Nov 6 - Fitch Ratings has affirmed its 'AAA' rating on the following bonds
issued by the Water Infrastructure Finance Authority of Arizona (WIFA, or the
---$863.9 million in outstanding water quality revenue bonds.
The Rating Outlook is Stable.
The bonds are secured by certain loan repayments payable primarily from
governmental entities, pledged account funds and investment earnings on such
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the
state revolving fund (SRF) 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). Liability default
hurdles derived by the PSC are calculated based on overall pool credit quality
as measured by the rating of underlying borrowers, size, loan term, and
SOLID PORTFOLIO CREDIT QUALITY: At least 58% of WIFA's loan portfolio is
estimated to be investment grade. Loan provisions are strong with the majority
of loan principal secured by water and/or wastewater revenue pledges or general
MODERATE-TO-HIGH CONCENTRATION: The combined pledged loan pool is concentrated
with 70 individual obligors, the top 10 of which represent approximately 63% of
the pool. Fitch views this concentration risk as mitigated given the strong loan
security and excess cushion after application of Fitch's stress test.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Annual cash flow coverage from repayments of pledged loans combined with
scheduled reserve de-allocations remains strong. 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 stress hurdle (45%), which is derived based on the aggregate
credit quality of the program's pledged loan pool.
BORROWER POOL EXHIBITS MODERATE-TO-HIGH CONCENTRATION
The combined pledged SRF loan pool is composed of approximately 70 obligors. The
largest borrower, Lake Havasu City (senior lien revenue bonds rated 'A' and
general obligation junior lien bonds rated 'AA-', both with Stable Outlook
by Fitch), represents about 22% of the portfolio on a combined basis. In
addition, the pool's 10 largest borrowers comprise approximately 63% of the
Fitch views the concentration as moderate-to-high for a municipal bond pool.
However, underlying loan provisions are strong, with approximately 83% of the
loan portfolio's principal secured by revenue pledges with the remainder backed
by either GO or other tax-backed pledges. Also, previous feedback from WIFA
suggests that Lake Havasu's concentration has peaked due to the completion of
most capital expenditure projects, and is expected to decrease moving forward.
EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING
WIFA's loan underwriting guidelines, evidenced by extensive formalized policies
and procedures, are a key credit strength. Prior to loan origination, WIFA staff
performs a due diligence review and a financial capability review. The due
diligence review includes determination of legal, managerial, technical, and
financial capability. The financial capability review focuses on a borrower's
historical performance over the previous three-year period, with results used to
analyze trends and project future performance.
WIFA annually reviews its portfolio to assess annual loan performance and to
confirm loan category (qualified or not qualified). To date, WIFA has not
experienced any borrower defaults. WIFA has identified a few borrowers whose
debt service coverage has slipped below their 1.2x rate covenant. WIFA is
working with each of these borrowers to implement strategies for improvement,
including rate adjustments.
STRUCTURAL CHARACTERISTICS ARE SOLID
WIFA provides loans to local entities for wastewater and drinking system
improvements through its clean water and drinking water SRF programs (CWSRF and
DWSRF). WIFA's SRF programs benefit from credit enhancement provided both by
pledged revenues in excess of debt service due (over-collateralization) plus
amounts and earnings held in pledged accounts. On a quarterly basis,
over-collateralization is projected to be over 1.3x for the leveraged bonds
after taking into account amounts due to state match bonds.
AVAILABLE RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT
In addition to over-collateralization, WIFA's SRF programs are supported by
certain pledged account funds and interest earnings on such funds including the
financial assistance account and reserve account.
The program indenture requires that the reserve account be maintained at a
minimum of: (i) 10% of the original balance of all outstanding bond principal,
(ii) 1.0x maximum annual debt service, or (iii) 1.25x of the average annual debt
service remaining. As of October 2012, the reserve fund stood at approximately
$88 million, or 9.7% of bonds outstanding.
Additional parity bonds can be issued provided that after such issuance debt
service coverage relating to leveraged bonds is at least 1.2x. In calculating
coverage, only principal and interest from qualified, pledged loans are
CROSS-COLLATERLIZATION STRENGTHENS PROGRAM
Excess amounts in the CWSRF can be transferred to make up any deficiencies in
the DWSRF and vice-versa, resulting in cross-collateralization of the two funds.
This increases the diversity of the aggregate loan pool and lessens the risk of
any one borrower's default eroding reserve balances and threatening bondholder
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:
Revenue-Supported Rating Criteria
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
Rating Guidelines for State Credit Enhancement Programs
Counterparty Criteria for Structured Finance Transactions