NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to the following Utah Housing Corporation (UHC) single family mortgage class I bank bonds (2000 Indenture):
--Series 2000 C;
--Series 2002 E;
--Series 2002 F;
--Series 2002 G;
--Series 2003 A;
--Series 2003 B;
--Series 2003 C;
--Series 2003 F.
The 'AA-' rating is being assigned to the various UHC bank bonds in connection with the upcoming substitutions of liquidity facilities for the above referenced series to JP Morgan Chase (rated 'A+/F1' with a Stable Outlook) from the Temporary Credit and Liquidity Program and Barclays Bank. For more information regarding this substitution please see the Fitch press releases titled, 'Fitch to Downgrade ST Ratings to F1 on Utah Hsg Corp S-F Mtge Class I VRBs (2000 Indenture) and 'Fitch to Confirm F1 Ratings on Utah Hsg Corp S-F Mtge Class I VRBs (2001 Indenture)', which are both dated May 6, 2014.
Additionally, in conjunction with the assignment, Fitch affirms approximately $82 million in outstanding UHC general obligation (GO) debt at 'AA-'.
The Rating Outlook is Stable.
Upon certain events detailed in the above referenced substitution press release, various class I bonds can be converted to bank bonds and the accelerated principal and interest payments would become general obligations of the Corporation, secured by its full faith and credit pledge.
KEY RATING DRIVERS
INCREASED GO NET POSITION: As of Dec. 31, 2013, UHC increased its available GO capital base to $76.2 million from $71.6 million in December 2012. Additionally, outstanding GO supported bonds have decreased to approximately $82 million as of March 31, 2014.
BALANCED FINANCIAL POSITION: Despite recent operating losses in their single family housing programs, UHC reported $7.7 million of operating income in FY 2013 and has demonstrated their ability to minimize overall financial losses in previous fiscal years.
SUCCESSFUL MANAGEMENT PERSONNEL: UHC has an experienced management team that has demonstrated their expertise in addressing market challenges.
STRONG LOAN PORTFOLIO: UHC's entire single family loan portfolio is federally insured by FHA, VA, or RD which minimizes the potential for loan losses.
WEAK DEBT STRUCTURE: UHC has been unable to economically redeem certain variable rate bonds under various indentures due to the termination fees of existing hedging contracts associated with the debt that would be incurred upon redemption. This has put a strain on profitability ratios and has the potential to put negative pressure on UHC's GO rating in the future.
HIGH LOAN PREPAYMENTS/LOW INTEREST RATES: Given the current debt structure and low interest rate environment, if UHC mortgage loans prepay at accelerated prepayment speeds, certain single-family housing indentures will be subject to negative arbitrage or large fees if the corresponding swap is terminated which could increase program operating losses. If this were to occur, these losses would fall upon UHC's GO and may strain their long-term GO rating.
AGENCY NET LOSSES: UHC has increased their overall net financial position in FY 2013 despite operating losses within their single family housing programs. However, should program losses begin to impact UHC's overall financial position and/or GO assets; a negative rating action may be taken on the Corporation's long-term GO rating.
INCREASE IN GO EXPOSURE: Fitch believes that the incremental risk associated with the bonds that have the potential to become bank bonds is in line with the current rating level; however any additional GO exposure could put negative pressure on the Corporation's long-term GO rating.
Based on a review of the standby bond purchase agreement supporting the substitution, the diversification of liquidity providers, and the strong cash levels residing within the programs, Fitch believes that UHC's GO rating can support the additional risk associated with these potential bank bonds. In addition to assigning the ratings on these bank bonds,Fitch is also affirming UHC's GO rating and all outstanding UHC GO debt.
UHC continues to perform favorably despite recent operating losses within its single-family housing programs. As of FY 2013, UHC had an adjusted debt-to-equity ratio of 5.3x and a net interest spread of 5%. UHC has a strong loan portfolio which is entirely federally insured by the following providers: FHA (98.87%), VA (1.12%), and RD (0.01%). Additionally, UHC has increased its available GO capital base to $76.2 million from $71.6 million in December 2012 which covers approximately $82 million in GO supported bonds.
Key GO credit concerns stem from UHC's debt structure and their exposure to variable rate debt. Concerns revolve around UHC's inability to economically redeem certain variable rate debt obligations under various indentures due to the high termination fees of existing hedging contracts tied to the debt. As mortgages prepay, these proceeds are reinvested in low interest yielding instruments resulting in negative arbitrage. There will be negative pressure on the Corporation's long-term GO rating if mortgages prepay at an accelerated rate which could increase the negative arbitrage within the various housing programs.
UHC's management oversight and overall financial position have mitigated concerns over the GO rating in the short term. In FY 2013, the corporation reported $7.7 million in operating income despite weak profitability ratios within their single family housing programs and the prolonged low interest rate environment. UHC's strong FY 2013 results are largely attributable to their originating and selling of mortgages to GNMA and FNMA on a monthly basis which generated $21.7 million in operating revenue. The corporation's ability to increase their net position is a reflection of management's ability to adapt to a changing business environment, which is viewed as a credit positive to the general obligation rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'State Housing Finance Agencies: General Obligation Rating Criteria' (Feb. 27, 2014);
--'Revenue-Supported Rating Criteria' (June 3, 2013).
Applicable Criteria and Related Research:
State Housing Finance Agencies General Obligation Rating Criteria
Revenue-Supported Rating Criteria