The 'AAA' rating assigned to the authority's refunding bonds, reflects good debt service coverage provided by excess loan repayments no longer needed for refunded senior lien bonds, coupled with available reserves in the program's surplus accounts. Unlike first lien bonds, 2001 series A bonds are not directly secured by the substantial reserves capitalized by federal grants and state matching funds. As a result of the refunding, outstanding non-refunded senior lien obligations' debt service will essentially be amply covered by the investment earnings of the related massive reserves. Therefore, the local government loan repayments will be available for debt service on the series 2001 A bonds.
Although the refunding bonds are not directly secured by reserve accounts, additional security is provided from surplus accounts. Surplus accounts capture reserves released from the SRF program as bond principal is retired. This pool mechanism, commonly referred to as cross-collateralization allows Clean Water State Revolving Fund (CWSRF) and Drinking Water State Revolving Fund (DWSRF) bonds, each with its own reserve accounts, to supply each other with funds for debt service payments in the event of loan defaults. The surplus accounts also are available to make-up subordinate lien debt service deficiencies. First, surplus accounts within each SRF are used to replenish reserve accounts within the same SRF if they fall below required levels. Then, surplus funds flow to refunding subordinated bonds, such as the ones now offered and bonds of the other SRF before becoming available to make or secure new loans.
This issuance will refund portions of debt associated with 25 borrowers. The city of Fort Collins is the single largest borrower accounting for 19 percent of proceeds. Of the top 10 borrowers, eight are estimated to be of investment-grade quality. Approximately 24 percent of loan repayments are from entities that are not of investment-grade quality, somewhat weaker than the credit profile of the overall program Currently, net present value saving are estimated in excess of 4 percent.
Fitch tested the default tolerance subordinate bonds could withstand assuming 24 percent of senior lien bonds defaulted over the next four years (minimum default tolerance required for Fitch's 'AAA' on the senior lien program). A default at the senior level would reduce the amount of released reserves available in the surplus account since reserves would be needed to cure senior lien debt service deficiencies. Under such a scenario where money available in the surplus accounts was reduced, approximately 42 percent of loan principal could default annually during the next four years of scheduled subordinate debt service without causing a bond default. Given the credit composition of the subordinate loan pool, actual default tolerance surpasses Fitch's 'AAA' requirements by a margin of 1.20:1.
Source: Businesswire
