Fitch Affirms Colorado Water Resource Authority Revs at 'AAA'; Outlook Stable
Fitch Ratings affirms its 'AAA' rating on the following Colorado Water Resources and Power Development Authority (CWRPDA) outstanding debt:
--$317.2 million senior lien clean water revenue bonds;
--$95.1 million wastewater revolving fund refunding revenue
--$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 are secured by loan repayments, interest earnings and reserves funds, which are derived from federal grants and state match amounts.
The subordinate lien bonds are secured by moneys released from the senior lien, including excess loan repayments, interest earnings and de-allocated reserves after senior debt service is paid.
The wastewater revolving fund refunding revenue bonds are on parity with the subordinate lien clean water revenue bonds.
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 can continue to pay bond debt service even with portfolio loan defaults of 100.0% (the default tolerance rate) over any four-year period. This is in excess of Fitch's 'AAA' liability default hurdle of 45.5% 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.
POOL CHARACTERISTICS: Fitch estimates that approximately 64% of CWRPDA's borrowers are small, non-rated entities. Nevertheless, underlying loan provisions are strong with virtually all 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.
CROSS-COLLATERALIZATION ENHANCES PROGRAM: The drinking water SRF (DWSRF) and clean water SRF (CWSRF) are cross-collateralized with one another, which allows shortfalls in one fund to be covered by surpluses in the other.
The combined CWRPDA revolving fund loan pool is currently composed of 196 obligors. There is a low-to-moderate degree of concentration, with the top 10 borrowers accounting for approximately 30% of the loan pool. Single obligor concentration is also low-to-moderate, with the cities of Englewood and Glenwood each representing approximately 4.0% of the total pledged loan pool.
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. Reserve requirements vary by series, but in aggregate totaled $259.6 million as of June 1, 2012, or approximately 43% of bonds outstanding. 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.
Surplus accounts provide additional security by establishing the pool mechanism that 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
Approximately 69% of 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%). The remaining 31% of reserve funds include U.S. Treasury securities in the form of State and Local Government Series, the state's investment pool, and the Federal Home Loan Bank. As the repurchase agreements mature, the program is purchasing other eligible securities.
LOAN UNDERWRITING AND MONITORING
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. The authority annually reviews each borrower's system rate covenants and financial information. There are a group of smaller borrowers that are tracked more frequently.
FLOW OF FUNDS
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.
Funds are de-allocated from reserve accounts into surplus accounts as bonds amortize. As permitted by federal law, the surplus account of each SRF is cross-collateralized with the other. If not needed for this purpose, reserves are recycled to make or secure new loans.
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.
Established in 1981, CWRPDA has a strong record in managing Colorado's CWSRF, DWSRF, and small water supply 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 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 before execution.
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
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