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
--$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.
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.
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
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
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
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
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.