NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following Maryland Community Development Administration (MCDA) capital fund bonds:
--Approximately $94.3 million MCDA capital fund securitization revenue bonds, series A of 2003, at 'A+'.
The Rating Outlook is Negative.
The bonds are secured by the pledged public housing capital fund annual appropriations of the five individual public housing authorities (PHAs). 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. Appropriation amounts are separately secured for the five PHAs and are not cross-collateralized. All pledged funds are subject to available annual appropriations, are not guaranteed, and are subject to changes in law or HUD regulations. MCDA acted as a conduit issuer when issuing the bonds and used the subsequent proceeds to make loans to distribute to the five individual PHAs.
KEY RATING DRIVERS
DECLINING APPROPRIATION LEVELS: The individual public housing authorities ' appropriations have decreased in recent years, with the aggregate appropriations falling 20% and 11% in fiscal years (FY) 2011 and 2012, respectively. Additionally, a March 1st Office of Management and Budget (OMB) report shows a 5% reduction to the Public Housing Capital Fund as a result of sequestration.
DECREASED DEBT SERVICE COVERAGE: Due to the declining appropriation amounts, debt service coverage (DSC) levels have drastically decreased in the last two years.
BOND STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service on a first-priority basis.
MANAGEMENT OVERSIGHT: MCDA acts as a conduit issuer which adds credit strength to the bonds and mitigates concerns with management's timely submission of capital fund plans. However, if appropriation amounts and debt service coverage levels continue to decline, the credit strength given for MCDA's management will be negated.
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 2013 appropriation were reduced from 2012 levels in an amount that is 17% or greater, this would put DSC on the cusp of the threshold ratio appropriate for its current 'A+' rating.
Fitch's rating approach for housing bonds secured by annual appropriations involves: a quantitative analysis of annual appropriation amounts and corresponding debt service coverage levels, review of the legal structure of the agreement, and a qualitative analysis of management oversight.
Fitch takes a conservative approach to analysing appropriation amounts and debt service coverage levels by evaluating the appropriation risk. Fitch recognizes that bonds with longer maturities are exposed to a higher degree of appropriation risk. Therefore, Fitch 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% of the previous year's funding. This base amount is then adjusted further depending on the remaining years to maturity, with a 10% decrease for bonds five years to maturity, a 15% decrease for 10 years, a 20% decrease for 15 years, and a 25% decrease for 20 years.
The final stressed appropriation amount is then used to calculate the adjusted debt service coverage level. A minimum stressed DSC of 4.0x is typical for an 'AA' rating, 3.0x is typical for an 'AA-' rating, 2.0x is typical for an 'A+' rating, and 1.5x is typical for an 'A' rating.
In addition to quantitative measures, Fitch also reviews the legal structure of the bonds. Fitch reviews 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 performance and their ability to meet HUD's deadlines and requirements to receive annual appropriations. Each year HUD requires PHAs 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 extremely 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 PHAs that plans were submitted to HUD. Fitch also discusses the current progress of modernization projects and the authority's ability to finish work to completion. Fitch monitors the authority's current number of housing units, since that factors into the capital fund appropriation formula because if the number of housing units decline, the portion of funds appropriated to an agency could also decline. Additionally, Fitch views a state housing finance agency acting as a conduit issuer as a credit strength.
According to the OMB report, dated March 1, 2013, the potential aggregate reduction to the Public Housing Capital Fund is expected to be 5% from sequestration; however, the actual reduction in capital allocations to housing authorities may vary depending on how the reduction is applied. If the application of sequestration causes a reduction of 5% to MCDA's capital fund appropriation, Fitch does not believe that this 5% reduction, in and of itself, will have a negative impact on the rating. However, Fitch estimates that a 17% decrease in the 2013 appropriation amount from the 2012 amount would put debt service coverage levels on the cusp of the threshold ratio appropriate for its current 'A+' rating. Therefore, Fitch will monitor the appropriation amounts as they become available and any reduction in MCDA's appropriation amount greater than 17% will prompt a new review by Fitch.
Given that the 2013 capital fund appropriation is not yet available, Fitch's review is restricted to prior appropriation amounts. The affirmation recommendation is based on the current DSC level, which uses the 2012 appropriation amount. Credit concerns revolve around the volatility of appropriation amounts. In recent years, appropriation amounts have drastically decreased, which has quickly eroded DSC levels. In FY 2012, the individual PHAs' coverage levels ranged from 2.0-3.0x for two of the PHAs, were between 3.0-4.0x for two of the PHAs, and one PHA had a coverage level of 8.9x. Under Fitch's stressed scenarios, the individual PHAs stressed DSC levels ranged from 2.10x-2.60x for three of the PHAs, 7.0x for one PHA, while the lowest PHA had a stressed DSC of 1.79x. The recent trend of declines in appropriations and the remaining 10 years to maturity on the bonds are the center of credit concerns and basis for the Negative Outlook on the bonds.
Maryland Community Development Administration acted as a conduit issuer when issuing the bonds, and used the bond proceeds to make loans to five individual PHAs. It is important to note that the loans are not cross-collateralized, meaning if one PHA fails to make debt service payments it puts all the bonds at risk for default. Fitch views MCDA acting as a conduit issuer as a credit strength due to the authority's ability to mitigate many of the concerns associated with management oversight and an individual PHA's ability to adhere, in a timely manner, to the HUD regulations. The proceeds of the bonds were used for modernization projects, which are still in various stages of completion.
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. This could potentially lead to political, economic, or regulatory delays in the timing of the appropriations. All of these concerns are somewhat mitigated by the legal structure of the bonds, the fact that the federal government has provided PHAs with funds every year since 1937, and by the debt service reserves. However, as the pressure mounts for the federal government to lower the deficit, HUD's capital fund budget is at risk and may continue to decline.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Revenue-Supported Rating Criteria', (June 12, 2012);
--'Tax-Supported Rating Criteria', (Aug. 14, 2012);
--'U.S. Municipal Structured Finance Rating Criteria', (Feb. 28, 2012).
Applicable Criteria and Related Research
U.S. Municipal Structured Finance Criteria
Tax-Supported Rating Criteria
Revenue-Supported Rating Criteria