Published: November 17, 2010
Fitch Downgrades Vermont Muni Bond Bank's $536.85MM Gen Res Program Bonds to 'AA'
CHICAGO - (BUSINESS WIRE) - Fitch Ratings assigns an 'AA' rating to the following 2010 Vermont
Municipal Bond Bank bonds, issued under the 1988 General Resolution:
--$24,280,000 (federally taxable recovery zone economic development
bonds) series 5.
The bonds are expected to sell via negotiation during the week of Nov.
15, 2010.
In addition, Fitch downgrades $536,855,000 in outstanding general
resolution bonds to 'AA' from 'AAA'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating downgrade is due to the program cash flows failure to pass
Fitch's 'AAA' stress test.
--The program's pledged reserves and
loan repayments, excluding federal subsidies, allow the bonds to
withstand borrower defaults of up to 20.3% for four years without
causing an interruption in bond payments. This is consistent with
Fitch's criteria for assigning an 'AA' rating given the loan pool's
borrowers' credit quality, size and diversification.
--The program,
which consists of 298 borrowers, is diverse with low single-borrower
concentration.
--The program's loan security is strong, with
approximately 98% of all loans backed by a general obligation pledge and
additional protection from borrower defaults through a state-aid
intercept mechanism.
KEY RATING DRIVERS:
--Fitch will continue to evaluate the bond bank's ability to balance
future leveraging with program resources to maintain borrower default
tolerance levels that pass Fitch's 'AA' stress test scenarios.
--Credit quality of the bonds is linked to repayment performance on the
program's loan portfolio.
SECURITY:
Program bonds are secured by borrower loan repayments and debt service
reserve funds. A state moral obligation on the reserve fund and a
state-aid intercept provision for borrowers provide additional credit
enhancement.
CREDIT SUMMARY:
Established in 1970, The Vermont Municipal Bond Bank (VMBB) is a
quasi-state agency. It is administered by a five-member board consisting
of four gubernatorial appointees and the state treasurer. The bond bank
issues bonds and uses the proceeds to make loans to local government
borrowers throughout the state. Virtually all of Vermont's eligible
municipalities use the bond bank as their primary borrowing vehicle
because it offers local government borrowers the lowest cost of capital.
The loan pool consists of 298 borrowers from cities, towns, counties,
school districts and other local governments throughout the state.
Approximately 98% of all loans are backed by a general obligation
pledge; the remaining are backed by utility pledges from four borrowers.
About 51% of the loans are to school districts, which are further backed
by an intercept mechanism that includes any state funds payable to
borrowers. State aid is reportedly over 90% of school district debt
service. The loan portfolio's largest borrower, Springfield School
District, comprises only 5% of the portfolio. The top 10 borrowers
account for 33% of the total outstanding loan balance.
Fitch analyzed the default tolerance of the VMBB loan pool using a
stress test it also applies to state revolving funds and other municipal
loan pools. The stress test considers loan quality, single risk
concentration, reserve fund size, and debt service requirements. Due to
the already tight margins on the program's stressed cash flows, with the
issuance of the 2010 series 5 bonds, the program cash flows fail to pass
Fitch's 'AAA' stress test by $4.4 million and $2 million in 2014 and
2027, respectively; this scenario assumes that no scheduled federal debt
service subsidies are received. Per its report 'Build America Bonds
Broaden Municipal Market -- Credit Considerations' dated April 27, 2010,
Fitch assesses the ability of the issuer to pay full interest on the
BABs, regardless of the subsidy. While Fitch believes there could be
offsets to some annual subsidy payments, it believes that VMBB
management would take action to address the reasons for the offset and
avoid multiple years with no subsidy, including the use of certain
optional redemption provisions for its federally subsidized bonds. Even
if the federal subsidies were considered in Fitch's analysis, the
stressed cash flows would still miss Fitch's 'AAA' test by $1.3 million
in 2014. Nevertheless, the program's pledged reserves and loan
repayments, excluding the federal subsidies, allow the bonds to
withstand borrower defaults of up to 20.3% for four years without
causing an interruption in bond payments. This is consistent with
Fitch's criteria for assigning an 'AA' rating given the loan pool's
borrowers' credit quality, size and diversification.
The debt service reserve fund, which is sized at the least of maximum
annual debt service, 125% average annual debt service, or 10% of bond
proceeds, is funded with bond proceeds and invested in U.S. treasury and
agency securities. Pledged reserves currently total $51.3 million, or
9.5% of bonds outstanding. In addition, the bank currently maintains
approximately $10.9 million in unrestricted general fund reserves, which
are not pledged to bondholders but may be used if a deficiency occurs.
The bonds are also supported by a state moral obligation to replenish
the debt service reserve fund if it falls below its minimum specified
level. Neither the intercept nor the moral obligation has ever been
utilized, because no borrower has defaulted on a loan repayment since
the bond bank began operations in 1970.
Loan payments are due 15 days before the bond payment dates. Under
Vermont's state intercept provision, if a borrower fails to make its
scheduled loan repayment, the bond bank will certify the failure of that
payment with the state treasurer. The state treasurer would then pay the
defaulted loan amount to the bank's trustee from amounts appropriated
and payable by the state to the defaulted borrower, if available. If
sufficient state aid is unavailable, it will be paid from subsequent
interceptable state aid payments, with bond bank reserves covering the
temporary shortfall. To date, this mechanism has not been tested as
there have not been any loan defaults in the history of the program.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Oct. 8, 2010);
--'State
Revolving Fund and Municipal Loan Pool Rating Guidelines' (April 28,
2008);
--'Build America Bonds Broaden Municipal Market - Credit
Considerations' (April 27, 2010).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
State Revolving Fund and
Municipal Loan Pool Rating Guidelines
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=384150
Revenue-Supported
Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565
Build
America Bonds Broaden Municipal Market -- Credit Considerations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=516265
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE.
Fitch Ratings
Primary Analyst:
Adrienne M. Booker,
+1-312-368-5471
Senior Director
Fitch Inc.
70 W. Madison
Street
Chicago, IL 60602
or
Secondary Analyst:
Chris
Hessenthaler, +1-212-908-0173
Director
or
Committee
Chairperson:
Jessalynn Moro, +1-212-908-0608
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com
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