Fitch Rates Missouri's State Revolving Funds $22.2MM Revs 'AAA'; Outlook Stable.

CHICAGO -- Fitch assigns an 'AAA' rating to the Missouri State Environmental Improvement and Energy Resources Authority's (EIERA, or the authority) $22.2 million water pollution control and drinking water revenue bonds (state revolving funds programs), series 2006B. The bonds are scheduled to price on Oct. 31, 2006 via a syndicate led by Oppenheimer & Co. Inc. Bond proceeds will be used to fund loans to seven governmental entities for wastewater and drinking water improvement projects. In addition, Fitch affirms the 'AAA' rating on EIERA's $1.2 billion outstanding water pollution control and drinking water revenue bonds. The Rating Outlook is Stable.

The rating reflects the strong coverage margins provided by excess loan repayments and federal state revolving fund (SRF) capitalization grants for the clean water SRF (CWSRF) and drinking water SRF (DWSRF) programs, which would facilitate bondholder payments, even assuming unprecedented levels of defaults among pledged municipal loans. EIERA's cross-collateralized structure further enhances bondholder security, as reserves from one program are available to cure deficiencies in the other program. The rating also reflects the SRF's strong investment guidelines and conservative underwriting practices.

After the 2006B bonds are issued, the SRF's combined invested reserves will equal approximately $739 million, or 62% of estimated outstanding debt. These pledged reserves provide significant enhancement allowing the bonds to withstand borrower defaults of 69% over the next four years, which exceeds Fitch's 'AAA' stress test requirements by 2.5 times, given the size and credit quality of the loans. CWSRF and DWSRF reserves, which are established under each series indenture, are currently sized at 70% of construction and issuance costs for each new loan. Fitch expects maintenance of current reserve funding levels for the near future.

Metropolitan St. Louis Sewer District (MSD; wastewater system revenue bonds rated 'AA' by Fitch) remains the largest combined pool participant, representing $223 million in clean water loans, or 18% of the portfolio. In Feb. 2004, the MSD, which was historically barred by charter from incurring debt for systemwide improvements, received voter approval of a charter revision and the authorization to issue $500 million in sewer system debt. Future concentration concerns are offset by ongoing lending to other large program participants, continuing diversification, and EIERA's option of lending to MSD outside the master trust.

Kansas City is the portfolio's second-largest pool participant, representing 9% of the portfolio. The pool's 10 largest borrowers make up 57% of the portfolio. Underlying loan security provisions are strong, and loans attained by most jurisdictions require voter approval for both general obligation and revenue bonds, providing additional security to the SRF portfolio, which contains a large percentage of nonrated credits.

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