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Fitch Affirms Kansas Development Fin Auth's SRF Bonds at 'AAA'; Outlook Stable.

Austin: Fitch Ratings has affirmed the rating on the following bonds issued by the Kansas Development Finance Authority (KDFA) at 'AAA':

--$93.4 million in outstanding revolving funds revenue bonds (Kansas Department of Health and Environment), series 2010SRF-1;

--$60.5 million in outstanding revolving funds taxable revenue bonds (Kansas Department of Health and Environment), series 2010SRF-2 (Build America Bonds - Direct Payment to Issuer);

--$49.9 million in outstanding revolving funds revenue bonds (Kansas Department of Health and Environment), series 2011SRF.

The Rating Outlook is Stable.

SECURITY

Revolving fund revenue bonds issued under the 2010 master financing indenture (MFI) are secured primarily by pledged loan repayments, interest earnings on all funds and accounts established under the MFI and Build America Bond interest subsidy payments.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability default hurdle, as produced using Fitch's Portfolio Stress Model (PSM).

HIGH-QUALITY LOAN POOL: Approximately 80% of KDFA's combined loan pool consists of borrowers exhibiting investment-grade credit quality. Loan security is very strong, with all loan principal secured by general obligation (GO) and/or utility revenue pledges.

MODERATE POOL DIVERSITY: KDFA's borrower pool is large and moderately diverse in comparison to similar municipal loan pools. The pool consists of nearly 300 obligors, the top 10 of which comprise 45% of the total pool. The largest borrower, representing 8% of the pool total, is the city of Manhattan.

EFFECTIVE PROGRAM OVERSIGHT: KDFA's loan underwriting and administration have proven effective as its revolving funds have never experienced a loan payment default.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in Kansas Development Finance Authority's SRF program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.

CREDIT PROFILE

KDFA, acting in conjunction with the Kansas Department of Health and Environment (KDHE), provides municipalities throughout the state with subsidized financing for water supply (drinking water) and sewer system (clean water) improvement projects. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects.

The 2010 MFI integrated the financing functions of the public water supply and water pollution control revolving fund programs and has now replaced the prior clean water (CWSRF) and drinking water state revolving fund bond (DWSRF) resolutions associated with these programs. The prior bond indenture was closed with the creation of the 2010 MFI.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Fitch calculates the pool program's asset strength ratio (PASR), which includes total scheduled loan repayments, earnings and reserves divided by total scheduled bond debt service, to be solid at 2.9x. This compares favorably to Fitch's 2017 'AAA' median PASR for other SRFs of 1.9x. Due to the program's available enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% in the first, middle and last four years of the outstanding bonds' life. This is in excess of Fitch's 'AAA' liability stress hurdle of 23%, as produced by the PSM. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Per Fitch criteria, a 90% recovery is applied when determining default tolerance.

HIGH-QUALITY BORROWER POOL WITH MODERATE DIVERSITY

Fitch estimates that approximately 80% of program participants exhibit investment-grade credit quality. In aggregate, pool credit quality is better than similar municipal pools, as reflected by an 'AAA' PSM liability stress of 23% versus Fitch's median of 30% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very good with all loans secured by GO and/or utility revenue pledges.

The program consists of 299 active borrowers, the top 10 of which comprise about 45% of the total pool. The city of Manhattan (GO bonds rated AA+) is the largest borrower, representing 7.7% of outstanding loan pool principal. At 7.0% of the total, the city of Topeka (GO bonds not rated by Fitch but assessed to be of strong credit quality) is the next largest borrower. The remaining top 10 borrowers range in size from 3.0% to 5.3% of the total pool. Fitch views the combined pool as moderately diverse in comparison to other SRF programs rated by Fitch. Overall, pool composition is similar to that at Fitch's last review in September 2016.

ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION

KDFA's 2010 MFI utilizes a cash-flow structure, wherein program bonds are primarily protected from losses by overcollateralization, or surplus loan repayments made in excess of bond debt service. After being made available for cross-collateralization, surplus funds are then eligible for release to the non-pledged general fund, in accordance with program documentation.

EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING

KDHE is responsible for the selection and approval of eligible loans to be financed. DWSRF loans are required to be secured by an unlimited GO pledge or by an 'AAA'-rated bond insurer. For borrowers without taxing authority, loans may be backed by net utility system revenues additionally secured by: (i) an 'AAA'-rated bond insurer, (ii) revenues sufficient to cover 1.4x debt service, or (iii) revenues sufficient to cover 1.25x debt service combined with a reserve fund equal to 10% of the original loan principal. CWSRF loans are required to be secured by an unlimited GO pledge or by net utility system revenue pledge additionally secured by an 'AAA'-rated bond insurer. Due to KDHE's strong underwriting and management, none of the revolving fund programs has ever experienced a loan default.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Oct 5, 2018
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