TEXT-Fitch affirms Iowa Finance Authority SRF revs at 'AAA'
Nov 26 - Fitch Ratings affirms its 'AAA' rating on the following Iowa Finance Authority's (IFA) outstanding bonds: --$502.7 million state revolving fund (SRF) bonds, series 2010A, 2010B and 2011; --$331.8 million SRF bonds, series 2003, 2007, 2008 and 2009. The Rating Outlook is Stable. SECURITY The series 2010A, 2010B, and 2011 bonds (together the MTA bonds) are secured by loan principal and interest amounts pledged under the restated and amended master trust agreement (MTA), account investment earnings, and, if necessary, amounts held in the equity fund. The series 2003-2009 bonds (or the existing bonds) are secured by each series' pledged loan principal and interest amounts, investment earnings, debt service reserve funds, deficiency funds, and revenues pledged to the MTA bonds. KEY RATING DRIVERS STRONG FINANCIAL STRUCTURE: The program's overcollateralization and significant reserves provide enough credit enhancement to withstand loan defaults of up to 89% (the default tolerance) of the pool in the first four years of the bonds life and up to 100% in both middle and last four-years. This is in excess of Fitch's 'AAA' liability default hurdle of 59% as produced using Fitch's Portfolio Stress Calculator (PSC), which is derived based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. ADEQUATE POOL CREDIT QUALITY: An estimated 60% of pledged borrowers are small, non-rated entities. However, strong underlying loan provisions provide security of loan principal from water, sewer, general obligation pledges, or some combination of the three. CROSS-COLLATERALIZATION ENHANCES POOL STRUCTURE: The deficiency fund (with respect to the existing bonds only) and equity fund provide for cross-collateralization, meaning surplus amounts in each respective fund allocated to the clean water accounts can be used to cure shortfalls in drinking water accounts and vice-versa. CREDIT PROFILE Iowa's SRF program follows guidelines established by the Environmental Protection Agency under the Drinking Water and Clean Water Acts, wherein federal capitalization grants and a 20% state match are used to provide subsidized loans to eligible borrowers. Such loans are used to provide below-market financing for water pollution and drinking water infrastructure projects within the state. HYBRID STRUCTURE PROVIDES STRONG ENHANCEMENT With the issuance of the 2010 bonds, the indenture was amended and restated allowing for all loan repayments to be pledged to the MTA instead of dedicated loan repayments specifically securing each outstanding series of program bonds. All future bonds are expected to be issued out of the amended and restated MTA and secured by the program's open indenture. IFA's scheduled borrower repayments derived from bond proceeds and direct loans derived from the program's pledged equity funds, plus interest income (net revenues), provide strong annual debt service coverage. Excess cash flow coverage or overcollateralization after paying debt service is expected to be a minimum of 1.25x. In addition to pledged revenues, existing bonds are secured by a deficiency fund held by the trustee. The deficiency fund is used to prevent any shortfalls of debt service payable to the existing bonds only. After debt service is paid in full, remaining amounts in the deficiency fund are transferred to the MTA equity fund on each payment date. Amounts available in the equity fund provide additional security for all outstanding bonds (both from the restated and existing MTA). CROSS-COLLATERALIZATION ENHANCES BONDHOLDER SECURITY The deficiency fund (with respect to the existing bonds only) and equity fund provide for crosscollateralization, meaning amounts in each fund allocated to clean water accounts can be used to cure shortfalls in drinking water accounts and vice versa. This increases the diversity of the loan pool and lessens the risk of any one borrower's default eroding reserve balances and threatening bondholder payments. As of August 2012, the unencumbered equity fund balance stood at approximately $70 million. Program reserves, which total approximately $35 million, are primarily invested in fully collateralized investment agreements, money market funds, and U.S. agency securities. ASSET COVERAGE RATIOS PROJECTED TO REMAIN STRONG Senior or first lien loans are required to be covered by pledged net revenues of at least 1.1x annual parity debt, while any junior lien loans must be covered by 1.05x maximum annual debt service. Senior lien loans account for more than 90% of all program loans. MTA funds can be transferred out of the program, as long as an officer's certificate report reflects that such withdrawals would not cause the projected asset coverage ratio to drop below 1.2x. Additional parity bonds can be issued provided that, after such issuance, all-in debt service coverage is at least 1.05x. In calculating such coverage, all expected pledged revenues, funds, accounts and subaccounts can be used, excluding amounts in the rebate fund. Given IFA's stated intent, Fitch expects that IFA will sustain coverage levels and borrower loan default tolerance levels that will continue to pass Fitch's 'AAA' stress test scenarios. PORTFOLIO CHARACTERISTICS The combined MTA consists of approximately 420 obligors. Although there are a large number of individual borrowers, concentration is moderate for a municipal bond pool, with the top 10 representing approximately 44% of the aggregate loan pool. Single-obligor concentration is also moderate, with the largest obligor, the Wastewater Reclamation Authority, representing 12% of the total pledged loan pool. Fitch estimates that approximately 32% of the pool exhibits investment-grade characteristics. Loan provisions are strong with virtually all loan principal secured by water and/or wastewater revenue pledges or general obligation pledges, the majority of which are senior lien. SOLID UNDERWRITING AND LOAN MONITORING IFA is ultimately responsible for the arrangement of financing for borrowers. This includes the review, processing, underwriting, and approval of program-eligible loans that meet the minimum coverage requirements. The IFA board consists of nine members appointed by the governor, with the approval of two-thirds of the members of the state Senate. Management of the program is supplemented by the state Department of Natural Resources (DNR). DNR is responsible for performing ongoing SRF program operations, monitoring project progress, and providing technical support to participants. DNR provides technical assistance to loan participants and monitors all projects to ensure conformity with SRF and DNR rules and regulations. 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: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (May 21, 2012); --'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria State Revolving Fund and Leveraged Municipal Loan Pool Criteria Counterparty Criteria for Structured Finance Transactions
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