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Fitch Rates Rhode Island SRF Bonds 'AAA'.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 1, 2004

Fitch Ratings assigns a 'AAA' rating to the Rhode Island Clean Water Finance Agency's (the agency) $40.29 million safe drinking water revolving fund revenue bonds, series 2004 A. The bonds are scheduled to price on March 9, through a negotiation led by UBS Financial Services, Inc.

In addition, Fitch affirms the 'AAA' rating on the agency's $292 million outstanding senior clean water revolving fund revenue bonds. Bond proceeds will be loaned to Pawtucket and East Providence to finance the costs of drinking water supply projects and will also be used to provide required state matching funds through the drinking water state revolving fund. The Rating Outlook for the agency's state revolving fund (SRF) program is Stable.

The 'AAA' rating reflects the program's developing but highly rated drinking water loan pool, which is being leveraged and cross-collateralized with the clean water SRF (CWSRF), and also its strong default tolerance due to substantial reserves. The rating also reflects the agency's use of state-match bonds to fund the state's matching requirement. Drinking water SRF (DWSRF) and CWSRF capitalization grants are typically deposited into reserve funds, which are available to cure loan defaults from the statewide pool of municipal borrowers. Interest earnings on the CWSRF reserves provide the subsidy for CWSRF borrowers, while interest earnings on the DWSRF reserves and the interest portion of DWSRF loan repayments secure the state-match portion of the bonds.

The issuance of the bonds represents several firsts for the agency. The 2004 A bonds represent the first leveraging of the DWSRF, and they also represent the first issuance of state-match bonds to cover the state's required matching contribution - which has previously been funded directly by the state. Given pressures on state and local finances nationwide, Fitch expects the agency to use this approach for the next leveraging of the CWSRF as well. Over the long term, the use of state-match bonds may require the agency to reduce the subsidy that borrowers receive. However, Fitch does not expect this to erode the credit quality of new or outstanding bonds. In addition, the agency has just established a cross-investment agreement that allows the drinking water or clean water pool to invest program reserves in the other pool should any of the DWSRF or CWSRF borrowers default, thus 'cross-collateralizing' the two loan pools and allowing them to be considered as one larger and more diverse pool, thereby reducing concentration risk.

With the cross-collateralization of the clean water and drinking water loan pools, the combined portfolio includes 29 municipal borrowers. Borrowers with investment-grade characteristics make up well over 90% of the loan pool, among the highest investment-grade compositions of any SRF program. Drinking water program reserves are expected to equal over 40% of the bonds and provide continued bond performance assuming 87% borrower defaults for four years, leading to a score of 327% on Fitch's SRF Strength Index. Nearly 54% of all drinking water loans could default over the life of the bonds without any interruption in payments to bondholders.

The significant default tolerance offsets concentration risk posed by the two largest borrowers - the Narragansett Bay Commission (NBC) and the city of Warwick - of the CWSRF and DWRSF loan portfolio. By cross-collateralizing the DWSRF with the CWSRF, the agency effectively reduced NBC's and Warwick's concentration from 40.3% and 27.7%, to 33.9% and 23.4%, respectively, and these levels should continue to drop given the large number of drinking water providers in the state. The 'AAA' rating reflects Fitch's expectation that the agency will seek insurance on the portion of future NBC lending which exceeds 50% of outstanding portfolio principal in order to manage single-risk concentration within the loan pool.

A major rating consideration is the cost of Rhode Island's program to reduce pathogen input to Narragansett Bay (the bay), about two-thirds of which is combined sewer overflow (CSO) from the Providence area. This environmental priority will likely drive CWSRF activities in the coming years. CSOs continue to make an impact on the bay with increased portions closed to shell fishing during wet weather, tangibly affecting the economy of the region. Rhode Island has provided NBC with low-cost capital since it created the utility to assume Providence's sewage facilities in 1980, and the SRF is now expected to provide the majority of funding for the CSO abatement plan, phase one of which is estimated to cost $244 million and is expected to be completed in 2007. NBC received approval for multi-year rate increases to cover the debt associated with this plan from the Rhode Island Public Utilities Commission in June 2003.
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Publication:Business Wire
Date:Mar 1, 2004
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