TEXT - Fitch rates Colorado Water Resource Auth revs
Jan 15 - Fitch Ratings assigns 'AAA' ratings to bonds issued by the Colorado Water Resources and Power Development Authority (CWRPDA): --$34.8 million drinking water refunding revenue bonds, 2013 series A; --$58.4 million clean water refunding revenue bonds, 2013 series A. The bonds are expected to price via negotiation during the week of Jan. 28, 2013. Bond proceeds will be used to refund certain outstanding drinking water and clean water bonds for debt service savings. In addition, Fitch affirms its 'AAA' rating on the following CWRPDA outstanding debt (pre-refunding): --$317.2 million senior lien clean water revenue bonds; --$95.1 million wastewater revolving fund refunding revenue bonds; --$161.8 million senior lien drinking water revenue bonds; --$17.4 million subordinate lien drinking water revenue bonds. The Rating Outlook is Stable. SECURITY The senior lien clean water and drinking water program bonds, including the 2013 series A bonds, are secured by loan repayments, interest earnings and reserves funds, which are derived from federal grants and state match amounts. The subordinate lien drinking water and wastewater revolving fund refunding revenue bonds are secured by moneys released from the drinking water and clean water senior liens, respectively. These include excess loan repayments, interest earnings and de-allocated reserves after senior debt service is paid. The senior and subordinate lien ratings are the same due to the structural enhancement of the program. KEY RATING DRIVERS STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the state revolving fund (SRF) program has significant structural loan default tolerance from loan repayments and debt service reserves. CROSS-COLLATERALIZATION ENHANCES PROGRAM: The drinking water SRF (DWSRF) and clean water SRF (CWSRF) are cross-collateralized with one another. These allow shortfalls in one fund to be covered by surpluses in the other. This feature effectively creates one program for modeling purposes. SOLID LOAN SECURITY: Underlying loan provisions for the pool are strong. Virtually all loan principal are secured by water and/or wastewater revenue pledges or general obligation pledges. SOUND RESERVE INVESTMENTS: CWRPDA maintains sound investment practices as the program's reserve investments are held in repurchase agreements or U.S. treasury and agency securities. STRONG PROGRAM MANAGEMENT AND UNDERWRITING: CWRPDA maintains sound underwriting and loan monitoring policies. This is reflected by the fact that the program has not experienced a borrower default in the past 17 years. CREDIT PROFILE CWRPDA issues bonds to provide subsidized financing to governmental entities throughout Colorado for its clean water and drinking water state revolving fund (SRF). The bonds are issued pursuant to a bond resolution and separate series supplemental resolutions. STRONG STRUCTURAL CHARACTERISTICS Fitch's cash flow modeling demonstrates that the state revolving fund (SRF) program can continue to pay bond debt service even with portfolio loan defaults of 100% and modeled recoveries (the default tolerance rate) over any four-year period. This is in excess of Fitch's 'AAA' liability default hurdle of 46% as produced using Fitch's Portfolio Stress Calculator (the PSC). This is derived based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Loans are funded through bond proceeds. Loan repayments, reserves held in matching accounts and investment earnings are dedicated to bond debt service payments. Currently, interest earned from reserve investments helps to provide the 30% interest subsidy for borrowers. In the event that loan repayments and investment earnings are insufficient to meet debt service, the matching accounts (funded by federal CWSRF and DWSRF capitalization grants and state matching funds) will be used to cover the deficiency. Historically, reserve requirements vary by series, but in aggregate totaled $249 million as of Dec. 1, 2012 (approximately 52% of senior bonds outstanding). As the loans/bonds amortize, reserves are released from each series' dedicated reserve account to surplus accounts so that remaining reserves for each series typically equal about 30%-35% of bond principal outstanding. Excess reserves are released and are recycled to make or secure new loans. For the 2013 refunding bonds, the reserve requirement will equal maximum annual debt service and will be funded from bond proceeds. Bond debt service payments are due semiannually on March 1 and Sept. 1, beginning on March 1, 2012. Excess moneys are released (deallocated) to non-pledged equity after the Sept. 1 payment. CROSS-COLLATERALIZATION ENHANCES STRUCTURE Surplus accounts provide additional security by establishing the pool mechanism. This allows for the separate CWSRF and DWSRF to supply the other with available funds to cure loan defaults and meet timely bond debt service payments. After meeting deficiencies on senior lien bonds, surplus funds may flow to subordinated bonds and bonds of the other SRF before becoming available to make or secure new loans. SOUND LOAN SECURITY AND POOL CHARACTERISTICS The combined CWRPDA CWSRF and DWSRF loan pool is currently composed of over 150 obligors. Fitch estimates that approximately 61% of the obligors are small, non-rated entities. Nevertheless, underlying loan provisions are strong with 96% of the pool's loan principal secured by water and/or wastewater revenue pledges or general obligation pledges. Overall pool strength is reflected by the fact that there has not been a default in the program in the past 17 years. There is a moderate degree of portfolio concentration, with the top 10 obligors accounting for 42% of the loan pool. Single obligor concentration is low-to-moderate, with the cities of Pueblo, Rifle and Englewood each representing just over 5% of the total pledged loan pool. SOLID INVESTMENT PRACTICES A portion of the program's reserve funds are currently invested in repurchase agreements with eligible counterparties (subject to minimum rating requirements). Cases in which minimum rating requirements are not met require such counterparties to post additional collateral in excess of 100% (requirements vary based on each series but currently average 114%). Other reserve investments include U.S. Treasury securities in the form of State and Local Government Series (SLGS), the state's investment pool, and the Federal Home Loan Bank. As the repurchase agreements mature, the program purchases other eligible securities. FAVORABLE PROGRAM MANAGEMENT AND UNDERWRITING Established in 1981, CWRPDA has a strong record in managing Colorado's CWSRF, DWSRF, and small water resources project programs. CWRPDA, Colorado Department of Public Health and Environment (CDPHE), and Colorado Department of Local Affairs (DOLA) share responsibility for administering the state's SRF programs. This is done through an interagency arrangement typical for SRFs nationwide. A nine-member board of directors, consisting of gubernatorial appointees subject to state senate confirmation, governs the CWRPDA. CWRPDA provides loans for approved projects, purchases and refinances debt, provides for bond debt service payments, and covers SRF administrative costs. CDPHE establishes eligibility lists for SRF loans and examines technical aspects of particular projects, while DOLA executes detailed analyses of local financial needs and credit quality. An interagency committee reviews loan applications before execution. CWRPDA maintains a formal underwriting process, which involves loan applications being submitted by borrowers and internal credit analysis conducted by CWRPDA staff. The analysis includes a review of the borrowers' general, economic and financial information, utility system data, sources of debt repayment and detailed project information. CWRPDA's financial committee makes a recommendation of funding to the full board. The full board votes on the approval on the loan funding recommendation. CWRPDA annually reviews each borrower's system rate covenants and financial information. There are a group of smaller borrowers that are tracked more frequently.
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