Fitch Rates Colorado's $190MM Education Loan Tax and Rev Antic Notes 'F1+'.

SAN FRANCISCO -- Fitch rates the State of Colorado's $190,000,000 education loan tax and revenue anticipation notes (TRANs) series 2005B 'F1+'. The notes will be sold competitively on Dec. 7. The notes will mature Aug. 7, 2006, and are on par with $225 million in education loan TRANs series 2005A notes issued in July. Fitch also affirms the 'F1+' rating on the series 2005A notes. The financial advisor is RBC Capital Markets Inc.

The 'F1+' rating reflects the notes' strong security, payable from individual districts' loan repayments and by the state treasurer's covenant to use substantial identified resources to purchase defaulted district loans, if any, as an investment. These and other structural features significantly enhance credit quality. Also, a majority of the loan amount is borrowed by school districts with good credit quality.

Note proceeds will be used to make interest-free loans to qualifying school districts to assist with the districts' cash flow. The loans are made under a program managed by the state treasurer, retaining safeguards that protect credit quality incorporated for the first time two years ago. The program includes eligibility requirements, monitoring throughout the year, and enforcement measures to minimize non-payment risks.

Each district covenants to repay its loan by remitting property taxes received after March 1, 2006 to the state treasurer one day after receipt from the county treasurer. Loan repayments are for principal only, although the loans will bear interest if a district defaults. Note interest will be pre-funded from state general fund resources at closing. Most of the district loan repayments will be made in March, May, and June, coincident with statewide property tax collections. The districts are borrowing from 19% to 77% of their expected tax levy, with the higher amounts done by the largest districts. Borrowing districts include the 15 that participated in the series 2005A notes as well as two other small districts. The second note issuance is substantially smaller than the state originally anticipated, reflected lower borrowing needs by several of the districts.

All district loan repayments are due by June 27, 2006, well in advance of the notes' Aug. 7 maturity. At that time, any non-payment constitutes default by the district, and the loan begins to bear interest. Under the state's note authorizing resolution, if, on June 28, the amount in the loan repayment account together with the pre-funded interest account is not sufficient to fully provide for the TRAN repayment, the state treasurer covenants to provide the shortfall amount using any funds in his custody available for investment. The state has considerable resources available for such investment, including the State Education and Highway Funds. These two funds are expected to equal about $555 million on June 30, 2006. These resources are distinct from those available for borrowing to repay the state's own cash flow notes. Funds that could be used to repay $700 million in Colorado's general fund TRANs on a priority basis also are available for investment if the two funds mentioned above are not sufficient. These other funds are projected to total $2.9 billion at June 30, 2006, providing strong coverage for both Education Fund TRAN issuances.

These notes are issued under state legislation revised in 2003 to enhance the TRANs' credit quality. Financial mismanagement by a small number of districts within the state has since been corrected, partly through control by the state treasurer. Under the cash flow loan program, the treasurer can reject a district's loan application, set the loan amount, and control the amount and timing of each district's periodic drawdowns. The law also requires each district's superintendent and board to authorize the loan, with the authorization codifying the loan repayment procedure. Then, each district must provide update reports to the treasurer throughout the borrowing year. The treasurer also requires verification of a cash shortage before approving a draw.

Three of the state's largest school districts are expected to make up 73% of the total district borrowings. These districts each carry credit ratings or evaluations showing good credit quality. Of the remaining 14 districts participating in the loan program, no one represents more than 10%. The cash flows demonstrate each district's ability to fully repay the loan, with all but the largest and smallest anticipated at least one month ahead of the June 27, 2006 due date.

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