Fitch Affirms Arkansas Development Finance Authority's SRF Revs at 'AAA'

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has affirmed its 'AAA' rating for the following bonds issued by the Arkansas Development Finance Authority (ADFA):

--Approximately $30.3 million revolving loan capital improvement bonds, series 2011C.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by loan repayments and other accounts that are pledged under the series and general bond resolutions.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the state revolving fund (SRF) program can continue to pay bond debt service even if there were loan defaults in excess of Fitch's 'AAA' liability default hurdle.

CONCENTRATED PORTFOLIO: The program is somewhat small and concentrated with the largest two borrowers representing nearly one-third of the portfolio. However, underlying loan provisions for program borrowers are strong, largely reflecting water and sewer revenue or general obligation pledges.

CROSS-COLLATERALIZATION STRENGTHENS PROGRAM: The program includes a cross-collateralization feature wherein excess funds from the clean water SRF (CWSRF) are available to cover deficiencies in the drinking water SRF (DWSRF) and vice versa. The ability for the two funds to cross-collateralize helps to minimize losses if defaults were to occur.

SOUND PROGRAM MANAGEMENT: Arkansas Natural Resources Commission (ANRC), which manages the program, maintains sound underwriting and loan monitoring procedures. To date, the pledged portfolio has not experienced a permanent loan default.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: If the Arkansas Development Finance Authority's revolving loan program were to experience significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased bond leveraging resulting in its inability to pass Fitch's liability default 'AAA' hurdle, downward pressure on the rating would occur.

CREDIT PROFILE

The ADFA issues revolving loan fund revenue bonds to fund ANRC SRF loans to various public entities within the state. Funds are typically disbursed to borrowers to pay eligible CWSRF or DWSRF project costs or to reimburse ADFA for projects previously funded. The combined CWSRF and DWSRF loan pool consists of 55 individual borrowers.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

The SRF program's scheduled pledged loan repayments are projected to provide significant minimum debt service coverage of 3.69x. Overall, Fitch calculates the program's asset strength ratio (PASR) to be a strong 4.60x, which is notably higher than Fitch's 2016 'AAA' median of 1.92x. The PASR includes total scheduled loan repayments divided by total scheduled bond debt service. While the program's general bond resolution (GBR) requires that coverage be maintained at 1.10x, the moderately low borrower demand for program resources offsets any concerns about overleveraging.

Given the significant pledged resources, Fitch's cash flow modeling demonstrates that the SRF program can continue to pay bond debt service even with hypothetical loan defaults of 100% over the first, middle and last four-year period of the bonds' life. This is in excess of Fitch's 'AAA' liability stress hurdle of 38.6% as produced by Fitch's Portfolio Stress Calculator. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, and loan term.

CONCENTRATED BORROWER POOL

The pool's single-borrower concentration remains moderately high as the city of Conway represents 18% of total loan par. The second largest borrower, the city of Little Rock, comprises 12.2% of the portfolio. Underlying loan provisions are strong with more than 85% of the portfolio's principal secured by water and sewer utility revenues or GO pledges. The remaining loans in the portfolio are backed by sales and use taxes or special taxes.

CROSS-COLLATERALIZATION PROVIDES ADDITIONAL PROTECTION

The GBR provides for cross-collateralization between the CWSRF and DWSRF accounts, meaning that deficiencies in one SRF account may be covered by available funds from the other SRF. This feature enhances bondholder security by providing additional sources of available revenues from which to draw for debt service. It also increases the overall diversity of the portfolio, allowing analysis of the program as one pool instead of separate SRF portfolios. Any such transfer creates a repayment obligation by the deficient SRF, but the obligation is subordinate to the trust estate's pledge under the GBR.

NON-PLEDGED FUNDS POTENTIALLY AVAILABLE

The GBR-established CW and DW revolving loan fund totaled approximately $53.9 million as of April 15, 2016 and provides additional cushion by capturing excess loan repayments after debt service is paid. While this fund is not pledged, and therefore not incorporated in Fitch's analysis, ADFA may use available amounts to cure deficiencies at its sole discretion.

EFFECTIVE PROGRAM MANAGEMENT AND OVERSIGHT

ANRC's program management is strong and includes an initial review of borrowers' finances and other characteristics to ensure compliance with provisions of loan agreements. Annual financial reviews are also conducted on outstanding borrowers. On a monthly basis, ADFA prepares borrower status reports that monitor loan repayments.

To date, no permanent loan defaults have been reported in the pledged program, although there have been a few delinquencies in the past. Under the GBR, management may substitute or move troubled loans out of the pledged portfolio. Since the establishment of the GBR in 2009, there have been no loans de-pledged from the portfolio.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 20 Oct 2016)

https://www.fitchratings.com/site/re/888966

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014493

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014493

Endorsement Policy

https://www.fitchratings.com/regulatory

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