Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Indiana Finance Authority (IFA):
--Approximately $100 million state revolving fund (SRF) program bonds, series 2015A (Green Bonds).
Series 2015A bond proceeds will be used to finance certain water and wastewater system projects in the state and to pay costs of issuance. The 2015A bonds replace the series 2014C bonds which were never sold. The 2015A bonds are expected to price via competitive sale the week of Jan. 19.
In addition, Fitch has affirmed the following rating:
--$1.5 billion outstanding parity bonds at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by loan repayments, debt service reserve funds and/or releases from such funds, and other accounts pledged under the series and master trust indentures.
KEY RATING DRIVERS
SOUND FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that IFA's SRF program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).
MODERATE POOL DIVERSITY: IFA's combined loan pool is large and moderately diverse. The largest borrower, the city of Fort Wayne, represents a manageable 9.3% of the combined pool. The largest 10 borrowers represent approximately 41% of the total pool.
BELOW-AVERAGE POOL QUALITY: Approximately 60% of IFA's loan portfolio consists of unrated entities, which Fitch conservatively assumes to be of speculative-grade credit quality in its analysis. Overall, pool credit quality is slightly below average in comparison to other SRFs rated by Fitch.
STRONG PROGRAM MANAGEMENT: The IFA adheres to consistent, conservative underwriting policies. Management and underwriting strength is exhibited by the fact that the program has never experienced a default.
RATING SENSTIVITIES
REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the SRF program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.
CREDIT PROFILE
IFA's clean water SRF (CWSRF) and drinking water SRF (DWSRF) were created to provide loans to local entities for wastewater and drinking system improvements. The IFA is responsible for administration and management of the SRFs. Like many SRF programs, the IFA is in the process of transitioning the program from primarily a reserve fund structure, wherein loss protection is provided by reserves, to a cash flow structure, or one in which loss protection is provided by available surplus cash flows.
FINANCIAL STRUCTURE EXHIBITS ADEQUATE DEFAULT TOLERANCE
Fitch considers the program's asset strength ratio (PASR) to be below average but adequate at approximately 1.3x versus Fitch's 2014 'AAA' median of 1.8x. The PASR is calculated by dividing total scheduled loan repayments plus any reserve balances and account earnings by total scheduled bond debt service. Minimum annual debt service coverage is also calculated to be about 1.1x, which is typical for SRF structures enhanced by reserve funds.
Because of this available enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 80% in the first four years and 100% in the middle and last four years of the outstanding bonds' expected life (per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This result is in excess of Fitch's 'AAA' liability rating stress hurdle of 43%, as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size and term, and concentration.
Current default tolerance levels are consistent with those at Fitch's last review in March 2014. However, as noted in Fitch's previous rating commentary, a sizeable reserve release associated with the series 2014B refunding led to a weakening of the default tolerance during the first four years of the programs' scheduled debt service.
LOAN POOL MODERATELY DIVERSIFIED
The combined loan pool is composed of about 350 borrowers. Excluding the Indianapolis Local Public Improvement Bond Bank, whose loans were defeased via an escrow agreement in 2011, the city of Fort Wayne is the largest participant, representing about 9.3% of the pool. At 7.8%, the second largest borrower is the Terre Haute Sanitation District. Although the specific loan securities pledged by these borrowers are not rated by Fitch, both are assessed to be of high credit quality. Each remaining program participant accounts for 4% or less of the total pool. Overall, Fitch views the loan pool as having above-average diversity in comparison to other similar 'AAA' programs. In aggregate, the top 10 borrowers represent approximately 41% of the loan pool versus Fitch's 'AAA' median level of 53%.
While approximately 40% of the pool is rated 'A-' or better, the remaining 60% does not have a public rating. Therefore, in accordance with its criteria, the unrated portion of the pool was conservatively estimated to be of speculative grade credit quality ('BB') in Fitch's analysis.
Due largely to the number of unrated entities, credit quality is somewhat weaker than that of similar municipal pools rated by Fitch, as reflected by an 'AAA' PSC liability stress hurdle of 43% versus Fitch's 'AAA' median level of 30% (lower liability stresses correlate to stronger credit quality). However, the strong loan security pledges, which consist primarily of water/wastewater net system revenues, and above-average pool diversity somewhat mitigate the pool credit risk.
LOSS PROTECTION PROVIDED BY RESERVES AND OVERCOLLATERALIZATION
Under the SRF program's structure, each bond series is protected from losses by borrower loans made in excess of bond debt service (overcollateralization) and, in certain prior series, separately secured debt service reserves. As series bonds amortize, released reserves, excess loan repayments and interest earnings are deposited into a deficiency fund, which is available to make debt service payments on any bonds issued under the master trust indenture. The method by which excess amounts are deposited into the deficiency fund allows for cross-collateralization between the CWSRF and DWSRF, increasing pool diversity and potentially lowering total loss amounts. Due to the cross-collateralization feature, Fitch combines the programs in its cash flow modeling.
No dedicated reserve fund is expected to be funded with the series 2015A bonds. However, the bonds benefit from excess reserve deallocations released from previous series' reserves, as described in the preceding paragraph. At the direction of the IFA, funding of dedicated reserves for the series bonds may be initiated by delivering written notice to the trustee. Combined reserve balances from previous bond issues are approximately $245 million, or roughly 17% of total outstanding bonds.
STRONG PROGRAM MANAGEMENT AND UNDERWRITING
IFA manages both the CWSRF and DWSRF programs using strong underwriting practices. Among other factors, IFA takes into consideration in its borrower assessment the creditworthiness of the borrower and environmental goals of the SRF program. Loans secured by system revenue pledges (the primary source of loan security) must demonstrate minimum coverage of 1.25x annual debt service coverage and are also required to create a local DSRF equal to 1.0x maximum annual debt service.
Loans are typically limited to 20 years and are structured with level annual payments. Annual loan monitoring is conducted on outstanding borrowers and includes verification of local reserves and a review of financial statements. No loan defaults have been reported within the IFA SRFs to date.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'State Revolving Fund and Leveraged Municipal Loan Pool Criteria' (Oct. 22, 2014);
--'State Revolving Fund and Leveraged Municipal Loan Pool 2014 Peer Review' (Nov. 10, 2014);
--'Revenue-Supported Rating Criteria' (June 16, 2014).
Applicable Criteria and Related Research:
State Revolving Fund and Leveraged Municipal Loan Pool Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=792908
State Revolving Fund and Leveraged Municipal Loan Pool (2014 Peer Review)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=806628
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=972315
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