Fitch Ratings affirms the following capital fund program (CFP) revenue bonds at 'AA-': --
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by the public housing capital fund annual appropriation assigned through the
KEY RATING DRIVERS
STABILIZED APPROPRIATION LEVELS:
STABLE DEBT SERVICE COVERAGE: Utilizing the appropriation amounts projected, debt service coverage (DSC) levels are expected to stabilize. When Fitch's stress scenarios are applied to current appropriation amounts the DSC increases slightly to 3.33x from prior the year stressed level estimate of 3.31x. Based on these levels, the annual appropriation would have to be cut by 26 percent to warrant a potential downgrade.
BOND STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service on a first priority basis.
DECLINES IN FUTURE APPROPRIATIONS: Further declines in the annual capital fund public housing appropriations may reduce debt service coverage to levels that would negatively impact the current rating. Fitch estimates that if the 2015 appropriation were reduced from 2013 levels after sequestration, in an amount of 26 percent or more than the FY 2013 appropriation, then debt service coverage would be on the cusp of the minimum threshold ratio appropriate for its current 'AA-' rating.
Fitch's approach for public housing authority (PHA) bonds secured by U. S.
Fitch takes a conservative approach to analyzing appropriation amounts and debt service coverage levels by evaluating the appropriation risk (i.e. the Fitch stressed appropriation amount). Fitch recognizes that bonds with longer maturities are exposed to a higher degree of appropriation risk i.e. budget cuts. Therefore, the agency recalculates the debt service coverage level to account for the potential volatility in annual appropriation amounts.
Fitch accounts for this by considering the base appropriation level to be the lower of either the lowest amount received over the past five years or 95 percent of the previous year's funding. This base amount is then adjusted further depending on the remaining years to maturity, with a 10 percent decrease for bonds five years to maturity, a 15 percent decrease for 10 years to maturity, a 20 percent decrease for 15 years to maturity, and a 25 percent decrease for 20 years to maturity.
The final Fitch stressed appropriation amount is then used to calculate the adjusted debt service coverage level. A minimum stressed DSC of 4.0x is typical for a 'AA' rating, 3.0x is typical for a 'AA-' rating, 2.0x is typical for a 'A+' rating, and 1.5x is typical for a 'A' rating.
In addition to quantitative measures, Fitch also reviews the legal structure of the bonds. We review the annual contributions contract (ACC) between the PHA and HUD for any items that would help mitigate the risks associated with the PHA's ability to pay bondholders. Fitch specifically looks for the following items in an ACC: debt service payments going directly from HUD to the trustee on a predetermined schedule usually three days in advance of the debt service payment date and administrative sanctions not being able to delay payments of the debt service or recapture funds approved for debt service payments.
The final component Fitch reviews is management's performance and their ability to meet HUD's deadlines and requirements to receive annual appropriations. Each year HUD requires public housing authorities to submit one-year and five-year capital fund plans and funds are only allocated after HUD's approval of the plans. Since the start of the capital fund program, agencies have been successful in submitting plans in a timely manner since appropriations are predicated upon an agency's ability to submit plans on time. Fitch confirms with individual public housing authorities that plans were submitted to HUD. Fitch also discusses the current progress of modernization projects and the authority's ability to finish the work to completion. Fitch monitors the authority's current number of housing units since that is a prime component in the capital fund appropriation formula because if the number of housing units decline the portion of funds appropriated to a public housing authority could also decline if there is no replacement housing plan in place.
According to the H.R. 3547 Consolidated Appropriations Act passed by both the
Given that the individual public housing authority's 2014 capital fund appropriation is not yet available, Fitch's review is restricted to the aggregate
Credit concerns revolve around the volatility of appropriation amounts. Prior to sequestration, appropriation amounts had drastically decreased which quickly eroded debt service coverage levels.
The appropriation amounts, under HUD's budget, are part of the U.S. government's general fund and are reliant upon the federal budget process. In January of 2014, the budget was agreed to at the same spending level for the next two years, another sign of stabilization. Most of these concerns are somewhat mitigated by the legal structure of the bonds, the fact that the federal government provided Public Housing Authorities funds every year since 1937, and the debt service reserves.
Fitch recognizes that
Additional information is available at 'fitchratings.com'.
--'Revenue-Supported Rating Criteria',
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Fitch Ratings affirms the following capital fund program (CFP) revenue bonds at 'AA-':