Fitch Rates Oklahoma Water Resources Board's Ser. 2016 DWSRF Revs 'AAA'; Outlook Stable

Fitch Ratings has assigned a 'AAA' rating to the following bonds issued by the Oklahoma Water Resources Board (OWRB):

--Approximately $90 million revolving fund revenue bonds - drinking water program, series 2016 (master trust).

The bonds will be used to finance eligible drinking water projects within the state, finance the state match component required for federal grant funding, and pay for the costs of issuance. The bonds are expected to price via negotiation on or around October 4th.

In addition, Fitch has affirmed the following:

--Approximately $446.5 million outstanding revolving fund revenue bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged loan repayments, amounts held in funds established under the respective bond indentures, interest earnings and certain excess amounts available under the master trust agreement.

KEY RATING DRIVERS

SOUND FINANCIAL STRUCTURE: Fitch's cash flow modeling demonstrates that OWRB's combined clean water state revolving fund (CWSRF) and drinking water state revolving fund (DWSRF) loan pool programs (the combined '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).

AVERAGE POOL DIVERSITY: The top 10 borrowers and the largest single borrower represent 55% and 13% of the pool, respectively. These numbers align well with Fitch's 2015 'AAA' medians of 55% and 18%.

LARGELY UNRATED PORTFOLIO: Approximately 61% of the loan portfolio does not carry a public rating. In its analysis, Fitch assumes unrated borrowers to be of sub-investment grade quality ('BB'). Therefore, overall pool quality is below average in comparison to similar programs rated by Fitch.

STRONG PROGRAM MANAGEMENT: Management has demonstrated strength and capability in its underwriting and monitoring processes, as evidenced by the fact that programs has never experienced a pledged loan default.

RATING SENSITIVITIES

REDUCTION IN MODELED STRESS CUSHION: If the Oklahoma Resource Board's revolving fund program were to experience significant deterioration in aggregate borrower credit quality, increased pool concentration, or increased bond leveraging resulting in its inability to pass Fitch's liability default 'AAA' hurdle downward pressure on the rating would occur.

CREDIT PROFILE

OWRB was established in 1957 as an agency and department of the state of Oklahoma, and serves as the state's financing vehicle for local government water and wastewater capital funding. In addition to managing the state revolving fund (SRF) programs, the OWRB administers an additional state loan program and two grant programs. It is also responsible for administering state laws related to water rights, promulgating state water standards, and developing and updating the state comprehensive water plan.

With respect to OWRB's current and recent bond issues, most of the program's credit metrics, including those of the financial structure and pool credit quality, have remained stable over the past several years.

FINANCIAL STRUCTURE EXHIBITS SOUND DEFAULT TOLERANCE

Fitch's cash flow modeling demonstrates that the availability of program resources allow for hypothetical loan defaults of 100% in the first, middle and last four years of the program's life (as per Fitch criteria, a 90% recovery is also applied in its cash flow model when determining default tolerance) while still paying bond debt service in full. This is in excess of Fitch's 'AAA' liability rating stress hurdle of 50%, thereby indicating a passing result under Fitch's quantitative analysis.

As an additional measure of financial strength, Fitch calculates the program asset strength ratio (PASR). The PASR, an asset-to-liability ratio, includes total scheduled loan repayments plus any additional pledge funds divided by total scheduled bond debt service. The resulting PASR for OWRB's SRF program is sound at approximately 1.8x, aligning well with Fitch's 2015 'AAA' median level of 1.9x.

LOSS PROTECTION PROVIDED BY RESERVES AND OVERCOLLATERALIZATION

The series 2013B and 2014A bonds used a reserve-fund structure, wherein loss protection for bondholders is provided primarily by dedicated debt service reserve funds. All other outstanding bonds issued since 2010, including the series 2016 bonds, use a cash-flow structure, wherein loss protection is provided primarily by pledged loan repayments made in excess of bond debt service, or overcollateralization.

Reserves from the series 2013B and 2014A bonds currently stand at approximately $54.3 million, which equates to 10% of total projected bonds outstanding after this issuance. On an annual basis, loan repayments overcollateralize bond debt service by a minimum of 1.4x, which is slightly better than Fitch's 'AAA' rating category median.

The program is also enhanced by a cross-collateralization feature of the separate CWSRF and DWSRF programs, which allows for shortfalls in one program to be covered by surpluses in the other. This feature allows Fitch to look at the separate programs on a combined basis in its modeling analyses.

LARGELY UNRATED LOAN POOL WITH MODERATE DIVERSITY

The combined loan pool is composed of 158 pledged borrowers. Inclusive of the internal credit opinions assigned by Fitch, approximately 49% of the portfolio is considered to be investment grade; this compares unfavorably to Fitch's 'AAA' median of 70%. As a result of the largely unrated loan pool, the 'AAA' liability hurdle is high at 50% versus an 'AAA' median of 31%, which translates to lower overall pool credit quality.

In aggregate, the top 10 borrowers represent 55% of the pool, which equates to Fitch's median. Tulsa Metropolitan Utility Authority (not rated by Fitch but assessed to be of strong credit quality) is the pool's largest participant, making up 13% of the total. At 12.2% and 6.7% respectively, the second largest and third largest borrowers are the Oklahoma City Water Utilities Trust and the Broken Arrow Municipal Authority (both also not rated by Fitch but assessed to be of solid credit quality). The remaining top 10 borrowers range from 1.9% to 4.3% in size relative to the aggregate pool. Based on the characteristics described above, Fitch views the loan pool as having diversity similar in comparison to other 'AAA'-rated pooled programs.

EXPERIENCED PROGRAM MANAGEMENT AND SOUND UNDERWRITING

The board's formal underwriting procedures consist of approval of clean water or drinking water project feasibility, review of loan credit, and application and approval by OWRB. A borrower must enter into a loan agreement with OWRB and enact an ordinance or resolution that provides for loan repayments through issuance of a local note. Borrower loan agreements typically must demonstrate 1.25x annual debt service coverage on outstanding loans, including any planned additional debt. Loans to smaller systems are secured further by a mortgage of the local borrower's system facilities.

In the event of a loan default, OWRB has the right to directly impose, enforce, and collect charges on users of the defaulting system. OWRB has never experienced a default by any borrower within its pledged loan programs. OWRB is the sole administrator of the CWSRF, while administration of the DWSRF is shared between OWRB and the state's Department of Environmental Quality.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

State Revolving Fund and Leveraged Municipal Loan Pool Criteria (pub. 29 Oct 2015)

https://www.fitchratings.com/site/re/872307

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012147

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012147

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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