralized investment agreements.
SECURITY
The bonds are secured by local borrower repayments, investment earnings, and debt service reserve funds (DSRFs). In addition, the commonwealth has pledged its MO to replenish the capital reserve on the commission's bonds if it falls below the required limit.
CREDIT PROFILE
The Commonwealth established its airports revolving fund as a vehicle for local governments to access capital at below-market rates to fund infrastructure needs for aviation facilities. Fitch analyzed the default tolerance of the portfolio using the stress test it applies to state revolving funds and other municipal loan pools. The test considers credit quality, single-risk concentration, reserve fund size, and debt service requirements. The overcollateralization from excess cash flows and reserve funds provide for a loan default tolerance of up to 84% over the next four-year period; this is in excess of what Fitch would expect in an 'AA' stress scenario for a pool of this size and credit quality. The pool is able to withstand over 59% and 55% defaults over the middle and last four-year periods, respectively; these default tolerances also exceed Fitch's stress requirement.
Bonds secured by the master indenture are backed on a parity basis by bond and direct (recycled) loans. With each bond issuance, VRA deposits a required amount into each borrowers' established DSRF, typically ranging from 25% to 40% of outstanding principal. VRA's reserves are invested in collateralized investment agreements with highly rated banks or financial institutions. In addition to local borrower repayments, investment earnings from reserve funds are transferred to the revenue fund to be used for debt service essentially subsidizing the interest rate on loans to the program borrowers.
As bonds amortize, reserves in excess of the required amount for each participant are released to a general reserve fund, which may be used to finance any potential deficiency caused by another borrower's loan default. The general reserve fund is maintained at the difference between the actual balance in the DSRF and the current aggregate DSRF requirements. Any excess is recycled back into the airport fund and may be used for additional loans. Currently, VRA pledges its direct (recycled) loans to bondholders generating a minimum of $32,000 in additional program cash flow.
The existing loan portfolio comprises only 17 participants with the largest borrower, the commission, accounting for over 60% of the outstanding loan principal. The commission's concentration is expected to remain high, given the limited number of potential airport borrowers within the commonwealth. The Charlottesville-Albemarle Airport Authority is the pool's second largest borrower at just under 11%.
Loan security provisions typically range from dedicated revenue pledges specific to single-user projects and/or a local government's general obligation pledge to a pledge of general airport revenues. VRA may require additional security, such as a MO or general obligation of the underlying locality to meet its underwriting guidelines. The commission has pledged the net revenues derived from the operation of RIA.
The commission's obligations are further secured by the commonwealth's MO, which is available to make up any deficiencies in the capital reserve account portion of RIA's DSRF. The DSRF is segregated into two subaccounts: a capital reserve account (funded in an amount equal to the borrower's maximum annual debt service requirement plus the following interest payment) and a secondary reserve, containing the remainder of the borrower's allocated reserves. Each year, the general assembly of the commonwealth is authorized but not obligated to restore the capital reserve account to its minimum level. Currently, the commission is the only borrower in which the commonwealth pledges its MO enhancement to the DSRF.
While VRA completes its own underwriting analysis, an independent feasibility analysis of the commission was provided because it carries the commonwealth's MO. In addition, all projects must first be approved by the Virginia Department of Aviation and then be placed on the commonwealth's priority list by the Virginia Aviation Board before being brought to the VRA for credit analysis and loan approval. The VRA also conducts annual reviews of pool participants to ensure compliance with all loan agreements. Loan monitoring efforts also include monitoring payment receipts and identifying borrowers with potential cash flow problems.
For more information on the commission please see the Fitch release 'Fitch Affirms Capital Region Airport Commission's (VA) $124.7MM Revs at 'A-'; Outlook Stable' dated May 19, 2011, and available on 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008).
Applicable Criteria and Related Research:
State Revolving Fund and Municipal Loan Pool Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150
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