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Fitch Affirms $51.9MM Florida DOT State Infrastructure Bank Bonds at 'AA'; Outlook Stable

From
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CHICAGO–(BUSINESS WIRE)–

Fitch Ratings affirms its ‘AA’ rating on the following Florida Department of Transportation (FDOT) state infrastructure bank (SIB) revenue bonds:

–Approximately $51.9 million SIB revenue bonds, series 2005A and 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged loan repayments, interest earnings and reserve funds.

KEY RATING DRIVERS

STRONG PROGRAM ENHANCEMENT: Fitch’s cash flow modeling demonstrates that the FDOT SIB can continue to pay bond debt service even if there were portfolio loan defaults in excess of Fitch’s ‘AA’ liability default hurdle, as demonstrated by using Fitch’s Portfolio Stress Calculator (PSC).

LOWER RECOVERIES LIMIT PROGRAM QUALITY: While coverage levels are strong, any default-related recoveries are not expected to be as high as those for certain traditional ‘AAA’ rated federal state revolving fund (SRF) programs (whose loans are secured by tax-backed or utility system pledges). In addition, the program’s reliance on state capital contributions distinguishes this credit from most traditional ‘AAA’ rated SRF programs, which are federally capitalized with strong federal oversight.

HIGH BORROWER CONCENTRATION: The SIB is a highly concentrated portfolio of 20 participants with the largest 10 borrowers comprising nearly 80% of the portfolio.

RECENT DECLINE IN BORROWER QUALITY: The quality of the portfolio has declined recently due to the addition of a number of unrated borrowers since 2012. Despite the decline, there have been no SIB program defaults to date. The portfolio’s decline in borrower quality is mitigated by the SIB’s strong debt service coverage.

HISTORICALLY STRONG STATE SUPPORT: The state historically has demonstrated a commitment to the program through annual appropriations, and that support is anticipated to continue. Fitch rates Florida’s general obligation bonds ‘AAA’ with a Stable Outlook.

RATING SENSITIVITIES

CONTINUED STRONG COVERAGE AND STATE SUPPORT: The SIB program’s ability to sustain strong debt service coverage from loan repayments and annual appropriations from the state is important to sustain the rating.

REDUCTION OF STRUCTURAL ENHANCEMENT: Continued reduction in aggregate borrower credit quality, and increased leveraging resulting in the program’s inability to pass Fitch’s ‘AA’ liability default hurdle would put downward pressure on the rating.

CREDIT PROFILE

The SIB was created in 2000 with the enactment of Section 339.55, Florida Statutes. Pursuant to that section, FDOT may provide loans and credit enhancements to governmental units and private entities for use in constructing and improving qualified transportation facilities. Such transportation facilities must be on the state highway system or provide for increased mobility on the state’s transportation system or provide intermodal connectivity with airports, seaports, rail facilities, and other transportation terminals for the movement of people and goods.

All program bonds are issued under a master resolution, with each series issued pursuant to a supplement resolution. The program bonds are structured using a hybrid (cash flow and reserve fund) model with pledged loan repayments and reserves securing the bonds. Management does not anticipate additional bond issuance in the near term due to sufficient program capital.

CONCENTRATED POOL, VARIOUS SECURITIES PLEDGED

The SIB loan pool has 20 borrowers, resulting in high portfolio concentration risk. The pool’s largest single-borrower, the city of Jacksonville (sales tax revenue bonds rated ‘A+’ by Fitch), represents approximately 12% of the loan portfolio. The Panama City-Bay County International Airport (not rated by Fitch) is the pool’s second largest borrower representing approximately 11.4%.

The pool’s 10 largest borrowers account for approximately 79% of the total. Given the nature of the SIB and management’s plans to issue no additional bonds in the near term, Fitch expects that the pool will remain concentrated. The portfolio’s pledged security varies, consisting of state appropriations, toll revenues, local option sales taxes, non-ad valorem revenues, port revenues, passenger facilities charges and Federal Transit Administration grants. Fitch believes default-related recovery levels with these security types are lower than other pools that have property tax or utility system revenue pledges.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Overcollateralization from excess cash flows and equity contributions is projected to provide substantial minimum debt service coverage of 3.8x. Overall, Fitch calculates the program’s asset strength ratio (PASR), to be a strong 4.9x, and higher than Fitch’s ‘AA’ median of 1.7x. The PASR is calculated by dividing total scheduled loan repayments and reserve funds by total scheduled bond debt service.

Given significant pledged resources, Fitch’s cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four year periods. This is in excess of Fitch’s ‘AAA’ and ‘AA’ liability stress hurdles of 65.3% and 58.1%, respectively, as produced by the PSC.

The liability stress hurdle is calculated based on overall pool credit quality as measured by the ratings of underlying borrowers, and loan size and term. Per Fitch criteria, a 90% recovery is applied when determining default tolerance. Fitch conducted additional recovery sensitivity tests in its analysis due to the potential for lower recoveries as discussed herein.

A program reserve for all parity debt, funded by bond proceeds at the least of 10% of par outstanding, 1x maximum annual debt service (ADS), or 1.25x average ADS is available to make up for shortfalls due to any missed repayments. Currently, the reserve fund equals $7.7 million or approximately 15% of outstanding bond par. The reserves are all invested in U.S. treasury securities.

DETERIORATION IN ESTIMATED BORROWER QUALITY

Fitch estimates that 42% of the pledged loan revenue is of investment-grade quality, which is a decline from the 71% estimated in 2012. The reduction in quality is primarily due to the addition of six unrated loans from both public and private borrowers. Although Fitch cannot determine the credit quality of the recently added loans, FDOT management maintains that its underwriting policies and monitoring guidelines for the SIB have remained unchanged. SIB borrowers have a strong repayment history, as there have been no loan defaults to date.

Loan agreements are standardized, with loans primarily being secured by a senior lien pledge. Subordinate lien pledges are only accepted if the senior lien is publicly rated ‘BBB’ or better. Currently, five of the program’s total loans are backed by subordinate lien pledges.

Loan approval is based on a number of factors, including the financial viability of the project, the perceived transportation benefits provided by the project, the interest rate, and the portion of the project funded from other sources. SIB loans are generally not used to fund the entire cost of a project, and would be made for initial right-of-way and other start-up costs if repayment is not dependent upon project completion. In addition, borrowers agree to submit semi-annual progress reports on program and financial activities and agree to provide FDOT with access to the project site, and to all records related to the project.

HISTORICALLY STRONG STATE SUPPORT SHOULD CONTINUE

Loans are made from a combination of capital contributions provided by state appropriations, recycled funds, and bond proceeds. Since program inception in 2001, over $350 million in capital contributions has been provided to the SIB by the state, with at least $10 million expected to be provided annually over the next several years.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘Revenue-Supported Rating Criteria’, dated June 3, 2013;

–‘State Revolving Fund and Leveraged Municipal Loan Pool Criteria’, dated April 28, 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=746076

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=896694

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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Contact:

Fitch Ratings, Inc.

Primary Analyst

Adrienne M. Booker, +1-312-368-5471

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

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Secondary Analyst

Major Parkhurst, +1-512-215-3724

Director

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Committee Chairperson

Steve Murray, +1-512-215-3729

Senior Director

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Fitch Affirms $51.9MM Florida DOT State Infrastructure Bank Bonds at 'AA'; Outlook Stable

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