Fitch Rates Arizona's Water Infrastructure Finance Auth $140MM SRF Bonds 'AAA'; Outlook Stable
Source: Business Wire
--$140,000,000 series 2010A;
--$50,000,000 series 2010 revenue refunding bonds.
The bonds are expected to sell via negotiation during the week of July 12, 2010. Series 2010A bond proceeds will be used to reimburse the authority for funds previously loaned to various entities throughout Arizona for water and sewer infrastructure projects. Series 2010revenue refunding bond proceeds will be used to refund portions of the Authority's outstanding program bonds.
In addition, Fitch affirms $857,910,000 in outstanding water quality revenue bonds at 'AAA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--WIFA's state revolving fund (SRF) program has significant structural default tolerance through overcollateralization of loans and debt service reserves.
--Approximately 63% of the authority's pledged loans are estimated to be investment-grade quality.
--The authority utilizes solid underwriting guidelines and program policies.
-- The investment practices of the authority are sound.
KEY RATING DRIVERS:
--Credit quality of the bonds is linked to repayment performance on the program's loan portfolio.
--Balancing of future leveraging with capitalization grants and program resources is necessary to maintain high tolerance to potential loan defaults.
SECURITY:
Program bonds are secured by borrower loan repayments and debt service reserve funds. As additional security, WIFA has pledged its debt management fees deposited into the loan servicing account in the event of deficiencies in the bond account, after taking into consideration all other transfers to the bond debt service account.
CREDIT SUMMARY:
The loan pool consists of 68 borrowers. Approximately 63% of all outstanding and projected pledged loans exhibit investment-grade characteristics. Fitch does not express an opinion on the remaining borrowers' credit quality. The top 10 borrowers account for approximately 67% of the portfolio loan principal. While the concentration levels among the top 10 borrowers are high, individual concentration is relatively moderate for an SRF. The largest borrower, Lake Havasu City, accounts for about 19% of pledged loans. While Lake Havasu's concentration is significant, WIFA has indicated that a separate structure may be utilized to fund a portion of the city's needs if the city's concentration levels under the existing indenture pose a credit concern. The performance of the pool remains satisfactory at the 'AAA' level even under the more stringent stress scenario applied to account for single-borrower concentration.
By making loans to each pool borrower from bond proceeds and SRF federal capitalization moneys, and pledging all loan repayments and interest earnings to debt service, WIFA's program structure significantly overcollateralizes the SRF bonds. After this issue, anticipated cash flows provide 1.4 times (x) minimum annual debt service coverage for leveraged bonds.
In addition, debt service requirements are funded from pledged revenues at least 90 days in advance of the payment dates. Over 80% of outstanding loans are secured by net system revenue pledges.
The program maintains debt service reserves funded with bond proceeds, which currently total $76.9 million. The reserve fund is sized at the least of maximum annual debt service, 125% average annual debt service, or 10% of bond proceeds and is invested in investment agreements with providers rated at least in the second highest rated category and/or fully collateralized by direct U.S. Treasuries or Agencies with third-party custodians.
As additional security, WIFA has pledged its debt management fees deposited into the loan servicing account, which currently total $7 million, in the event of deficiencies in the bond account, after taking into consideration all other transfers to the bond debt service account.
The excess cash flows and reserves allow for continued bond payments even in scenarios where 50% of loans default for the first four years, without recoveries or use of funds in the loan servicing account. This default tolerance exceeds what Fitch would expect for a pool of this credit quality, size and diversification in an 'AAA' stress scenario.
WIFA is expected to increase its leveraging to meet its large water and wastewater infrastructure needs in the state. However, comprehensive management and fiscal policies provide a solid foundation for sustained strong performance, and Fitch does not believe that additional leveraging will materially affect the cash flows or the pool's default tolerance capability.
Applicable criteria on Fitch's website at 'www.fitchratings.com' include:
--'Revenue-Supported Rating Criteria' (Dec. 29, 2009);
--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008).
Additional information is available at 'www.fitchratings.com'.
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Contact:
Fitch Ratings
Adrienne M. Booker, 312-368-5471, Chicago
Julie Seebach, 512-215-3740, Austin
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
Email:
cindy.stoller@fitchratings.com
