Fitch Ratings affirms the 'AA' rating on the following bonds of the Tennessee State School Bond Authority (TSSBA):
--Approximately $212 million qualified school construction bonds (QSCBs), series 2010 (federally taxable-direct subsidy payment).
The Rating Outlook is Stable.
SECURITY
The series 2010 QSCBs are limited obligations of the authority payable from loan repayments by local governments, funds held under the bond resolution, the withholding, if necessary, of state-shared taxes not otherwise pledged, and all rights under the loan agreement.
KEY RATING DRIVERS
--The rating is based on the withholding, if necessary, of unobligated state-shared taxes paid to local borrowers, which provides ample coverage of debt service in the event that borrowers fail to make loan repayments.
--The authority is well established, with longstanding, conservatively managed programs to aid institutions of higher education and local governments. There have been no draws to date on state intercept programs supported by state-shared taxes.
--Tennessee plays a very active role in overseeing local governments, and authority management is closely integrated with state fiscal and debt management. The state is rated 'AAA', with a Stable Outlook by Fitch.
WHAT COULD TRIGGER A RATING ACTION
--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.
CREDIT SUMMARY
The 'AA' rating reflects the state of Tennessee's pledge to intercept unobligated state-shared taxes for loan repayment in the event of a default by a local borrower, and the state's overall conservative management of local government loan programs. Series 2010 QSCB proceeds were loaned by TSSBA to 15 local governments for school projects, subject to provisions of the federal American Recovery and Reinvestment Act of 2009 (ARRA), which has since expired.
Under loan agreements with TSSBA, borrowers pledge their full faith and credit taxing power to loan repayment as well as the intercept of unobligated state-shared taxes by the state's Commissioner of Finance and Administration, if necessary. The series 2010 bonds depleted the state's QSCB authorization under ARRA, and followed a separately secured, earlier series of QSCBs issued in December 2009.
The state has a history of careful oversight of local entities and operates multiple loan programs for local governments, schools and institutions of higher education through TSSBA and the Tennessee Local Development Authority (TLDA). The Office of State and Local Finance within the Comptroller's Office staffs the TSSBA and oversees all state intercept programs, including the current program. There have been no instances of local entities failing to make loan payments under TSSBA and TLDA state intercept programs. The TSSBA's board overlaps with those of TLDA and the state's funding board, and includes the state's highest elected officials.
Bond proceeds are intended to fund school construction projects, which must meet ARRA guidelines including completion within three years. The TSSBA executed loan agreements with each borrower under which each pledges its full faith and credit taxing power to loan repayments representing its proportionate share of total bond interest and principal sinking fund payments. Loan repayments are paid on a monthly basis, and likewise the state pays state-shared taxes to local governments on a monthly basis. In the event of a borrower's failure to make a timely loan repayment, the withholding of unobligated state-shared taxes would be triggered within two days, providing sufficient timing cushion to ensure bondholder payment.
Borrowers also pledge not to make any parity or prior pledges of unobligated state-shared taxes. While six of the 15 borrowers have previously pledged portions of state-shared taxes to other state loan programs, coverage on the series 2010 loans remains ample. Federal subsidies, which flow through the TSSBA to participating local governments and are not pledged to bondholders, would be available to bondholders in the event of default by a borrower.
State-shared taxes include portions of gasoline, sales, investment income, and mixed-drink taxes, as well as certain Tennessee Valley Authority (TVA) payments to the state. State-shared taxes are subject to change by the state. The taxes are distributed to local entities by the Department of Revenue on a monthly basis. Tax distributions are subject to some cyclicality due to seasonality and collection factors, as well as to broader economic trends. Although distributions declined during the recession and have fallen more modestly since then, coverage of maximum loan repayments by each borrower's state-shared taxes has remained high, ranging from 1.9x to 11.4x.
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. 14, 2012.
--'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012.
--'Rating Guidelines for State Credit Enhancement Programs', June 19, 2012.
Applicable Criteria and Related Research:
Rating Guidelines for State Credit Enhancement Programs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681239
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
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