Fitch Rates Michigan Finance Authority's SRF 2011 Revenue Bonds 'AAA'; Outlook Stable

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AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to bonds issued by the Michigan Finance Authority (MFA):

--$235.72 million clean water revolving fund revenue refunding bonds (CWRFRRB), series 2011, 'AAA';

--$58.69 million drinking water revolving fund revenue refunding bonds(DWRFRRB), series 2011, 'AAA'.

In addition, Fitch affirms its 'AAA' rating on the following MFA outstanding debt:

--$1.60 billion clean water and drinking water SRF program bonds.

The Rating Outlook is Stable.

KEY RATING DRIVERS

--Strong Financial Structure: The program's overcollateralization and significant reserves provide sufficient credit enhancement to withstand loan defaults of up to 100% (the default tolerance) of the pool in all three of the four year stress periods (first, middle, last four years). This result exceeds Fitch's 'AAA' stress test (approximately 20% defaults) for a pool of this size and credit quality.

--Pool Credit Quality: Pool credit quality is solid; Fitch estimates that more than 85% of MFA's loans are rated at least investment-grade by Fitch or one of the other Nationally Recognized Statistical Rating Organizations (NRSRO). Entities that do not have public investment-grade ratings are required to demonstrate such characteristics through state credit support or private credit assessments. Additionally, underlying loan provisions are strong with virtually all loan principal secured by water and/or wastewater revenue pledges, general obligation pledges or combination (double-barrel) pledges.

--Concentration: The top 10 obligors in the combined SRFs represent over 50% of the aggregate pool. In addition, approximately 22% of the aggregate pools consist of loans to the city of Detroit. Fitch views this risk as mitigated given the credit quality of the pools combined with the high default tolerance levels exhibited by the financial structure.

--Cross-Collateralization: The drinking water and clean water state revolving funds (DWSRF/CWSRF or SRFs) are cross-collateralized, which allows shortfalls in one fund to be covered by surpluses from de-allocated reserves in the other.

SECURITY

The CWRFRRB and DWRFRRB series 2011 bonds are secured by loan repayments payable from local government entities (which are in excess of what is owed in debt service), reserves, and investment earnings.

The CWRFRRBs are on parity with other previously issued clean water revolving fund revenue bonds classified as type PPB-III (PPB = Pooled Project Bonds). The DWRFRRBs have not been previously issued and are classified as type DWPPB-III.

CREDIT PROFILE

The combined SRFs are composed of more than 250 obligors. Although there are a large number of individual borrowers, concentration is high, with the top 10 representing over 50% of the aggregate loan pool. Single obligor concentration is also high, with the city of Detroit (second-lien revenue obligations rated 'A-' by Fitch) representing 22% of the total pledged loan pool. While Detroit is expected to remain the largest single program participant, management does not anticipate its participation to grow materially in the near term.

The CWSRF and DWSRF are cross-collateralized, meaning surplus revenues after reserves are de-allocated from each SRF program are available to cure deficiencies in the other. This feature increases the diversity of the loan pool and lessens the risk of any one borrower's default eroding reserve balances and threatening bondholder payments.

With the issuance of the series 2011 bonds, outstanding bonds of the existing series 2001 and 2002 type PPB-I (clean water) and DWPPB-I (drinking water) will be fully defeased and no longer considered outstanding. Reserve amounts held by each will be transferred to the respective PPB-III and DWPPB-III reserve accounts.

MFA uses conservative underwriting guidelines and sound investment policies. More than 85% of the combined pool participants are of investment-grade quality as reflected by public investment-grade ratings from one of the NRSROs. Borrowers that do not have public investment-grade ratings are required to demonstrate investment-grade characteristics through state credit support or private credit assessments. Strength in underwriting is demonstrated by the fact that neither pool has ever experienced a default or delinquency.

MFA has a staff of two in charge of ongoing monitoring of borrowers. Monitoring consists of the review of each borrower's annual financial reports.

STRUCTURAL CHARACTERISTICS

Reserve funds have been funded by federal capitalization grants, required state matching amounts of 20%, and other available funds. De-allocated reserves can be used to cure loan defaults by any borrower within either of the SRFs. Combined reserves total $762.3 million, or 48% of bonds outstanding.

As the loans/bonds amortize, reserves are released from each series' dedicated reserve account to the extent that remaining reserves for each series equal their required minimum.

Reserves are invested in repurchase agreements with eligible counterparties. Cases in which minimum rating requirements are not met require such counterparties to post additional collateral in excess of minimum requirements. The remaining investments are held in U.S. Treasuries and State and Local Government Series (SLGS).

MFA, the successor to the Michigan Municipal Bond Authority (MMBA), administers several pooled loan programs. In addition to the CWSRF and DWSRF programs, MFA also facilitates Michigan's local government and school loan programs.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's 'Revenue-Supported Rating Criteria', this action was additionally informed by information from IHS Global Insight.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 20, 2011);

--'State Revolving Fund and Municipal Loan Pool Rating Guidelines' (Aug. 15, 2011);

--'Rating Guidelines for State Credit Enhancement Programs' (July 29, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

State Revolving Fund and Leveraged Municipal Loan Pool Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648902

Rating Guidelines for State Credit Enhancement Programs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647629

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