Feb 4 - Fitch Ratings has assigned an 'AAA' rating to the following bonds
issued by the state of Connecticut (the state):
--Approximately $150 million state revolving fund (SRF) general revenue bonds,
--Approximately $100 million SRF refunding general revenue bonds, series 2013B.
The bonds are expected to sell via negotiation during the week of Feb. 4th. The
2013A bond proceeds will be used to make loans to governmental entities in the
state for SRF wastewater and drinking water projects. The 2013B bonds will be
used to refund certain outstanding series of SRF program bonds.
In addition, Fitch has affirmed the following bonds at 'AAA':
--Approximately $824 million in outstanding general revenue bonds.
The Rating Outlook is Stable.
The program's loan repayments, debt service fund and support fund are legally
pledged to bondholders. In addition, the state is required under the resolution
to make sufficient transfers to the debt service fund from all available moneys
in the revolving fund, which includes program equity, if necessary.
SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that pledged
program resources 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).
CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The clean water SRF (CWSRF) and
drinking water (DWSRF) are cross-collateralized with one another, which allow
shortfalls in one fund to be covered by surpluses in the other, further
enhancing bondholder security.
SOUND BORROWER QUALITY: A minimum of 80% of all outstanding loan principal
exhibits investment-grade characteristics. In addition, approximately 78% of the
aggregate loan principal is secured by unlimited tax general obligation pledges.
SOLID PROGRAM MANAGEMENT AND UNDERWRITING: Connecticut maintains sound formal
program underwriting and loan monitoring guidelines exhibited by the fact that
there have been no borrower defaults to date.
WEAK LEGALS: The general bonds resolution (GBR) provides that additional bonds
can be issued without regard to minimum coverage requirements as long as no
prior liens exist on amounts securing such additional bonds.
PLEDGED RESOURCES CAN WITHSTAND RATING STRESS HURDLE
Connecticut issues SRF bonds and uses the proceeds to provide subsidized loans
to local entities throughout the state for clean water and drinking water fund
projects or to reimburse its SRF for loans made with program equity. The bonds
are issued pursuant to a GBR and separate series resolutions. Fitch evaluates
the CWSRF and DWSRF and as a single program given the cross-collateralization
feature, whereby debt service deficiencies in one fund may be cured by surpluses
in the other.
While all program funds are held in the SRF (including SRF federal
capitalization moneys, required state matching funds and pledged loan
repayments), the program's legally pledged resources are limited to the debt
service and support funds. Pledged resources alone allow the bonds to perform
even if loan defaults were 100% over the first, middle, and last four years of
the program's life, assuming 90% recoveries per Fitch's criteria. This is in
excess of the Fitch's PSC stress hurdle of 26%, which is derived from the pool's
overall credit quality as measured by the ratings of underlying borrowers, size,
loan terms, and concentration.
The program also maintains monies in its equity fund which would be available to
pay bondholders in the event of a shortfall from pledged funds. As of Nov. 1,
2012, the equity balance totaled $341 million. Under the GBR, the state is
obligated to transfer to the debt service fund any available moneys in the SRF
(including equity monies) in an amount sufficient to make debt service payments.
Connecticut's incorporation of this obligation in the GBR provides additional
bondholder protection and is unique among traditional SRF programs, which
typically exclude such a covenant. Fitch acknowledges this structural
enhancement but notes that equity monies were not included in Fitch's current
program model primarily because equity balances could diminish over time if they
are recycled into new loans. However, some portion of these balances may be
included in future models.
SOLID INVESTMENT PRACTICES
Connecticut's program assets are invested in investment agreements, with
providers that are highly rated and/or fully collateralized by direct U.S.
Treasury or Agency securities. Certain assets are also invested in the state
treasurer's short-term investment fund (STIF), which is an investment pool of
high-quality, short-term money market instruments. The sustained credit quality
of the SRF program's asset investments is important to sustaining the current
FAVORABLE PORTFOLIO CHARACTERISTICS
The loan pool consists of 96 borrowers, with the largest, the Metropolitan
District Commission (MDC), accounting for approximately 23% of outstanding
obligations. The largest 10 borrowers account for approximately 57% of
outstanding obligations. The portfolio's credit quality is strong, with a
minimum of 80% of total outstanding obligations estimated to exhibit
investment-grade characteristics. Loan security is also strong as the loan
portfolio is secured entirely by general obligation pledges, local utility
revenue pledges or a combination of both.
STRONG UNDERWRITING AND LOAN MONITORING PROCEDURES
Connecticut requires that program borrowers evidence its ability to repay loans
and provide relevant documentation such as financial statements, capital budgets
and economic data. Management monitors monthly loan repayments and works with
its loan servicing contractor, the program's trustee bank. In the event of a
late payment, a policy is in place to implement immediate collection procedures.
LIBERAL ADDITIONAL BONDS REQUIREMENT
Fitch views negatively the absence of a minimum coverage provision in the GBR as
it could result in less than sum-sufficient coverage of debt service from
pledged loan repayments and account earnings alone. However, the program's ample
additional funds sufficiently mitigate the risk of loss at the current rating
level, as demonstrated in Fitch's cash flow modeling.