Nov 7 - Fitch Ratings affirms its 'AAA' rating on the Texas Water
Development Board's (TWDB) state revolving fund (SRF) program bonds:
--$116.6 million SRF senior lien revenue bonds at 'AAA';
--$764.9 million SRF subordinate lien revenue bonds at 'AAA'.
The Rating Outlook is Stable.
Senior bonds are secured by loan repayments, a debt service reserve fund (DSRF)
and interest earnings. Subordinate lien bonds are secured by excess loan
repayments and interest earnings.
KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the SRF
program can continue to pay bond debt service even with portfolio loan defaults
of 68%(the default tolerance rate) over the next four-years and 100% over the
middle and last four-year periods. This is in excess of Fitch's 'AAA' liability
default hurdle of 30%(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.
SOLID LOAN SECURITY: Program loans are secured primarily by the obligors'
utility system revenue or GO pledges.
HIGH BORROWER CONCENTRATION: The loan portfolio has a high single borrower
concentration with the largest borrower, Trinity River Authority (revenue bonds
rated 'AA+' by Fitch) comprising 39.5% of the portfolio. The second largest
borrower, City of Houston (combined utility system revenue bonds rated 'AA-' by
Fitch), accounts for approximately 20% of the outstanding portfolio. The pool's
concentration risks are largely mitigated by strong borrower credit quality.
HIGHLY RATED POOL: TWDB's SRF pool is of high credit quality and includes, with
at least 79% of the pool exhibiting 'AA-' or higher credit characteristics.
SOLID RESERVE INVESTMENTS: TWDB maintains sound investment practices as the
program's DSRF is held in U.S. treasury securities.
STRONG ABILITY TO WITHSTAND RATING STRESS HURDLE
TWDB makes loans for clean water SRF (CWSRF) projects to pool participants from
bond proceeds, SRF federal capitalization grants and recycled funds, and pledges
those loan repayments and interest earnings to debt service. Pledged loan
repayments combined with a debt service reserve fund dedicated to senior lien
bonds provide significant aggregate program debt service coverage of 2.35x
(total program resources divided by total debt service). These resources allow
the senior and subordinate lien bonds to perform even if loan defaults were 68%
over the first four years of the bonds life and 100% over the middle and last
four years. This is well in excess of the Fitch's PSC stress hurdle of 30%.
In its analysis, Fitch conservatively incorporates a 15% maximum interest rate
on the board's outstanding variable rate demand bond principal totaling
approximately $69.1 million. The TWDB maintains sufficient program cash to cover
any market disruptions that might impact variable interest rates. The TWDB
monitors the interest rate resets daily and is prepared to call part or all of
the bonds as necessary.
BONDS ENHANCED BY SOLID RESERVE INVESTMENTS
The program DSRF is invested in U.S. Treasuries and amounts in excess of the
requirement are used to redeem senior lien debt service until such bonds fully
mature in 2021. The subordinate bonds are paid by excess loan repayments and
interest earnings. The absence of a DSRF for subordinate debt is typical and
acceptable at the high rating level given the strong debt service coverage.
STRONG LOAN QUALITY REFLECTS CAREFUL UNDERWRITING:
The loan pool consists of over 150 borrowers. Approximately 90% of all
outstanding loans exhibit investment-grade characteristics; Fitch does not
express an opinion on the remaining borrowers' credit quality. The top 10
borrowers account for approximately 79% of the portfolio's loan principal. While
the single borrower concentration is high, the pool's strong credit quality and
management's solid underwriting guidelines somewhat mitigate concentration
risks. Recently, TWDB instituted a procedure to its underwriting practice by
establishing a loan committee of key staff members to review projects prior to
board review. Loan security provisions are also strong, consisting of water and
sewer revenue or GO pledges.
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