OREANDA-NEWS. September 01, 2015. Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Rhode Island Infrastructure Bank (RIIB; formerly the Rhode Island Clean Water Finance Agency):

--Approximately \\$23.9 million water pollution control refunding revenue bonds series 2015B;

--Approximately \\$23.2 million water pollution control subordinated refunding revenue bonds series 2015C.

Bond proceeds will be used to refund certain previously issued senior lien water pollution control revenue bonds and to pay for the cost of issuance. The bonds are scheduled to sell via negotiation the week of September 7th.

The Rating Outlook is Stable.

SECURITY

The series 2015B and outstanding senior bonds are secured primarily by borrower loan repayments and debt service reserve funds.

The series 2015C and outstanding subordinated revenue bonds are secured by moneys released from the senior lien bonds including surplus loan repayments, interest earnings, and de-allocated reserves after senior debt service is paid in full.

KEY RATING DRIVERS

SOLID FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the program should continue to pay bond debt service even with loan defaults in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

HIGHLY RATED BORROWER POOL: Approximately 86% of RIIB's clean water state revolving fund (CWSRF) loan portfolio is measured to be investment grade. Loan provisions are strong with the majority of loan principal secured by borrowers' net system revenue or general obligation pledges.

SIGNIFICANT BORROWER CONCENTRATION: The loan portfolio has a high level of concentration risk as the pool consists of only 29 borrowers. The pool's largest borrower, the Narragansett Bay Commission (NBC), represents an outsized portion of the aggregate pool. To account for this risk, concentrated pools are assessed at higher stress levels in Fitch's PSC.

STRONG PROGRAM MANAGEMENT: RIIB's management team is experienced and maintains sound underwriting and loan monitoring procedures as evidenced by the fact that the trust has never experienced a borrower 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 not likely to occur.

CREDIT PROFILE

RIIB issues bonds to provide subsidized financing to governmental entities throughout Rhode Island for its DWSRF and CWSRF projects. In association with its bond issues, RIIB makes loans to eligible borrowers from bond proceeds and from the state's matching requirement for its federal capitalization grants.

Unlike most other SRFs, RIIB's CWSRF and drinking water state revolving fund (DWSRF, pooled loan program revenue bonds rated 'AAA', Outlook Stable by Fitch) do not have legal cross-collateralization requirements. A consequence of this is that, viewed on an individual basis, each program presents greater pool concentration risk. Therefore, to capture this risk, Fitch analyzes and rates the bonds supported by each pool on a separate, standalone basis.

SOUND FINANCIAL STRUCTURE

Fitch measures the financial strength of SRFs by calculating each program's asset strength ratio (PASR). The PASR is calculated by summing all scheduled loan repayments plus reserve deallocations and account earnings and dividing this sum by total scheduled bond debt service. The CWSRF's PASR is 1.6x, which is considered sound yet is slightly below Fitch's 2014 sector median PASR of 1.8x.

Because of the program's sound financial coverage and available reserves, 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 (per Fitch criteria, a 90% recovery is applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability default hurdle of 34%, as produced by the PSC, which is derived based on the overall pool credit quality as measured by the rating of underlying borrowers, size, loan term, and concentration.

LOSS PROTECTION PROVIDED BY RESERVES AND SURPLUS CASH FLOW

Debt service reserves (or 'LIST' funds) are maintained at a level sufficient to generate earnings to cover the borrower interest rate subsidies. Additionally, amounts held in the LIST fund account serve to protect senior bondholders from potential shortfalls in debt service. LIST funds are released from the fund annually as bonds amortize, at which point they can be used to cover debt service shortfalls on the subordinate bonds, back additional bonds or be used to fund pledged or non-pledged federal direct loans. RIIB's CWSRF LIST fund balance totals \\$93 million, or about 15% of outstanding and proposed series 2015A bonds.

Additional loss protection is provided by pledged loan repayments and account earnings in excess of bond debt service. On an annual basis, pledged cash flows excluding scheduled reserve deallocations are projected to provide a minimum of 1.3x coverage on both the senior and junior bonds' debt service.

CROSS-INVESTMENT AGREEMENT PROVIDES ADDITIONAL SUPPORT

As additional support, the agency can invest its CWSRF or DWSRF reserves in either pool should any of the borrowers default. This mechanism is permitted under the 2004 cross-investment agreement as long as there are no defaults in the pool that is providing the support. It is important to note that while the ability to cross invest exists, the agency is not legally obligated to use this feature.

HIGHLY RATED POOL WITH SIGNIFICANT CONCENTRATION
The combined pledged loan pool is composed of only 29 borrowers, with the top 10 representing approximately 88% of the pool. NBC (parity utility system revenue obligations not rated by Fitch but assessed to be of very high credit quality) is the program's largest borrower, representing 49% of the total pledged portfolio. These numbers compare unfavorably to Fitch's 'AAA' medians which in 2014 showed top 10 concentration at 53% and single-borrower concentration at 19%. To account for concentration risk, concentrated portfolios are stressed at higher levels in Fitch's PSC. NBC's strong credit quality and the program's solid financial structure also help to mitigate some of the concentration risk.

Pool credit quality is strong with approximately 86% of the pool's loans held by what Fitch assesses to be investment-grade borrowers. The program's loan security is also solid, with approximately 96% of loan principal backed by net system revenue pledges, general obligation pledges or a combination of both, and the remaining 4% backed by airport revenues.

STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING

RIIB maintains a formal underwriting process involving extensive review of pool participant eligibility and security. The agency requires all prospective borrowers to maintain a minimum of 1.25x debt service coverage (DSC) on loans and covenant to raise rates if DSC is not met. Loan repayments are tracked closely by the RIIB staff. All borrowers must submit annual financial information to the agency. In addition, the agency reviews borrower credit quality on a regular basis.

The CWSRF portfolio carries an interest rate of approximately two-thirds of the borrower's market rate. However, in the event of a borrower default, RIIB is authorized to require all pool borrowers to pay higher interest rates up to the borrower's market rate, thereby creating a step-up provision, which provides additional bondholder security. To date, there have been no defaults on borrower loans.