Chicago-based ratings agency Fitch announced it had assigned an “AAA” rating to the R.I. Clean Water Finance Agency’s $57.2 million water-pollution control revolving-fund revenue bonds, series 2006 A (pooled loan issue). In addition, Fitch said it affirms its “AAA” rating on the agency’s $366.6 million outstanding senior bonds, on parity with the new issue. The rating outlook is stable.
The revolving-fund revenue bonds are expected to price on Monday, Dec. 4, via a syndicate led by UBS Investment Bank. Bond proceeds will be lent to 9 borrowers for certain water-pollution abatement projects through the state’s clean water state revolving fund (CWSRF).
The “AAA” ratings reflect the program’s highly rated clean-water loan pool and strong default tolerance due to substantial reserves,” Fitch said.
CWSRF capitalization grants are typically deposited into a reserve fund, which is available to cure loan defaults from the statewide pool of municipal borrowers.
As of this issue, Fitch said, the program reserve, which includes both pledged and de-allocated CWSRF capitalization grants, equals approximately 30 percent of outstanding bonds and provides continued bond performance assuming 97 percent borrower defaults for four years. More than 30 percent of the CWSRF loans could default over the life of the bonds without causing any interruption in payments to bondholders.
As of this issue, the CWSRF loan pool includes 22 municipal borrowers. CWSRF borrowers with investment-grade characteristics make up approximately 97 percent of the loan pool, among the highest investment-grade compositions of any SRF program.
The significant CWSRF default tolerance offsets concentration risk posed by the two largest borrowers, the Narragansett Bay Commission and the City of Warwick, which comprise 46 percent and 25 percent, respectively, of the pledged CWSRF loan portfolio.
The Bay Commission’s concentration continues to increase, as it is slated to receive a $30 million loan from the upcoming bond issue, Fitch noted. The “AAA” rating for the bond issue “reflects Fitch’s expectation that the [CWSRF] will seek insurance on the portion of future [Bay Commission] lending that exceeds 50 percent of outstanding portfolio principal in order to manage single-risk concentration within the loan pool,” the ratings agency said.
“The City of Warwick’s concentration should drop over the next two years, as it has utilized most of the borrowing currently authorized for its system improvements.”
A major rating consideration, Fitch said, was the cost of Rhode Island’s program to reduce the discharge of pollutants into Narragansett Bay, about two-thirds of which are discharged as a result of Providence-area CSOs. “This environmental priority will likely drive CWSRF activities in the coming years,” Fitch wrote.
“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,” the ratings agency wrote. “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 NBC’s CSO plan, which is estimated to cost $347 million, is expected to be completed by November 2008. 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 of 2003.”
Fitch’s rating definitions, terms of use and additional information are available at www.fitchratings.com.
