Fitch Rates Alaska Municipal Bond Bank 2010 Resolution GOs 'AA-'; Outlook StableNEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to $4.765 million Alaska Municipal Bond Bank (bond bank) general obligation (GO) bonds (2010 municipal obligation bond resolution), consisting of:
--$800,000 2010 series A-1 (tax-exempt - bank qualified);
--$3.96 million 2010 series A-2 (taxable).
The precise par amount of each series will be determined at final sale, expected via negotiated sale on or about Dec. 9, 2010.
The Rating Outlook is Stable.
--The rating is based on the bond bank's statutory authority to intercept aid to local governments in the event of a local government borrower's failure to repay the bond bank.
--The bonds are also supported by reserves at the borrower and bond bank levels, other available bond bank resources and the bank's statutory power to borrow funds from the state. The bank pledges to seek a legislative appropriation if reserves fall below the level required to fund annual debt service.
--Bond bank programs have a strong repayment history.
--The state has a demonstrated history of support for and involvement with the bond bank. The state's own resources are substantial, with state GO bonds rated 'AA+' with a Stable Rating Outlook.
KEY RATING DRIVERS:
--Continued support of the bond bank by the State of Alaska, including access to state resources.
--Changes in the state's credit profile.
General obligations of the bond bank, not of the state, to be repaid from local government borrowers. Payment default by a borrower triggers an intercept by the bond bank of state aid payments to the borrower. In the event of a draw on the program reserve fund the bond bank pledges to seek a legislative appropriation for reserve replenishment.
The 'AA-' rating on the bond bank's newly established 2010 GO resolution bonds is based on the bond bank's statutory ability to intercept state funds to local government borrowers in the event of a failure by borrowers to pay, in the context of multiple reserves and other statutory provisions to ensure timely payment of debt service. Bond proceeds under the new 2010 resolution, as with the existing 2005 resolution, are provided to local governments for essential capital needs, and are supported by an underlying pledge of the local governments sufficient to cover debt service. Under the 2010 resolution, the underlying pledge of the local borrowers to the bond bank may be in the form of an annual appropriation, in contrast to the requirement under the existing 2005 resolution of an underlying local borrower GO or revenue pledge.
The rating distinction with the 2005 resolution bonds (rated 'AA' with a Stable Outlook by Fitch) is based on the presence of a standing appropriation for 2005 resolution bonds of state general fund resources in the event of a program reserve draw; this feature is not available under the 2010 resolution. Otherwise, both programs benefit from multiple layers of security at both the borrower and bond bank levels. Bonds issued under the 2010 resolution may require a borrower reserve to be funded at closing, as with those 2005 resolution bonds backed by an underlying revenue pledge. For the current sale, the borrower will fund a reserve from its own resources, to be held by the trustee. A separate bond bank program reserve also is being established from bond bank resources, backed by a moral obligation of the state to seek a general fund appropriation in event of a borrower's payment default. State statute requires the bond bank chair to certify annually the sum necessary to restore the program reserve to the required level in the event of a draw. In addition, the bond bank's custodian account, currently funded at $5.5 million, may also be drawn to support the bonds, and the bond bank has separate statutory authority to borrow from the state's general fund surpluses.
Payment by the borrower is due seven days prior to debt service payment. Under its authorizing statute, the bond bank must direct state agencies to intercept scheduled state payments to local borrowers in the event of a borrower's failure to pay. Payments to local governments by the state are frequent and substantial, and include those for education, state revenue sharing and matching grants; these resources provided fiscal 2011 coverage of all bond bank obligations issued on behalf of the current borrower, Ketchikan Gateway Borough, by 4.65 times prior to the current sale. The solid annual coverage, combined with multiple reserve provisions, the bond bank's strong statutory powers to access internal and state resources and the state's close involvement with the bond bank mitigate the risk of a debt service payment delay.
Local borrowers must demonstrate project essentiality and ability to repay to access bond bank financing. There have been no payment defaults to date under programs managed by the bond bank. Under such a scenario, the trustee would draw from the program reserve and the state would pursue intercept of available state aid. Program reserve funding is required based on one of three tests sufficient to fund annual debt service. The 2010 resolution program reserve, to be sized for this sale at about $350,000, is being funded initially by a loan from state general fund surplus resources under the bond bank's statutory authority noted above. The bond bank was established in 1975 to provide access to low cost capital financing for Alaska local governments. Bonds are currently outstanding under a 1976 GO resolution and the 2005 GO resolution, as well as under a separate revenue bond program. Approximately $719 million in MBBA bonds will be outstanding following this sale; state statute limits bond bank debt outstanding to a maximum of $1 billion.
The state's 'AA+' GO rating reflects its very substantial reserve balances and conservative financial management practices. State revenues are linked closely to oil production from the North Slope and global petroleum price trends, exposing the state to revenue volatility. Accordingly, state fiscal practices are generally conservative, with the state dedicating a substantial share of oil-related revenue to reserves and employing long-range forecasting of revenues and expenses. The state took advantage of the oil price spike in 2008 to repay past reserve draws, set aside additional balances and prefund key operating expenses. Planning continues on a natural gas pipeline from the North Slope, completion of which would help diversify state revenues, a particularly important factor given the forecast slow decline of oil production. Debt practices are conservative, with limited issuance and rapid amortization. The state's economy continues to grow and diversify beyond natural resources, although the state levies no general personal income or sales taxes. For further information on the state, please see Fitch's press release of Nov. 19, 2010, 'Fitch Rates Alaska GOs at 'AA+' Outlook Stable,' available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
--'State Credit Enhancement Program Criteria', dated Dec. 16, 2009.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
State Credit Enhancement Program Criteria
Posted: December 3, 2010
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