Fitch Affirms Arizona Water Infrastructure Finance Auth's SRF Bonds at

AUSTIN, Texas?(BUSINESS WIRE)?

Fitch Ratings has affirmed its ?AAA? rating on the following bonds
issued by the Water Infrastructure Finance Authority of Arizona (WIFA,
or the authority):

?$863.9 million in outstanding water quality revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by certain loan repayments payable primarily from
governmental entities, pledged account funds and investment earnings on
such accounts.

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 with loan defaults in excess of Fitch?s ?AAA? liability
default hurdle, as produced using Fitch?s Portfolio Stress Calculator
(PSC). Liability default hurdles derived by the PSC are calculated based
on overall pool credit quality as measured by the rating of underlying
borrowers, size, loan term, and concentration.

SOLID PORTFOLIO CREDIT QUALITY: At least 58% of WIFA?s loan portfolio is
estimated to be investment grade. Loan provisions are strong with the
majority of loan principal secured by water and/or wastewater revenue
pledges or general obligation pledges.

MODERATE-TO-HIGH CONCENTRATION: The combined pledged loan pool is
concentrated with 70 individual obligors, the top 10 of which represent
approximately 63% of the pool. Fitch views this concentration risk as
mitigated given the strong loan security and excess cushion after
application of Fitch?s stress test.

CREDIT PROFILE

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Annual cash flow coverage from repayments of pledged loans combined with
scheduled reserve de-allocations remains strong. Cash flow modeling
demonstrates that the program can continue to pay bond debt service even
with hypothetical loan defaults of 100% over any four-year period. This
is in excess of Fitch?s ?AAA? liability stress hurdle (45%), which is
derived based on the aggregate credit quality of the program?s pledged
loan pool.

BORROWER POOL EXHIBITS MODERATE-TO-HIGH CONCENTRATION

The combined pledged SRF loan pool is composed of approximately 70
obligors. The largest borrower, Lake Havasu City (senior lien revenue
bonds rated ?A? and general obligation [GO] junior lien bonds rated
?AA-?, both with Stable Outlook by Fitch), represents about 22% of the
portfolio on a combined basis. In addition, the pool?s 10 largest
borrowers comprise approximately 63% of the portfolio.

Fitch views the concentration as moderate-to-high for a municipal bond
pool. However, underlying loan provisions are strong, with approximately
83% of the loan portfolio?s principal secured by revenue pledges with
the remainder backed by either GO or other tax-backed pledges. Also,
previous feedback from WIFA suggests that Lake Havasu?s concentration
has peaked due to the completion of most capital expenditure projects,
and is expected to decrease moving forward.

EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING

WIFA?s loan underwriting guidelines, evidenced by extensive formalized
policies and procedures, are a key credit strength. Prior to loan
origination, WIFA staff performs a due diligence review and a financial
capability review. The due diligence review includes determination of
legal, managerial, technical, and financial capability. The financial
capability review focuses on a borrower?s historical performance over
the previous three-year period, with results used to analyze trends and
project future performance.

WIFA annually reviews its portfolio to assess annual loan performance
and to confirm loan category (qualified or not qualified). To date, WIFA
has not experienced any borrower defaults. WIFA has identified a few
borrowers whose debt service coverage has slipped below their 1.2x rate
covenant. WIFA is working with each of these borrowers to implement
strategies for improvement, including rate adjustments.

STRUCTURAL CHARACTERISTICS ARE SOLID

WIFA provides loans to local entities for wastewater and drinking system
improvements through its clean water and drinking water SRF programs
(CWSRF and DWSRF). WIFA?s SRF programs benefit from credit enhancement
provided both by pledged revenues in excess of debt service due
(over-collateralization) plus amounts and earnings held in pledged
accounts. On a quarterly basis, over-collateralization is projected to
be over 1.3x for the leveraged bonds after taking into account amounts
due to state match bonds.

AVAILABLE RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT

In addition to over-collateralization, WIFA?s SRF programs are supported
by certain pledged account funds and interest earnings on such funds
including the financial assistance account and reserve account.

The program indenture requires that the reserve account be maintained at
a minimum of: (i) 10% of the original balance of all outstanding bond
principal, (ii) 1.0x maximum annual debt service, or (iii) 1.25x of the
average annual debt service remaining. As of October 2012, the reserve
fund stood at approximately $88 million, or 9.7% of bonds outstanding.

Additional parity bonds can be issued provided that after such issuance
debt service coverage relating to leveraged bonds is at least 1.2x. In
calculating coverage, only principal and interest from qualified,
pledged loans are considered.

CROSS-COLLATERLIZATION STRENGTHENS PROGRAM

Excess amounts in the CWSRF can be transferred to make up any
deficiencies in the DWSRF and vice-versa, resulting in
cross-collateralization of the two funds. This increases the diversity
of the aggregate loan pool and lessens the risk of any one borrower?s
default eroding reserve balances and threatening bondholder payments.

Additional information is available at ?www.fitchratings.com?.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

?Revenue-Supported Rating Criteria (June 12, 2012)

?State Revolving Fund and Leveraged Municipal Loan Pool Criteria (May
21, 2012)

?Rating Guidelines for State Credit Enhancement Programs (June 19, 2012)

?Counterparty Criteria for Structured Finance Transactions (May 30,
2012)

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

State Revolving Fund and Leveraged Municipal Loan Pool Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677858

Rating Guidelines for State Credit Enhancement Programs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681239

Counterparty Criteria for Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938

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.

Contact:

Fitch Ratings

Primary Analyst:

Major Parkhurst, +1-512-215-3724

Director

Fitch, Inc., 111 Congress Avenue, Austin, TX 78701

or

Secondary Analyst:

Adrienne Booker, +1-312-368-5471

Senior Director

or

Committee Chairperson:

Doug Scott, +1-512-215-3725

Managing Director

or

Elizabeth Fogerty, +1-212-908-0526

New York, Media Relations

elizabeth.fogerty@fitchratings.com

Continued here:
Fitch Affirms Arizona Water Infrastructure Finance Auth's SRF Bonds at 'AAA'

Source: http://cashwoe.com/?p=9160

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