OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following bonds issued by the Minnesota Public Facilities Authority (MPFA or the authority):

--Approximately $247.4 million state revolving fund (SRF) revenue bonds, series 2016A;
--Approximately $103.3 million SRF revenue refunding bonds, series 2016B.

The bonds are expected to sell via competitive bid during the week of February 8. Series 2016A bond proceeds will be used to finance eligible drinking water and clean water projects within the state. Series 2016B bonds will be used to refund certain previously issued series of bonds.

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

--Approximately $793 million senior lien clean water and drinking water revenue bonds, and subordinate lien SRF revenue bonds.

The Rating Outlook is Stable.

SECURITY
The 2016A and 2016B SRF revenue bonds and previous series of bonds issued under the 2010 indenture are subordinate lien obligations of MPFA secured primarily by remaining loan repayments after payment to the senior lien bonds. The senior lien bonds include the clean water revolving fund revenue bonds and drinking water revenue bonds issued before 2010 under two prior resolutions.

In addition to loan repayments, senior lien bonds are secured by amounts available in debt service reserve funds (DSRFs), operating accounts and revenue accounts. The subordinate lien bonds, including the 2016A and 2016B bonds, are secured by releases from the DSRFs and the operating accounts to the extent they are not needed to pay debt service on the senior lien obligations.

KEY RATING DRIVERS
STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that MPFA'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 well in excess of Fitch's 'AAA' liability rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

QUALITY BORROWER POOL: Approximately 80% of MPFA's program loan pool consists of borrowers exhibiting investment-grade ratings. Additionally, loan provisions are very strong, with virtually all loan principal secured by general obligation pledges and water and/or wastewater revenue pledges.

AVERAGE PORTFOLIO DIVERSITY: The program's pledged loans exhibit diversity similar to other programs rated by Fitch. The Twin Cities' Metropolitan Council (the council) comprises a high 32% of the pool total. The council's very strong credit attributes mitigate any large single-obligor risk.

SOUND PROGRAM MANAGEMENT: Since inception, management's underwriting and monitoring abilities have been demonstrated by the program's sound performance. As a result, more than 99% of program loan repayments have been received by the due date, and none have been more than four days late. Additionally, the program has never experienced a permanent loan default.

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

CREDIT PROFILE

MPFA provides financing to certain governmental entities within the state for eligible clean water and drinking water infrastructure projects. 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. Although not considered a major credit factor, as the program continues to shift from more of a traditional reserve-fund structure (under the prior bond resolutions) to more of a cash-flow structure (the 2010 bond indenture), bondholder loss protection is expected to also shift, in aggregate, from reserves to overcollateralization, as described below.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE
Fitch measures 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. MPFA's PASR is 1.9x, which is on par with Fitch's 2015 'AAA' rating category median of 1.9x and is indicative of a strong financial structure.

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 100% over the first, middle and last four years of the program's life (Fitch's criteria applies a 90% recovery in its cash flow model when determining default tolerance). This level of loan defaults is in excess of the MPFA's 'AAA' liability rating stress hurdle of 21% 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. The pool's liability rating stress hurdle is better than Fitch's 'AAA' median level of 31% (as stronger credit quality correlates to a lower stress hurdle), aided in part by the pool's lower than average weighted average life.

LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION AND RESERVES
MPFA currently issues bonds for its CW and DW programs under one master bond resolution which was adopted in 2010. The 2010 bond resolution essentially combined two prior resolutions into one using a hybrid cash flow/reserve fund structure. Overcollateralization, or annual loan repayment cash flows in excess of bond debt service, provides the majority of loss protection to bondholders. On an all-in basis, overcollateralization is projected to result in a minimum of 1.4x annual debt service coverage.

In addition to overcollateralization, the program's senior lien bonds have approximately $74.9 million in DSRFs, which is equal to 7.2% of total bonds outstanding after this issuance. Also, there is approximately $178.2 million (17.1 % of bonds outstanding) available in senior lien operating reserve accounts. Under the senior lien bond resolutions, after annual completion of a projected revenue certificate demonstrating minimum coverage levels are met, excess amounts in the DSRFs and operating reserve accounts can be deallocated and used to cure subordinate lien deficiencies, make new loans or release moneys from such accounts.

PROGRAM BONDHOLDERS BENEFIT FROM CROSS-COLLATERALIZATION
Both the prior and the 2010 bond resolutions allow for some form of cross-collateralization between the clean water and drinking water programs. Under each resolution, surplus amounts in the clean water fund accounts are available to cure deficiencies in the drinking water funds and vice versa. However, the cross-collateralization provision under the 2010 bond resolution is legally subordinate to the prior bond resolutions. Given the cross-collateralization feature, Fitch combines the CW and DW SRFs in its modelling analysis.

QUALITY BORROWER POOL WITH AVERAGE DIVERSITY
The combined loan pool is larger than average with 370 pledged borrowers. In aggregate, the top 10 borrowers represent 53.4% of the pool versus Fitch's 'AAA' median level of 55%. The council (GO bonds not rated by Fitch but assessed to be of very strong credit quality) is the pool's largest participant, making up a high 32% of the total. The remaining top 10 borrowers range from a manageable 1.4% to 4.1% of the pool. Based on these characteristics, Fitch views the loan pool as having diversity similar to other 'AAA'-rated municipal loan pool programs.

Approximately 80% of the portfolio is considered to be investment grade compared to Fitch's 'AAA' median of 70%. Underlying loan security provisions are strong with virtually all loans are backed by the borrowers' general obligation and net system revenue pledges.

SOUND PROGRAM MANAGEMENT
The authority is led by an experienced management team consisting of an executive director, CFO, and five loan officers. Loan officers review borrower's past financial audits, budget documents, proposed payment structures, and demographic data, paying particular attention to the borrower's sources of repayment and ongoing financial condition. Although management's policies allow for exceptions to its guidelines, program performance has been sound, as it has never experienced a permanent loan default.