NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following Puerto Rico Housing Finance Authority (PRHFA) capital fund (CFP) bonds:
--$384.475 million CFP bonds, series A & B 2008 at 'A'.
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by Puerto Rico Public Housing Administration's public housing capital fund annual appropriations; however, appropriations are first used to pay off the senior 2003 capital fund bonds (which are not rated by Fitch), with the remaining amount being used to pay the 2008 capital fund bonds. The 2008 series A & B capital fund bonds are subordinate to the 2003 capital fund bonds, which were issued under a separate indenture. In addition to the capital fund appropriations, debt service reserve funds covering half of the maximum annual debt service payment are invested in highly liquid funds to cover any timing delays in appropriations.
KEY RATING DRIVERS
STABILIZED APPROPRIATION LEVELS: The Stable Outlook reflects current budgetary agreements that increased capital fund appropriation levels for FY 2014 and should stabilize levels for FY 2015 (based on the 'Bipartisan Budget Act of 2013', which set federal spending thresholds at an amount slightly above 2014 levels). These agreements provide short-term security to the rating and reverse multiple years of declining appropriation amounts.
STABILIZED DEBT SERVICE COVERAGE: The affirmation reflects current stressed DSC levels, which remain in the appropriate range for the current rating level.
BOND STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service on a first priority basis, whereby payments are first used to pay 2003 capital fund bonds prior to the subordinate 2008 capital fund bonds.
MANAGEMENT OVERSIGHT: PRHFA's management has consistently submitted capital plans to HUD in a timely manner and has had no material decrease in housing units.
DECLINES IN FUTURE APPROPRIATIONS: 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 2016 appropriation were reduced from enacted 2014 levels in an amount that is 16% or greater it would put debt service coverage on the cusp of the threshold ratio appropriate for the current 'A' rating.
MANAGEMENT SUBMISSION OF PLANS: Although remote, any inability from the individual PHAs to submit capital plans to HUD in a timely manner would put negative pressure on the rating and could result in a downgrade.
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 analyzing 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 to maturity, a 20% decrease for 15 years to maturity, and a 25% 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. 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 Outlook revision to Stable from Negative primarily reflects current budgetary agreements which increased FY 2014 capital fund appropriation amounts and should stabilize those amounts for FY 2015. These agreements provide short-term security to the rating and reversed five straight years of declines in capital funding. The affirmation is based on FY 2014 stressed DSC levels which increased from FY 2013 levels in correlation with the increased appropriation amounts. In FY 2014, PRHFA's Fitch stressed DSC increased to 1.74x which is consistent with its 'A' rating. While concerns are mitigated in the short term, budgetary pressures still exist. Therefore, if annual appropriation amounts decrease in the future there will be negative pressure on the rating.
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 provided PHAs funds every year since 1937, and the debt service reserves. However, as the pressure remains for the federal government to lower their deficit, HUD's capital fund budget is at risk and may decline.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Revenue-Supported Rating Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria