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Fitch Rates Vermont Muni Bond Bank's $44MM 2008 Bonds 'AAA'; Outlook Stable
CHICAGO & NEW YORK-(Business Wire)-July 3, 2008 - Fitch Ratings has assigned an 'AAA' rating to approximately $38 million Vermont Municipal Bond Bank (VMBB) 2008 series 1 bond, and approximately $5.5 million 2008 series 2 bonds issued under the bank's 1988 general bond resolution. In addition, Fitch affirms the 'AAA' rating on VMBB's $486 million outstanding 1988 general bond resolution bonds. The Rating Outlook is Stable. The 2008 series 1 and 2 are scheduled to price via negotiation during the week of July 7. VMBB will loan the proceeds to local governmental entities for various capital improvements.
The 'AAA' rating is based on the bond program's strong underlying loan security, diversification of the pledged local bond portfolio and various structural enhancements, i.e. a state aid intercept to assure local bond repayments, a reserve fund backed by a moral obligation make-up provision, and additional non pledged reserves.
Bonds issued under the 1988 general resolution are secured by loan repayments and a debt service reserve, funded by bond proceeds, and sized at the least of maximum annual debt service, 125% average annual debt service, or 10% of bond proceeds. As of Dec. 31, 2007, the reserve requirement was $38.4 million and the actual level of reserves was $39.7 million. In addition, the bond bank's unrestricted general fund balance totaled $10 million, which, while not pledged, is also available to cure potential loan deficiencies. The combined pledged debt service reserves and unrestricted general fund reserves equaled $49.7 million, approximately 10% of bonds outstanding.
General fund and pledged debt service reserves are sufficient to pay bonds even if scheduled loan repayments fall short by 20% for four consecutive years and no action is taken by the state to replenish the reserve fund. A loan repayment shortfall this severe is in excess of what Fitch would expect to occur in an 'AAA' stress scenario, given the quality and diversification of the bond bank's loan pool.
Additional credit enhancements to the bonds include a state aid intercept provision to cover potential borrower defaults, as well as a moral obligation of the state, albeit not a legal requirement, to replenish the debt service reserves if they fall below the minimum specified level. Neither the intercept nor the moral obligation has ever been utilized, because there has not been a default since the bond bank began operations.
Including loans made from the proceeds of the 2008 series 1 and 2 bonds, the bond bank will have loans outstanding to 307 borrowers from various cities, towns, villages, schools districts, water districts, fire districts, solid waste districts, and a transportation authority. The bank's loan pool is naturally diversified, with the largest borrower, Brattleboro Union High School District, accounting for roughly 5% of the total outstanding loan balance and the top 10 borrowers accounting for approximately 28% of the outstanding loan balance after this bond issuance. General obligation loans, which must receive voter approval and include local bond counsel opinions and a financial audit, constitute 97% of the bond bank's outstanding loan portfolio. Approximately 59% of the loans outstanding are to school districts; these loans garner strong support from the state aid intercept since state aid is usually a multiple of school district debt service.
Revenue loans, which are rarely accepted, require three years of financial statements, a feasibility study for new or expansion projects, at least 1.25 times (x) debt service coverage, and a contingency reserve sized at 10% of operating expenses plus 10% of debt service. Only 3% of outstanding obligations are backed by pledged revenues.
Established in 1970, The Vermont Municipal Bond Bank 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.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
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