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Fitch Affirms Arkansas Development Finance Authority's SRF Revs at 'AAA'

CHICAGO–(BUSINESS WIRE)–

Fitch Ratings has affirmed the ‘AAA’ ratings for the following Arkansas Development Finance Authority’s (ADFA) bonds:

–$56 million revolving loan fund capital improvement bonds, series 2011C.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by loan repayments and other accounts that are pledged under the series and general bond resolutions.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch’s cash flow modeling demonstrates that the state revolving fund (SRF) program can continue to pay bond debt service even if there were loan defaults in excess of Fitch’s ‘AAA’ liability default hurdle.

CONCENTRATED PORTFOLIO: The program is somewhat small and concentrated with the largest two borrowers representing over one-third of the portfolio. However, underlying loan provisions for program borrowers are strong, largely reflecting water and sewer revenue or general obligation pledges.

CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The program includes a cross-collateralization feature wherein excess funds from the clean water SRF (CWSRF) are available to cover deficiencies in the drinking water SRF (DWSRF) and vice versa. The ability for the two funds to cross-collateralize helps to minimize losses if defaults were to occur.

SOUND PROGRAM MANAGEMENT: Arkansas Natural Resources Commission (ANRC), which manages the program, maintains sound underwriting and loan monitoring procedures. To date, the pledged portfolio has not experienced a permanent loan default.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration or increased leveraging resulting in the program’s inability to pass Fitch’s liability default ‘AAA’ hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch’s view that these events are not likely to occur.

CREDIT PROFILE

ADFA issues revolving loan fund revenue bonds to fund ANRC SRF loans to various public entities within the state. Funds are typically disbursed to borrowers to pay eligible CWSRF or DWSRF project costs or to reimburse ADFA for projects previously funded. The combined CWSRF and DWSRF loan pool consists of 65 individual borrowers.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

The SRF program’s scheduled pledged loan repayments are projected to provide significant minimum debt service coverage of 3.69x. Overall, Fitch calculates the program’s asset strength ratio (PASR) to be a strong 4.6x, which is notably higher than Fitch’s’ AAA’ median of 1.6x. The PASR includes total scheduled loan repayments divided by total scheduled bond debt service. While the program’s general bond resolution (GBR) requires that coverage be maintained at 1.10x, the moderately low borrower demand for program resources offset’s any concerns about overleveraging.

Fitch’s cash flow modeling demonstrates that the SRF program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four-year period of the bonds life. This is in excess of Fitch’s ‘AAA’ liability stress hurdle of 47.4% 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, size, and loan term.

CROSS-COLLATERALIZATION ENHANCES BONDHOLDER SECURITY

The GBR provides for cross-collateralization between the CWSRF and DWSRF accounts, meaning that deficiencies in one SRF account may be covered by available moneys from the other SRF. This feature enhances bondholder security by providing additional sources of available revenues from which to draw for debt service. It also increases the overall diversity of the portfolio, allowing analysis of the program as one pool instead of separate SRF portfolios. Any such transfer creates a repayment obligation by the deficient SRF, but the obligation is subordinate to the trust estate’s pledge under the GBR.

NON-PLEDGED MONIES POTENTIALLY AVAILABLE

The GBR-established CW and DW revolving loan fund currently totals approximately $136 million and provides additional cushion by capturing excess loan repayments after debt service is paid. While this fund is not pledged, and therefore not incorporated in Fitch’s analysis, ADFA may use available amounts to cure deficiencies at its sole discretion.

PROGRAM CONCENTRATION OFFSET BY LOAN SECURITY AND MANAGEMENT

The pool’s single-borrower concentration remains moderately high as the city of Little Rock represents 18% of total loan par. The second largest borrower, the city of Conway, comprises 16% of the portfolio. Underlying loan provisions are strong with more than 85% of the portfolio’s principal secured by water and sewer utility revenues or GO pledges. The remaining loans in the portfolio are backed by sales and use taxes or special taxes.

ANRC’s program management is strong and includes an initial review of borrowers’ finances and other characteristics to ensure compliance with provisions of loan agreements. Annual financial reviews are also conducted on outstanding borrowers. On a monthly basis, ADFA prepares borrower status reports that monitor loan repayments.

To date, no permanent loan defaults have been reported in the pledged program, although there have been a few delinquencies in the past. Under the GBR, management may substitute or remove troubled loans out of the pledged portfolio. Since the establishment of the GBR in 2009, there have been no loans de-pledged from the portfolio.

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

Applicable Criteria and Related Research:

–‘Revenue-Supported Rating Criteria’ (June 16, 2014);

–‘State Revolving Fund and Leveraged Municipal Loan Pool Criteria’ (April 28, 2014).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria — Effective April 28, 2014 to Oct. 22, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746076

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=920236

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.

Security Upgrades & DowngradesBondsFitch Ratings Contact:

Fitch Ratings

Primary Analyst

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

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst:

Major Parkhurst, +1-512-215-3724

Director

or

Committee Chairperson:

Jessalynn Moro, +1-212-908-0608

Managing Director

or

Elizabeth Fogerty, +1-212-908-0526

Media Relations, New York

elizabeth.fogerty@fitchratings.com […]