OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Rhode Island Infrastructure Bank (RIIB):

--Approximately $18.3 million safe drinking water revolving fund revenue bonds, series 2015A (green bonds) (pooled loan issue).

Bond proceeds will be used to finance or refinance certain drinking water projects within the state and to pay the cost of issuance. The bonds are scheduled to sell via negotiation the week of Nov. 30.

In addition, Fitch affirms its 'AAA' rating on the following bonds:

--$171.8 million in outstanding parity bonds (issued under Rhode Island Clean Water Finance Agency).

The Rating Outlook is Stable.

SECURITY
The series 2015A and outstanding parity bonds are secured primarily by loan repayments. In addition, certain series of bonds issued prior to 2009 are secured by a reserve account and reserve account earnings. All bonds benefit from scheduled reserve releases or deallocations.

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 88% of RIIB's drinking water state revolving fund (DWSRF) 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 19 borrowers. To account for this, programs with higher concentration 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
Through its DWSRF and clean water state revolving fund (CWSRF, pooled loan program revenue bonds also rated 'AAA', Outlook Stable by Fitch) programs, the RIIB provides loans to fund eligible water and wastewater infrastructure projects within the state. Through these programs, borrowers receive an interest rate subsidy creating an attractive financing option, some of which may also have limited access to the capital markets.

With respect to RIIB's DWSRF current and recent issues, most of the program's pool credit quality has remained stable over the past several years. As the program continues its transition from a primarily reserve-fund model to a cash-flow model, the reserve balance as a percentage of outstanding bonds is decreasing while minimum annual debt service coverage is increasing.

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 of the DWSRF's scheduled loan repayments, pledged reserves, and account earnings and dividing this sum by total scheduled bond debt service. The DWSRF's PASR is 1.6x, which is considered sound yet is slightly below Fitch's 2015 sector median PASR of 1.9x.

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 (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance). This is in excess of Fitch's 'AAA' liability default hurdle of 30%, 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 PROVED BY RESERVES AND SURPLUS CASH FLOW
For certain series of bonds, 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 bondholders from potential shortfalls in debt service. LIST funds are released (or deallocated) annually as bonds amortize, at which point they can be used to cover debt service shortfalls on either of the SRFs' bonds, back additional bonds or be used to fund pledged or non-pledged federal direct loans. RIIB's DWSRF LIST fund balance totals $24.8 million, or about 13% of outstanding and the 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 LIST fund deallocations, are projected to provide a minimum of 1.5x coverage on both the senior and junior bonds' debt service.

CROSS-INVESTMENT AGREEMENT PROVIDES ADDITIONAL SUPPORT
As additional support, the agency can invest deallocated CWSRF or DWSRF LIST funds 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. While the ability to cross invest exists, the agency is not legally obligated to use this feature. 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.

HIGHLY RATED POOL WITH SIGNIFICANT CONCENTRATION
The combined pledged loan pool is composed of only 19 borrowers, with the top 10 representing approximately 98% of the pool total. With the series 2015 bond issue, the Providence Water Supply Board (PWSB) is expected to replace the city of Newport as the DWSRF's largest borrower. PWSB, Newport, and the Pawtucket Water Supply Board represent 31%, 30%, and 25% of the pool total, respectively. These numbers compare unfavorably to Fitch's 2015 'AAA' medians which, showed top-10 concentration at 55% and single-borrower concentration at 18%. To account for the increased risk, concentrated portfolios are stressed at higher levels in Fitch's PSC. Additionally, the sound credit quality of the pool's largest borrowers (parity utility system revenue obligations are not rated by Fitch but each are assessed to be of strong credit quality) combined with the program's solid financial structure also help to mitigate some of the concentration risk.

Pool credit quality is strong with approximately 88% of the pool's loans held by investment-grade borrowers. The program's loan security is also solid, with approximately 97% of loan principal backed by net system revenue pledges and the remaining 3% backed by general obligation pledges.

STRONG PROGRAM MANAGEMENT, UNDERWRITING, AND MONITORING
The 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 borrowers rated below 'BBB' on an annual basis.

The DWSRF portfolio carries an interest rate of approximately three-fourths of the borrower's marker rate, while the CWSRF's subsidy results in an interest rate equal to 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 each 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.