OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the Indiana Finance Authority (IFA):

--Approximately $158.1 million state revolving fund (SRF) program bonds, series 2016D (Green Bonds);

--Approximately $134.4 million SRF program refunding bonds, series 2016E (Green Bonds).

Series 2016D bond proceeds will be used to finance certain eligible water and wastewater system projects in the state and to pay costs of issuance. The series 2016E bonds will be used to refund certain outstanding bonds and to pay costs of issuance. The bonds are expected to price via negotiated sale the week of September 19.

In addition, Fitch has affirmed the 'AAA' rating on the following:

--$1.5 billion outstanding SRF parity bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by loan repayments, debt service reserve funds and/or releases from such funds, and other accounts pledged under the series and master trust indentures.

KEY RATING DRIVERS

SOUND FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that IFA's combined clean water (CW) SRF and drinking water (DW) SRF program (the program) can continue to pay bond debt service, even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using our Portfolio Stress Calculator (PSC).

BELOW-AVERAGE POOL QUALITY: Approximately 55% of IFA's loan portfolio consists of unrated entities, which Fitch conservatively assumes in its analysis to be of speculative-grade credit quality. Overall, pool credit quality is slightly below average, compared with other SRFs rated by Fitch.

MODERATE PORTFOLIO DIVERSITY: IFA's combined loan pool is large and moderately diverse. The largest borrower, the city of Fort Wayne, represents an above-average 19.3% of the combined pool. The largest 10 borrowers represent approximately 49% of the total pool.

STRONG PROGRAM MANAGEMENT: IFA adheres to consistent, conservative underwriting policies. Management and underwriting strength is exhibited by the fact that the program has never experienced a default.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration or increased leveraging resulting in the program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. The Stable Outlook reflects Fitch's view that these events are unlikely to occur.

CREDIT PROFILE

IFA's SRF programs were created to provide loans to local entities for wastewater and drinking system improvements. IFA is responsible for the administration and management of the SRFs. Bond proceeds and recycled funds are combined with federal grants and a state matching requirement to provide loans for such projects.

Most of the program's credit metrics, including those of the financial structure and pool credit quality, have remained stable over the past several years. Like many SRF programs, IFA is in the process of transitioning the program from primarily a reserve fund structure, wherein loss protection is provided by reserves, to a cash flow structure, or one in which loss protection is provided by available surplus cash flows.

SOUND FINANCIAL STRUCTURE

Fitch measures the financial strength of SRFs by calculating each program's asset strength ratio (PASR). The PASR includes the sum of the total scheduled pledged loan repayments and reserves divided by total scheduled bond debt service. IFA's PASR is 1.4x, which is slightly lower than Fitch's 2015 'AAA' rating category median of 1.9x but considered to be supportive of Fitch's 'AAA' rating.

Due to the strength of the financial structure, cash flow modeling demonstrates that the program can continue to pay bond debt service, even with hypothetical loan defaults of 85.1% in the first year and 100% in the middle and last four years of the program's life (per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of IFA's 'AAA' liability rating stress hurdle of 40%, as produced by Fitch's PSC. The rating stress hurdle is calculated based on overall program credit quality as measured by the ratings of underlying borrowers, borrower size, loan term and concentration.

LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION AND RESERVES

Under the SRF program's structure, each bond series is protected from losses by borrower loans made in excess of bond debt service (overcollateralization) and, in certain prior series, separately secured debt service reserves. As series bonds amortize, released reserves, excess loan repayments and interest earnings are deposited into a deficiency fund, which is available to make debt service payments on any bonds issued under the master trust indenture. The method by which excess amounts are deposited into the deficiency fund allows for cross-collateralization between the CWSRF and DWSRF, increasing pool diversity and potentially lower total loss amounts. Due to the cross-collateralization feature, Fitch combines the programs in its cash flow modeling.

No dedicated reserve fund is expected to be funded with the series 2016 bonds. However, the bonds benefit from excess reserve deallocations released from previous series' reserves, as described in the preceding paragraph. At the direction of IFA, funding of dedicated reserves for the series bonds may be initiated by delivering written notice to the trustee. The combined reserve balance from previous bond issues is approximately $176 million, or roughly 12% of total outstanding bonds.

Minimum annual debt service coverage is calculated to be about 1.06x, which is low but typical for SRF structures enhanced by reserve funds. As the transition from a reserve fund to a cash flow structure continues, minimum annual debt service coverage is expected to improve. Current projections demonstrate coverage improving to 1.25x by 2022 and then remaining around or better than this level through maturity.

QUALITY LOAN POOL WITH AVERAGE DIVERSITY

The combined loan pool is composed of about 351 borrowers. Excluding the Indianapolis Local Public Improvement Bond Bank, whose loans were defeased via an escrow agreement in 2011, the city of Fort Wayne is the largest participant, representing about 19.3% of the pool. The city of Fort Wayne's loan pool concentration has increased, as the current financing will provide an additional $138 million to help the city address its combined sewer overflow issues. At 7.4% and 6.6%, respectively, the second and third largest borrowers are the Terre Haute Sanitation District (THSD) and the city of Evansville. Although the specific loan securities pledged by these borrowers are not rated by Fitch, all three are assessed to be of strong credit quality. However, management reports that THSD has had recent trouble managing its expenses under its property tax cap. As a result, IFA has prudently required additional provisions to ensure THSD's loans are paid in full and on time. Most notably, the utility is raising rates by 15% this year and has deposited $3 million with IFA's trustee until the rate increase takes effect. Fitch will continue to monitor this situation.

Each remaining program participant accounts for 3% or less of the total pool. In aggregate, the top-10 borrowers represent approximately 49% of the loan pool versus Fitch's 'AAA' median level of 55%. Based on these attributes, Fitch views the loan pool as having somewhat better diversity than similar 'AAA' programs.

While approximately 45% of the pool is rated 'BBB+' or better, the remaining 55% does not have a public rating. Therefore, in accordance with Fitch criteria, the unrated portion of the pool was conservatively estimated to be of speculative-grade credit quality ('BB') in our analysis.

Due largely to the number of unrated entities, credit quality is somewhat weaker than that of similar municipal pools rated by Fitch, as reflected by an 'AAA' PSC liability stress hurdle of 40% versus Fitch's 'AAA' median level of 31% (lower liability stresses correlate to stronger credit quality). However, the strong loan security pledges, which consist primarily of water/wastewater net system revenues, and above-average pool diversity somewhat mitigate the pool credit risk.

STRONG PROGRAM MANAGEMENT

IFA manages both the CWSRF and DWSRF programs using strong underwriting practices. Among other factors, IFA takes into consideration in its borrower assessment the creditworthiness of the borrower and environmental goals of the SRF program. Loans secured by system revenue pledges (the primary source of loan security) must demonstrate minimum coverage of 1.25x annual debt service coverage and are also required to create a local debt service reserve fund equal to 1.0x maximum annual debt service.

Annual loan monitoring is conducted on outstanding borrowers and includes verification of local reserves and a review of financial statements. No loan defaults have been reported within the IFA SRFs to date.