OREANDA-NEWS. Fitch Ratings has affirmed its 'AAA' rating on the following bonds issued by the Kansas Development Finance Authority (KDFA):

--$225.7 million in outstanding revolving fund revenue bonds (2010 MFI);

--$1.2 million in outstanding public water supply (PWS) revolving loan fund revenue bonds, issued by KDFA (prior resolution).

The Rating Outlook is Stable.

SECURITY

Revolving fund revenue bonds issued under the 2010 master financing indenture (MFI) are secured primarily by pledged loan repayments, excess prior resolution loan repayments, interest earnings on all funds and accounts established under the MFI, and Build America Bond (BAB) interest subsidy payments. The outstanding prior resolution bonds are secured by pledged loan repayments, debt service reserve funds (DSRFs), BAB interest subsidies, and interest earnings from the DSRFs.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the 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).

HIGH-QUALITY LOAN POOL: Approximately 78% of KDFA's combined loan pool consists of borrowers exhibiting investment-grade ratings. Loan security is very strong, with all loan principal secured by general obligation (GO) and/or utility revenue pledges.

MODERATE POOL DIVERSITY: KDFA's borrower pool is large and moderately diverse in comparison to similar municipal loan pools. The pool consists of more than 300 obligors, the top 10 of which comprise 49% of the total pool. The largest borrower, representing 10% of the pool total, is the city of Manhattan.

EFFECTIVE PROGRAM OVERSIGHT: KDFA's loan underwriting and administration have proven effective as its revolving funds have never experienced a loan payment 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

KDFA, acting in conjunction with the Kansas Department of Health and Environment (KDHE), provides municipalities throughout the state with subsidized financing for water supply (drinking water) and sewer system (clean water) improvement projects. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects.

The 2010 MFI integrated the financing functions of the PWS and water pollution control (WPC) revolving fund programs and gradually replaces the prior clean water (CWSRF) and drinking water state revolving fund bond (DWSRF) resolutions associated with these programs. The prior bond indenture was closed with the release of the 2010 MFI.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

Fitch calculates the pool program's asset strength ratio (PASR), which includes total scheduled loan repayments, earnings and reserves divided by total scheduled bond debt service, to be solid at 2x. This compares favorably to Fitch's 2015 'AAA' median PASR for other SRFs of 1.9x. Due to the program's available enhancement, cash flow modeling demonstrates that the program can continue to pay bond debt service even with hypothetical loan defaults of 100% in the first, middle and last four years of the outstanding bonds' life. This is in excess of Fitch's 'AAA' liability stress hurdle of 20%, as produced by the PSC. The liability stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration. Per Fitch criteria, a 90% recovery is applied when determining default tolerance.

HIGH-QUALITY BORROWER POOL WITH MODERATE DIVERSITY

Fitch estimates that approximately 78% of program participants exhibit investment-grade credit quality. In aggregate, pool credit quality is better than similar municipal pools, as reflected by an 'AAA' PSC liability stress of 20% versus Fitch's median of 31% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very good with all loans secured by GO and/or utility revenue pledges.

The program consists of 302 active borrowers, the top 10 of which comprise about 49% of the total pool. The city of Manhattan (GO bonds rated 'AA+') is now the largest borrower, representing 9.8% of outstanding loan pool principal. At 9.5% of the total, the city of Topeka (GO bonds not rated by Fitch but assessed to be of strong credit quality) is the next largest borrower. The remaining top 10 borrowers range in size from 2.1% to 5.4% of the total pool. Fitch views the combined pool as moderately diverse in comparison to other state revolving fund programs rated by Fitch. Overall, pool composition is similar to that at Fitch's last review in September 2014.

ENHANCEMENT PROVIDED PRIMARILY BY OVERCOLLATERALIZATION

KDFA's 2010 MFI utilizes a cash-flow structure, wherein program bonds are primarily protected from losses by overcollateralization, or surplus loan repayments made in excess of bond debt service. The 2010 MFI also redirects the flow of each of the previous programs' recycled loan accounts, which captures surplus loan repayments, interest earnings and de-allocated reserves, to serve as enhancement to the 2010 MFI bonds.

While the prior resolution bonds and 2010 MFI are separately secured, Fitch analyzes the programs as one combined structure due to cross-collateralization. The cross-collateralization feature available under the prior bond resolution and the 2010 MFI allow the sharing of surplus amounts between the CWSRF and DWSRF. After being made available for cross-collateralization, the prior resolution surplus funds then flow to the 2010 MFI bonds to serve as additional loss protection before eventually being eligible for release to the non-pledged general fund, in accordance with program documentation.

RESERVES ADD ADDITIONAL STRUCTURAL ENHANCEMENT

While the 2010 MFI allows for a DSRF, it has not been funded in connection with recent issues. DWSRF loans under the prior resolution bond indenture required DSRF minimums at the greater of 1.0x maximum annual debt service (MADS) or 25% of outstanding bonds. CWSRF loans under the prior resolution bond indenture required DSRF minimums at the lesser of 1x MADS or 10% of original bond principal. Currently, combined reserves under both prior resolution bond programs total approximately $35 million, or 12% of all outstanding bonds.

EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING

KDHE is responsible for the selection and approval of eligible loans to be financed. DWSRF loans are required to be secured by an unlimited GO pledge or by an 'AAA' rated bond insurer. For borrowers without taxing authority, loans may be backed by net utility system revenues additionally secured by: (i) an 'AAA' bond insurer, (ii) revenues sufficient to cover 1.4x debt service, or (iii) revenues sufficient to cover 1.25x debt service combined with a reserve fund equal to 10% of the original loan principal. CWSRF loans are required to be secured by an unlimited GO pledge or by net utility system revenue pledge additionally secured by an 'AAA' rated bond insurer. Due to KDHE's strong underwriting and management, none of the revolving fund programs has ever experienced a loan default.