Dec 11 - Fitch Ratings has affirmed its 'AA-' rating on the following bonds
issued by the state of Ohio (the state) through its state transportation
infrastructure general revenue fund bond fund program (the program):
--Approximately $17.1 million in outstanding transportation project revenue
The Rating Outlook is Stable.
The bonds are secured on a parity basis by program loan repayments combined with
amounts in related program funds and accounts.
KEY RATING DRIVERS
HIGH DEFAULT TOLERANCE: Fitch's cash flow modeling demonstrates that the program
can continue to pay bond debt service even with loan defaults in excess of
Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio
Stress Calculator (PSC).
LOWER RECOVERY PROSPECTS LIMIT RATING: While coverage levels are strong, if any
defaults were to occur, recoveries are not expected to be as high as those for
certain traditional 'AAA'-rated federal state revolving fund programs, whose
loans are secured by tax-backed or utility system pledges.
FUTURE LEVERAGING: The rating also reflects Fitch's expectation of additional
leveraging to fund loans to political subdivisions throughout the state for
transportation projects and uncertainty as to the credit quality of those loans.
This risk is somewhat mitigated by minimum bond debt service coverage and
reserve balance requirements but is reflected in a rating which is lower than
the liability default hurdle would suggest.
HIGHLY CONCENTRATED LOAN POOL: The combined pledged loan pool, which includes
loans made directly from the program (direct loans) and loans made from bond
proceeds (indirect loans), is highly concentrated in comparison to similar
programs. The pool consists of 23 direct and indirect loans placed to a total of
18 borrowers. On a combined basis, the largest participant, the Toledo-Lucas
County Port Authority (not rated by Fitch), represents approximately 37% of the
MORAL OBLIGATION ENHANCES STRUCTURE: In the event pledged loan revenues are
insufficient to cover debt service or if the reserve balance falls below the
required amount, the state provides a moral obligation (MO) to replenish such
amounts. While the MO is a positive structural feature, there currently is no
rating enhancement provided by the MO factored into Fitch's analysis although
the rating could be enhanced by the MO in the future.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Annual cash flow coverage from repayments of pledged loans is strong through the
next eight years, exceeding 1.5x annually. After eight years, cash flow coverage
drops below 1x but is expected to be supplemented by future direct loans and
enhancement provided by required reserve balances. On a combined basis, all-in
debt service coverage (scheduled loan repayments, expected future loans and
reserves divided by scheduled debt service) is approximately 1.7x.
Cash flow modeling demonstrates that the program can continue to pay bond debt
service even with hypothetical loan defaults of 100% over any four-year period.
This is in excess of Fitch's 'AAA' liability default hurdle (34.7%), as produced
by the PSC, which is derived based on the overall pool credit quality as
measured by the rating of underlying borrowers, size, loan term, and
BORROWER POOL EXHIBITS HIGH CONCENTRATION
The combined direct and indirect loan pool is composed of 17 obligors, with the
top 10 representing approximately 94% of the total loan pool. The largest
borrower, the Toledo-Lucas County Port Authority, represents about 37% of the
total pool. Fitch views the pool concentration as high in comparison to similar
municipal loan pools.
EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING
The state GRF program follows a formal underwriting process requiring a review
by the Division of Finance within the state Department of Transportation, then
the approval of both a loan committee and the Director of Transportation of the
state. Loans must also meet certain criteria including the possessing a revenue
stream from one or more of the following: motor vehicle gas taxes, local
government tax pledges, toll proceeds, tax increment financing payments,
property assessments, license plate and registration fees, Issue 2 local
government funds, or other user payments or fees.
The state GRF program is an investment fund used to make loans and provide other
forms of credit assistance to public and private entities to carry out highway
construction and transit capital projects, including highway, transit,
intermodal, rail, airports and waterways. The state of Ohio was selected as one
of the pilot states in 1996 and capitalized with $87 million of federal funds,
pursuant to section 350 of the National Highway System Designation Act. Also in
1996, the program was granted $40 million of additional funds in state GRF as
part of state matching funds to provide loans that would not qualify under the
AVAILABLE RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT
The program is currently structured as a hybrid-style model, with excess cash
flow (i.e. overcollateralization) plus reserves providing the majority of credit
enhancement. Excess amounts available after debt service is paid are then
re-loaned to eligible borrowers creating a revolving loan program.
The program reserve fund, which is required to be maintained at the greater of
$5 million or 10% of outstanding bonds, provides structural security. The
current balance of the program reserve fund is $5 million.
If loan repayments are insufficient to cover debt service, SIB GRF account
balances are pledged to bondholders prior to drawing on the program reserve
fund. Amounts in the SIB GRF totaled $ million as of March 2012. However,
amounts in the GRF are expected to be loaned (i.e. recycled) to future borrowers
and therefore may not be immediately available for bondholders.
STATE MO PROVIDES ADDITIONAL ENHANCEMENT
There is an MO by the state, albeit not a legal requirement, to replenish the
program reserve fund if it falls below the minimum specified level. The MO is a
positive credit feature, but Fitch notes that the MO currently does not provide
any enhancement to the rating. To date, the MO has never been needed.
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)
--Rating Guidelines for State Credit Enhancement Programs (June 19, 2012)
--Counterparty Criteria for Structured Finance Transactions (May 30, 2012)
Applicable Criteria and Related Research:
Counterparty Criteria for Structured Finance Transactions
Rating Guidelines for State Credit Enhancement Programs
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Revenue-Supported Rating Criteria