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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