OREANDA-NEWS. March 21, 2016. Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the California Infrastructure and Economic Development Bank (IBank) on behalf of the California State Water Resources Control Board (SWRCB):

--Approximately \\$406.145 million clean water state revolving fund revenue bonds series 2016 (Green Bonds).

The bonds are expected to sell via negotiation during the week of April 11. Bond proceeds will be used to provide funding for certain water pollution control projects within the state.

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

--Approximately \\$29.9 million clean water state revolving fund refunding revenue bonds series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured primarily by pledged borrower loan repayments.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that the IBank's clean water state revolving fund (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).

IMPROVED POOL DIVERSITY: The series 2016 bond issue improves overall pool diversity, although the concentration of the top 10 borrowers is still elevated.

ROBUST CREDIT QUALITY: Approximately 80% of the program's loan portfolio consists of borrowers exhibiting investment-grade ratings. Loan security is very strong as borrowers are secured primarily by net utility-system revenue pledges.

SOUND PROGRAM MANAGEMENT: The program is managed by the SWRCB. Program management adheres to a formal underwriting policy which includes, among other things, minimum coverage requirements for borrowers. To date, there have been no pledged loan payment defaults in the clean water SRF (CWSRF) program.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: Significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased leveraging resulting in the clean water state revolving fund program's inability to pass Fitch's 'AAA' liability rating stress hurdle would put downward pressure on the rating. Fitch's believes that these events are not likely to occur.

CREDIT PROFILE

Through its CWSRF bond program, the SWRCB provides below-market financing to borrowers for eligible clean water projects. The series 2016 bonds are the second to be issued under the 2012 master trust indenture (MTI).

With this issue, the 2012 MTI's leveraging is being significantly expanded, improving both the credit quality and diversity of the pool, and also the strength of the financial structure.

FINANCIAL STRUCTURE EXHIBITS STRONG DEFAULT TOLERANCE

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 divided by total scheduled bond debt service. The IBank's clean water SRF program's PASR is 2.9x, which is very strong in comparison to Fitch's 2015 'AAA' rating category median of 1.9x. As the program is further leveraged over the next few years, the PASR is expected to decrease but should still remain at or above Fitch's median.

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 IBank's 'AAA' liability rating stress hurdle of 20% 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

In accordance with the 2012 MTI, the CWSRF program utilizes a cash-flow based structure, wherein program bonds are primarily protected from losses by overcollateralization, or excess annual loan repayments made in excess of bond debt service. Although the program's 1.05x coverage requirement and additional bonds tests are considered weak, Fitch calculates actual minimum annual debt service coverage to be a very solid 2.5x. As with the PASR, the program's annual coverage is expected to decrease as leverage increases, but is expected to remain robust over at least the intermediate term.

Although not considered in Fitch's credit analysis, the SWRCB's CWSRF program also benefits from a substantial pool of non-pledged loans totaling approximately \\$2 billion, which could be pledged at any time to the 2012 MTI bonds.

BORROWER POOL EXHIBITS IMPROVED DIVERSITY AND ROBUST CREDIT QUALITY

New participants in the series 2016 financing will increase the pool size to a still relatively small 32 separately secured loans (issued by 25 borrowers). The top 10 participants now represent approximately 73% of the pledged loan pool versus Fitch's 'AAA' median level of 55% and an improvement over the 90% registered during 2014. At 15.1% of the pool total, the Los Angeles County Sanitation District (sewer revenues unrated by Fitch but assessed to be of very high credit quality) narrowly replaces the Orange County Water District (rated 'AAA' by Fitch; accounts for 14.5% of the pool total) as the pool's largest participant. The remaining top 10 participants range from 3.9% - 7.5% of the pool total, all of which exhibit 'AA' category or stronger credit quality.

Fitch estimates that approximately 80% of program participants exhibit investment-grade credit quality. In aggregate, pool credit quality is better than similar municipal pools, as reflected by a 'AAA' PSC liability rating stress hurdle of 20%, which is better than Fitch's median of 31% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very robust with loans primarily secured by utility system revenue pledges.

EFFECTIVE PROGRAM MANAGEMENT AND OVERSIGHT

The CWSRF program is jointly coordinated by the IBank, SWRCB, and State Treasurer's Office, with general program management including loan underwriting and monitoring owned by the SWRCB. The expansion of the CWSRF leveraging has been aided, in part, by recent revisions to the SWRCB's policies to create more efficiency in the loan application process.

The SWRCB has managed the CWSRF program for nearly 30 years. Management maintains a formal underwriting process involving review of a borrower's loan documentation and financial audits. To qualify for the program, among other things, borrowers must demonstrate sufficient net utility system revenues to cover 110% - 120% of annual debt service. Emblematic of effective program management, no pledged borrower has ever defaulted on its loan obligations.