OREANDA-NEWS. Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the Kentucky Infrastructure Authority (KIA):

--Approximately $45 million wastewater and drinking water revolving fund revenue refunding bonds series 2016A.

The bonds are expected to sell via negotiation the week of March 28, 2015. Bond proceeds will be used to advance refund certain previously issued series 2010A and series 2012A bonds, and to pay for costs of issuance.

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

--$241 million wastewater and drinking water revolving fund revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged loan repayments, pledged funds and accounts, and investment earnings on such funds and accounts.

KEY RATING DRIVERS

STRONG FINANCIAL STRUCTURE: Fitch Ratings' 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 rating stress hurdle, as produced using Fitch's Portfolio Stress Calculator (PSC).

SOLID BORROWER POOL: On a weighted-average basis, approximately 72% of Kentucky Infrastructure Authority's (KIA) state revolving fund (SRF) loan pool consists of borrowers exhibiting investment-grade credit quality. Loan security is very strong as borrowers are secured by net utility system revenue pledges.
SOMEWHAT ELEVATED POOL CONCENTRATION: The loan portfolio has slightly above-average borrower concentration, with the top 10 borrowers representing approximately 60% of the loan pool. At 20% of the total pool, Sanitation District No.1 (the district) is the largest borrower. The district is the second largest public sewer utility in Kentucky, serving 33 communities within Boone, Campbell and Kenton counties in northern Kentucky.

EFFECTIVE PROGRAM MANAGEMENT: KIA's SRF program serves many small cities and towns which are exposed to risks associated with limited economic diversity. As a result, a limited number of KIA's borrowers have experienced payment hardships. Management has effectively worked with such borrowers to prevent permanent program defaults.

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 Kentucky Infrastructure Authority's wastewater and drinking water revolving fund rating. Fitch's believes that these events are not likely to occur.

CREDIT PROFILE

KIA provides financing to certain governmental entities within the state for eligible clean water and drinking water SRF infrastructure projects. Bond proceeds are combined with federal grants and a state matching requirement to provide loans for such projects. KIA's SRF program bondholders are primarily protected from losses by pledged loan repayments made in excess of bond debt service.

SOUND FINANCIAL STRUCTURE, DEFAULT TOLERANCE

Fitch measures the financial strength of the combined SRFs by calculating the program asset strength ratio (PASR). The PASR includes total scheduled pledged loan repayments divided by total scheduled bond debt service. The state's PASR is 2.2x, which is higher than Fitch's 2015 'AAA' median level of 1.9x and is therefore considered to be strong.

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 program's life (per Fitch criteria, a 90% recovery is applied when determining default tolerance). These results are in excess of Fitch's 'AAA' liability rating stress hurdle of 28%, as produced by the PSC. The liability rating stress hurdle is calculated based on overall pool credit quality as measured by the rating of underlying borrowers, loan size and term, and concentration. The program's moderately low PSC stress hurdle is reflective of the slightly better than average borrower credit quality.

LOSS PROTECTION PROVIDED BY OVERCOLLATERALIZATION

KIA's SRF utilizes a cash flow based program structure, wherein program bonds are primarily protected from losses by overcollateralization, or annual loan repayments made in excess of bond debt service. Fitch calculates the minimum annual debt service coverage to be a very solid 1.9x, compared to Fitch's 'AAA' median of 1.3x. Additional enhancement is provided from the program's $288 million in available surplus funds. While not legally pledged, these resources would likely be used if available and needed to meet payment deficiencies

SOLID BORROWER POOL WITH ABOVE-AVERAGE CONCENTRATION

Fitch estimates that approximately 72% of the program exhibits investment-grade credit quality. In aggregate, pool credit quality is slightly better than similar municipal pools, as reflected by a 'AAA' PSC liability rating stress hurdle of 28%, which is slightly lower than Fitch's median of 31% (lower liability stresses correlate to stronger credit quality). Underlying loan security is very good with 100% of loans secured by water and/or wastewater system revenue pledges.

The pool program consists of 134 separately secured loans to 116 unique borrowers, the top 10 of which comprise approximately 60% of outstanding loan obligations. Consistent with Fitch's last review, the district (not rated by Fitch but assessed to be of very strong credit quality) remains the largest borrower, representing 20% of outstanding pool loan principal. The remaining top 10 borrowers range in size from 2.0% to 8.2% of the total pool and all are assessed to be of investment-grade quality.

CROSS-COLLATERALIZATION PROVIDES ADDITIONAL PROTECTION

On each payment date, debt service shortfalls originating from KIA's drinking water SRF can be covered from excess clean water SRF revenues and vice versa. Because of this cross-collateralization, Fitch combines both pools in its modeling analyses.

EFFECTIVE PROGRAM MANAGEMENT AND UNDERWRITING

The authority maintains effective loan underwriting policies consisting of review of historical audited financial statements, cash flow projections, and rate affordability. Monitoring procedures include annual review of audited financial statements.

The program has never experienced a permanent loan default but has had a limited number of stressed borrowers. This is likely due to the below-average socioeconomic makeup of portions of the state and, in particular, the fact that many of the smaller borrowers are exposed to risks associated with limited economic diversity.

Unlike most SRF programs, the general assembly of Kentucky, which established the authority, has authorized KIA to directly impose service charges on any borrowers pursuant to its loan agreement and adjust and increase such service charges, if necessary. Under certain circumstances, an increase in service charges may be subject to approval by the Public Service Commission of Kentucky.