Fitch Affirms Illinois Finance Auth SRF Revenue Bonds at 'AAA'; Outlook Stable
Fitch Ratings has affirmed its 'AAA' rating on the following bonds issued by the Illinois Finance Authority (IFA):
-- $136.3 million revolving fund revenue bonds, series 2002 and series 2004.
The Rating Outlook is Stable.
Bonds secured by proceeds from pledged loan repayments, debt service reserves and account interest earnings.
KEY RATING DRIVERS
SOLID 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).
LARGELY UNRATED POOL: Approximately 85% of IFA's loan portfolio consists of unrated entities. In accordance with its criteria, Fitch has reviewed the credit quality of certain large borrowers and conservatively assumes the remaining unrated and unreviewed borrowers to be of speculative grade credit quality in its analysis.
MODERATE POOL DIVERSITY: IFA's borrower pool is large with a total of 160 borrowers. Only one borrower, the Bloomington and Normal Water Reclamation District (BNWRD), represents greater than 4% of the combined pool.
CROSS-COLLATERALIZATION ABILITY STRENGTHENS PROGRAM: The program includes a cross-collateralization feature wherein excess funds from the clean water state revolving fund (CWSRF) are available to cover deficiencies in the drinking water state revolving fund (DWSRF) and vice-versa. The ability for the two funds to cross-collateralize helps to minimize losses if defaults were to occur.
WHAT COULD TRIGGER A RATING ACTION
A significant increase in leverage without a corresponding increase in credit enhancement could reduce the ability of the program to withstand Fitch's 'AAA' default stress hurdle, as produced by the PSC.
FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Annual cash flow coverage from repayments of pledged loans 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 (33%) as produced by the 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 concentration.
LARGELY UNRATED BORROWER POOL EXHIBITS MODERATE DIVERSITY
The pledged loan pool is large with a total of 160 obligors. The top 10 borrowers represent approximately 36% of the aggregate loan pool. BNWRD (no public rating available) represents 13% of outstanding principal, down from 16% during Fitch's last review in November 2011. The remaining borrowers represent less than 4% of the total pool.
Including internal credit opinions provided for three borrowers, Fitch calculates that approximately 33% of the pool exhibits investment-grade characteristics. The remaining unrated portion of the pool was conservatively estimated to be of speculative grade credit quality in Fitch's analysis. Loan security provisions are strong. Approximately 96% of the pledged loans are backed by a municipality's water/sewer system revenues, while the remaining loans are backed by general obligation pledges.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
The Illinois SRF programs are jointly managed by the IFA, the Illinois Environmental Protection Agency (IEPA), and the Governor's Office of Management Budget (GOMB) through a memorandum of agreement. The IFA serves as the SRF issuer of the bonds for the state, while the GOMB provides assistance and advice on all SRF bond issues.
The IEPA acts as the day-to-day CWSRF and DWSRF program administrator and executes all federal capitalization grants from the U.S. Environmental Protection Agency. The IEPA is also responsible for the overall management of the SRF programs, including review and approval of all loan applications, planning documents, and disbursement requests.
Program loans are chosen by the IEPA following an established set of administrative policies and procedures to evaluate loan applications. Qualified applicants must demonstrate technical compliance; compliance with regulatory and statutory requirements; project administration; environmental aspects; and financial capability to repay the loan.
SOLID STRUCTURAL CHARACTERISTICS
IFA utilizes a hybrid-style structure, benefiting both from scheduled loan repayments plus investment earnings and amounts held in reserves. Over the life of the bonds, aggregate loan repayments excluding reserves are expected to be approximately 1.5 times (x) total debt service due, with a minimum annual coverage level of 1.14x anticipated.
SIGNIFICANT RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT
The 2002 and 2004 bonds also require a minimum debt service reserve fund balance of 50% of outstanding bonds, respectively. As of September 2012, the program's combined reserve balance was $63.5 million, equal to approximately 50% of outstanding bonds.
Eligible investments include U.S. obligations, municipal debt, and short-term obligations of U.S. corporations rated in the two highest rating categories. Other eligible investments include federal securities, certificates of deposit, direct bank obligations, repurchase agreements, and other investments that may be permitted by the state of Illinois.
Additional parity bonds can be issued provided that a debt service reserve fund equal to at least 10% of outstanding bonds is established and provided that after such issuance all in debt service coverage is at least 1.10x.
CROSS-COLLATERLIZATION ADDS STRENGTH
The program includes a cross-collateralization feature whereby after sufficient funds are deposited into the debt service fund of a particular bond series, released reserves, excess loan repayments, and investment earnings flow into a deficiency fund. Deficiency fund monies are available to make debt service payments on any CWSRF and DWSRF bonds issued under the master trust agreement.
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
Major Parkhurst, +1-512-215-3724
111 Congress Avenue
Austin, TX 78701
Adrienne Booker, +1-312-368-5471
Doug Scott, +1-512-215-3725
Elizabeth Fogerty, +1-212-908-0526 (New York)