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Fitch Affirms Texas Water Development Board's SRF Sr & Sub Lien Revs 'AAA'; Outlook Stable.

CHICAGO -- As part of its continuous surveillance efforts, Fitch Ratings affirms the following state revolving fund (SRF) program bonds:

--$191.3 million SRF senior lien revenue bonds at 'AAA';

--$958.7 million SRF subordinate lien revenue bonds at 'AAA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Significant overcollateralization and reserves allow the State Revolving Fund Bond (SRF) Program to withstand significant borrower defaults; consistent with Fitch's 'AAA' stress test.

--Additional bonds test requirements prohibit new issuance that would result in downgrades of outstanding senior lien debt.

--The program's loan security requirements are strong, with borrower loan principal backed by general obligation or utility system pledges.

--The Investment practices of the Board are sound.

KEY RATING DRIVERS:

--Credit quality of the bonds is linked to repayment performance of the program's loan portfolio and quality of invested reserves.

--High single borrower concentration, albeit with highly rated entities, makes the program vulnerable to fluctuations in underlying borrowers' credit profiles.

--Balancing of future leveraging with capitalization grants and program resources is necessary to maintain strong tolerance to potential loan defaults.

SECURITY:

Senior bonds are secured by loan repayments, reserve funds and interest earnings. Subordinate lien bonds are secured by excess loan repayments and interest earnings.

CREDIT SUMMARY:

By making loans for clean water state revolving fund (CWSRF) projects to pool participants from bond proceeds, SRF federal capitalization moneys and recycled funds, and pledging loan repayments and interest earnings to debt service, TWDB's program structure significantly overcollateralizes the SRF bonds. Program cash flows provide 1.9 times (x) minimum annual debt service coverage for combined senior and subordinate outstanding bonds, with the exception of 2019 when coverage is 1.28x due to the maturity of the Board's variable rate demand bonds (VRDB) which currently total $127.6 million. In addition, the senior lien bonds are afforded a debt service reserve fund (DSRF), which is required to be maintained at average annual debt service. The reserves are invested in U.S. Treasuries and amounts in excess of the requirement are used to redeem senior lien debt service until such bonds fully mature in 2021. The subordinate bonds are paid by excess loan repayments and interest earnings. The absence of a DSRF for subordinate debt is typical and acceptable at the high rating level given the strong debt service coverage.

The loan repayments and excess cash flows excluding reserves (pledged to senior lien bonds) allow for continued senior and subordinate bond payments even in scenarios where 45% of loans default over the next four years, without recoveries. This default tolerance exceeds what Fitch would expect for a pool of this credit quality, size and diversification in an 'AAA' stress scenario (18.14%). Middle and last four year loan default tolerance equals 59% and 90%, respectively. In its analysis, Fitch conservatively incorporates a 15% maximum interest rate on the board's outstanding VRDB totaling approximately $127.6 million and applies its stress test to an additional period (2016-2019). While the default tolerance fails (by $9.7 million) to pass during the additional stress period, the board currently maintains program cash that it would use to react to any market disruptions that would impact VRDB rates. Currently, available program fund balances total approximately $300 million. The board monitors the interest rate resets daily and is prepared to call part or all of the bonds as necessary.

The loan pool consists of over 200 borrowers. Approximately 86.5% of all outstanding loans exhibit investment-grade characteristics. Fitch does not express an opinion on the remaining borrowers' credit quality. The top 10 borrowers account for approximately 79% of the portfolio's loan principal. While the concentration levels among the top 10 borrowers are high, individual concentration is relatively moderate for an SRF. The largest borrower, Trinity River Authority (revenue bonds rated 'AA+' by Fitch), currently accounts for 39% of the outstanding portfolio. The City of Houston (first lien and junior lien revenue bonds rated 'AA-' and 'AA' by Fitch) and San Antonio Water System (water revenue bonds rated 'AA+' and 'AA' by Fitch) are the next largest borrowers accounting for 17% and 9% of the total loan balance, respectively. The program's high single borrower concentration, notwithstanding strong credit quality, makes the program vulnerable to fluctuations in underlying borrower credit profiles. Loan security provisions are strong, with sewer revenue and general obligation pledges common.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);

--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28, 2008).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

State Revolving Fund and Municipal Loan Pool Rating Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150

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.
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Publication:Business Wire
Geographic Code:1U3IL
Date:Jul 5, 2011
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