Fitch Rates Oregon Bond Bank 'AA'
Source: Business Wire
The 'AA' rating reflects the diversification of the pledged loan pool, strong collateralization levels from loan repayments and a debt service reserve fund. The rating also incorporates OECDD's loan underwriting standards. The bond bank structures the loan pool with a 1.2 times (x) cash flow coverage level. At this level, coupled with the debt service reserve fund, loan repayments can withstand four-year defaults of up to 35%. While the bond bank's loan pool passes Fitch's 'AAA' stress test, this pool is rated 'AA' because of the ability to leverage the pool down to a 1.1x coverage level. In addition, unlike 'AAA' rated state revolving loan pools, this program does not have the added layer of federal oversight.
Administered by OECDD, the Oregon Bond Bank funds infrastructure loans to localities statewide through three main programs: special public works; community facilities; and water/wastewater. By policy, 80% of each loan is funded with bond proceeds with the remaining 20% funded by a collateral loan that is made with state lottery revenue-the bond bank's main source of capital. Both loans are pledged as security for debt service, as well as the repayments from direct loans made during the initial institution of the bond bank.
With the receipt of lottery bond proceeds and multiple other grants and loan sources at the state and federal level, the bond bank is able to handle the state's local infrastructure needs. The OECDD has received a portion of lottery revenue since fiscal 1995. Continued leveraging of bond bank capital and diversification of the loan pool are expected. The overall pledged loan pool, including nonbond-funded loans, comprises 110 borrowers. More than half of the borrowers are estimated to exhibit investment-grade characteristics. Since 2002, borrowers are no longer required to make a general fund pledge for loan repayment. However, if alternative funding is pledged for a particular loan, then borrowers must prove that the loan's credit quality is at least as high as the outstanding rating on the bond bank's pool. Management anticipates that most borrowers will continue to make a general fund pledge.
Approximately 50% of all loans currently fund water and wastewater treatment improvements. The bank requires these loans to maintain a minimum of 1.1x revenue bond coverage. In addition to revenue, general fund, or other pledges, OECDD may request that the state divert revenue due to a local government in the event that the respective entity defaults on its loan obligation. With the current issue, the city of Newberg is the largest borrower, representing 7% of the total pledged loan pool. The Metropolitan Service District (Metro) is the second largest borrower, representing approximately 6% of the portfolio. All pledged loan repayments are projected to provide 1.2x debt service coverage over the next 25 years, although additional bonds tests allow leveraging down to the 1.1x coverage level.
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