OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to the Commonwealth of Kentucky State Property and Buildings Commission (SPBC) agency fund revenue bonds, project no, 114 issued on behalf of the Kentucky Community and Technical College System (KCTCS).

The bonds are expected to price via negotiation on or about May 24, 2016

In addition, Fitch has affirmed the 'A+' rating on the following SPBC bonds:

--Agency fund revenue and revenue refunding bonds, Project No. 80 series A;
--Agency fund revenue refunding bonds Project No. 102 series A and taxable series B;
--Agency fund revenue refunding bonds Proj. No. 103 series A and taxable series B.

The Rating Outlook is Stable.

SECURITY

Agency fund bonds issued on behalf of public higher education institutions in Kentucky are special and limited obligations of the SPBC, payable from a pledge of general receipts of the institutions via lease agreements with the SPBC. A statutory commonwealth public higher education aid intercept enhances the credit quality of the bonds and is the basis for the rating.

KEY RATING DRIVERS

RATING BASED ON COMMONWEALTH INTERCEPT: The 'A+' rating, one notch below the Commonwealth of Kentucky's 'AA-' Long-Term Issuer Default Rating (IDR), reflects the statutory requirement to intercept available commonwealth public higher education aid. The statute establishing the intercept and transaction documents ensure timely notification by the trustee to Kentucky's Finance and Administration Cabinet to provide funds to pay debt service if borrowers fail to make payments on the underlying leases to SPBC.

SATISFACTORY COMMONWEALTH AID COVERAGE: For each public higher education institution issuing agency fund bonds rated by Fitch, historical interceptable commonwealth aid (over the past 10 years) covers pro-forma maximum annual debt service (MADS) by no less than 3x. Direct aid for higher education is a key component of the commonwealth's biennial budgets and an essential revenue item for the institutions.

STRUCTURAL TIMING PROTECTIONS FOR INTERCEPT: The leases between the SPBC and the public higher education institutions ensure adequacy of interceptable aid throughout each year. The leases require that all lease payments due within a fiscal year from an institution must be deposited to the trustee before the date on which remaining lease payments for the year would exceed appropriated commonwealth aid that had not yet been disbursed to the institution.

RATING SENSITIVITIES

COMMONWEALTH CREDIT QUALITY: The rating is sensitive to changes in Kentucky's IDR, to which this rating is linked.

INTERCEPT PROGRAM MECHANICS: The rating is also sensitive to changes in the statutes or administrative procedures governing the commonwealth public higher education aid intercept program and trends in public higher education aid appropriations.

CREDIT PROFILE

Kentucky Revised Statutes section 164A.608 establishes an intercept mechanism whereby aid due to public higher education institutions must be redirected to bond paying agents or trustees to cover any unpaid debt service on agency fund bonds. The statute and interagency documents between the commission, the institutions for each transaction, and the trustee require that the trustee notify the commonwealth's secretary of the Finance and Administration Cabinet of any failure of an institution to make payments no later than 10 days before the debt service payment date. Within five days, the secretary shall intercept appropriated aid for that institution that has yet to be disbursed and remit it to the trustee.

To ensure availability of sufficient undisbursed funds, the interagency agreements for each transaction require the institutions to fully pay debt service due within a fiscal year before remaining debt service would exceed undisbursed funds. If such payment is not made then the intercept provisions noted earlier apply. The agreements also require the institutions to provide the trustee and the commission with annual schedules of debt service payments and commonwealth aid disbursements each year.

Historical state appropriations provide ample coverage of maximum annual debt service (MADS) for the bonds. Each institution's commonwealth aid is available solely for its own debt service payments. The agency fund bonds rated by Fitch were, or will be, issued on behalf of the University of Kentucky (Project No. 102 bonds and a portion of the project no. 80 bonds), Eastern Kentucky University (Project No. 103 bonds and a portion of the project no. 80 bonds), and the Kentucky Community and Technical College System (Project No. 114 bonds).

Pro-forma MADS coverage from historical state appropriations over the past 10 years has never been below 3x. For local school district intercept enhancement programs, Fitch views 1.25x as the minimum MADS coverage to apply the enhancement. The commonwealth has significant responsibility for higher education, but has also cut spending for higher education while maintaining local school aid levels (as recently as the budget for the upcoming biennium). Accordingly, Fitch views 1.75x - 2x as the minimum level of pro-forma MADS coverage from historical appropriations for the credit enhancement to apply for agency fund bonds issued for Kentucky public higher education institutions.