Fitch Rts $99.2MM Pennsylvania IDA Bds 'A' Underlying.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 24, 2003

Fitch Ratings assigns an underlying 'A' rating to $99.2 million Pennsylvania Industrial Development Authority (PIDA) economic development revenue bonds, series 2004, and affirms the 'A' rating on $551.1 million outstanding parity bonds.

The new bonds, expected the week of Dec. 29 through negotiation with a syndicate led by Goldman, Sachs & Co., will be due Jan. 1, 2014 and are issued as periodic auction reset securities (PARS) with a seven-day auction period. The bonds are limited obligations of PIDA, payable from its revenues, including loan repayments and investment income. The bonds will be insured by Ambac Assurance Corp. whose insurer financial strength is rated 'AAA' by Fitch.

The 'A' rating reflects PIDA's well established record as the critical economic development arm of the commonwealth, its program including the 1.50x test for both the issuance of additional bonds or additional loans, the small loan sizes, its geographic distribution of loans as well as its generally low default rate. Projected debt service coverage now approximates the rate covenant following PIDA's substantial transfer of funds to the commonwealth in 2002.

PIDA has served as one of the primary engines of economic development within Pennsylvania for more than four decades. The authority has the ability to make loans throughout all areas of the state to all industrial classifications, at subsidized rates. PIDA is not the sole lender as other sources of financing must be achieved by the projects, and certain requirements must be met.

PIDA has had a particularly interactive relationship with the commonwealth of Pennsylvania over the past decade, with PIDA generated funds flowing to the commonwealth in some years and in other years, commonwealth resources flowing to PIDA. In 1991 PIDA, in a strong cash position, transferred some $200 million to the commonwealth and in 1994, an additional $93 million. In 1996, proceeds of $83.3 million bonds flowed to the commonwealth to be used for debt service on commonwealth general obligation bonds.

From 1992 through 2001, PIDA received $258 million in commonwealth appropriations as well as a loan portfolio (Sunny Day fund). In 2002, PIDA sold $258.1 million bonds to provide funds for debt service on commonwealth bonds for budgetary relief; there are no plans currently for additional appropriations to PIDA.

The series 2004 bonds are being issued to refund series 1994 bonds due in 2012 and 2014. In conjunction with the refunding plan, PIDA entered into an interest rate swap with JP Morgan Chase, the counterparty, in October 2002 and received $9.5 million in fiscal 2003. The swap will be exercised on Jan. 6, 2004 and PIDA will be paid $1.9 million. The $99.2 million notional amount of the swap is the same amount as the series 2004 bonds and the swap will amortize in the same principal amounts as the series 2004 bonds. The swap agreement terminates in 2014 and PIDA will receive 68% of the London Interbank Offering Rate (LIBOR) and will pay a fixed 5.12% to the counterparty. The series 2004 bonds are auction rate bonds.

PIDA's obligation under the swap agreement is on parity with outstanding debt. In fiscal 2003, the $6.2 million net decrease in fair market value of the swap contract contributed to PIDA's $6.8 million net loss. Concurrent with the refunding of series 1994 maturities, the authority will refund selected maturities of series 1996 bonds from authority funds. After these actions, PIDA's unrestricted assets will amount to $181 million.

PIDA bonds are payable from loan repayments and investment income. The loan portfolio includes 1,168 PIDA loans with a balance of $501.5 million and 20 loans remaining from the Sunny Day fund, with a balance of $54.2 million. Criteria for the Sunny Day loans were different from those employed by PIDA but as the loans are repaid, reinvestment is under PIDA conditions. The average original PIDA loan was $703,220 and the weighted average annual interest rate is 3.51%; delinquency rates have risen to 3.4% of outstanding principal in October 2003 from 2.4% in March 2002. All Sunny Day loans are current although there were write-offs at acquisition. Additionally, there is a planned forgiveness of one $5.2 million loan following construction of a new facility to retain 350 jobs and create 650 new ones by June 30, 2004.

Projected net revenues available for debt service provide about 1.5 times (x) coverage for annual debt service. PIDA's rate covenant provides that no loans shall be made if net revenues would decline below 1.50x current debt service requirements. Additional bonds also require 1.50x projected annual coverage. Bond security includes a reserve fund, the lesser of peak debt service or 10% of bond proceeds; a surety bond will provide the requirement for the new issue. The 7th supplemental indenture provides for the elimination of the parity debt service reserve fund requirement for future series of bonds.