Fitch Ratings has assigned an 'AAA' rating on the following
Kentucky Infrastructure Authority's (KIA, or the authority) state
revolving fund (SRF) bonds:
--$125 million wastewater and drinking water revolving fund
revenue bonds, series 2012A.
In addition, Fitch affirms the following rating:
--$197 million in outstanding wastewater and drinking water
revolving fund revenue bonds, series 2010A at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by loan repayments from governmental
agencies throughout Kentucky, pledged funds and accounts, and
investment earnings on such funds and accounts.
KEY RATING DRIVERS
SOLID PROGRAM ENHANCEMENT: The program's overcollateralization
from loan repayments enable the authority's clean water and
drinking water SRF program to withstand loan defaults in excess of
what Fitch would expect in an 'AAA' stress scenario for a pool of
this size and credit quality. In addition, the program's available
surplus funds totaling $296 million provides further
enhancement.
STRONG LOAN SECURITY: All loans are backed by net system revenue
pledges.
MODERATE-TO-HIGH CONCENTRATION: The combined pledged loan pool
is concentrated, with the top 10 obligors representing
approximately 56% of the aggregate loan pool.
RELATIVELY WEAK LEGAL COVENANTS: Certain legal covenants are
weaker than some other SRF programs, including the additional bonds
test and the lack of a required debt service reserve at the general
trust indenture level.
CREDIT PROFILE
CASH FLOW PROGRAM AND PORTFOLIO
The authority leverages its wastewater and drinking water
programs, using a traditional SRF cash flow structure. Bonds are
typically issued under an open general trust indenture with each
series issued under separate series indentures. Bond proceeds are
used to make loans to certain governmental entities to finance
eligible clean water and drinking water SRF infrastructure
projects, or reimburse the authority for qualifying infrastructure
loans already made to certain entities.
KIA's combined wastewater and drinking water SRF portfolio
securing the bonds comprises 153 borrowers. The largest borrower,
Sanitation District No. 1 (the district), represents 16% ($142.4
million) of the combined portfolio. The authority does not plan to
make any additional loans to the district due to its concentration
in the pool. Overall, Fitch views the pool concentration as high
with the largest 10 obligors accounting for approximately 56% of
the aggregate loan portfolio. Nevertheless, underlying loan
provisions are strong with the entire loan portfolio's principal
secured by utility revenue pledges.
DEFAULT TOLERANCE ASSESSMENT
By making loans to each borrower from bond proceeds and SRF
federal capitalization moneys, including the SRF's required state
matching funds, and pledging all loan repayments to debt service,
the authority's program structure overcollateralizes the SRF bonds.
Projected program cash flows from pledged loan repayments provide a
minimum of 1.9 times (x) annual debt service coverage. The
overcollateralization from loan repayments enable the authority's
SRF program to withstand 46.3% loan defaults (the default
tolerance) during the first four-year stress period, and up to
53.5% and 53.7% during the middle and last four-year periods,
respectively. This is in excess of Fitch's 'AAA' stress scenario
(35.2%) for a pool of this size and credit quality.
Additional enhancement is provided from the program's $296
million in available surplus funds. While not legally pledged,
these resources would likely be used if available and needed. If
surplus funds were included in Fitch's stress analysis, the
program's significant enhancement would allow 100% default
tolerance in any four-year stress period.
LEGAL COVENANTS
The program's legal structure is somewhat weak comparable to
other cash flow SRFs, as no debt service reserve is funded for the
outstanding or the series 2012A bonds and the additional bonds test
requires only 1.1x coverage on senior lien debt and 1.0x coverage
on all debt. However, based upon the authority's survey of future
borrowing needs, Fitch does not expect coverage to fall below
levels necessary to sustain the current rating.
UNDERWRITING AND LOAN MONITORING
The authority maintains strong loan underwriting policies
consisting of review of historical audited financial statements,
cash flow projections and user rates and charges and affordability.
Monitoring procedures consists of annual review of audited
financial statements. At present, all of the pledged borrowers are
current and the program has never experienced a permanent loan
default.
Unlike most SRF programs, the General Assembly of Kentucky,
which established the authority, has authorized KIA to directly
impose service charges on any borrowers pursuant to its loan
agreement and adjust and increase such service charges, if
necessary. Under certain circumstances, an increase in service
charges may be subject to approval by the Public Service Commission
of Kentucky.
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 20, 2011);
--'State Revolving Fund and Municipal Loan Pool Rating
Guidelines' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
State Revolving Fund and Leveraged Municipal Loan Pool Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648902
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