Fitch Rates Utah Housing Corp's $100MM Class III Mortgage Bonds 2015 Ser D 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' long-term rating to the following Utah Housing Corporation (UHC) single-family mortgage bonds:

--$100 million UHC single-family mortgage class III bonds 2015 Series D.

In addition, Fitch has affirmed the 'AAA' rating on approximately $352 million in class I bonds (2000 Indenture). Fitch has also affirmed the 'AA-' rating on UHC's general obligation (GO) rating and approximately $64 million in class III bonds.

SECURITY

The Class I bonds are secured by all assets and revenues under the indenture which are mainly comprised of mortgage loans, investments, and reserve funds. The assets and revenues of the trust estate secure the Class I bonds on a senior basis to the Class III bonds. Additionally, the various Class III bonds are general obligations of the corporation and are secured by its full faith and credit pledge.

KEY RATING DRIVERS

SUFFICIENT ASSET PARITY LEVELS: After this upcoming issuance, the Class I bonds are expected to have an asset parity level of 131% which are sufficient for their 'AAA' rating. Additionally, the various supplemental indentures provide for strong asset parity requirements on the Class I bonds.

INCREASED GO NET POSITION: As of June 30, 2015, UHC increased its available GO capital base to $83 million from $76 million in December 2013.

IMPROVED OPERATING INCOMES: Despite recent operating losses in their single family housing programs, UHC reported $26 million of operating income (before fair market adjustments) in FY 2015 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 Federal Housing Administration (FHA), Veteran Affairs (VA), or Rural Development (RD) which minimizes the potential for loan losses.

RATING SENSITIVITIES

INABILITY TO MAINTAIN PROGRAM PROVISIONS: If asset parity requirements are not met on the Class I bonds there will be negative pressure on the Class I bond ratings.

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 necessitate resources from UHC's GO and put negative pressure on their long-term GO rating.

AGENCY NET LOSSES: UHC has increased their overall net financial position in FY 2015 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 these new Class III 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.

CREDIT PROFILE

The 2015 series D class III single-family mortgage bonds are to be issued on parity with the other outstanding class III obligations of the 2000 Indenture. The 2015 series D class III bonds are being issued to purchase new mortgage loans and to refund older debt obligations under both the 2000 Indenture and various other UHC indentures. After the refunding, the mortgages securing these older debt obligations will be transferred to the 2015 series D bonds. Additionally, all 2000 Indenture class II bonds are expected to be refunded with this new issuance.

The affirmation of the 'AAA' rating on the Class I bonds reflects expected asset parity levels, strong program provisions, and UHC management oversight. After this upcoming issuance, the Class I bonds are expected to have an asset parity level of 131%. Additionally, third-party cash flows, which incorporated various Fitch stress scenarios, illustrated minimum asset parity levels of 121% for the class I bonds.

The 'AA-' rating on the 2015 Series D class III bonds reflects the general obligation rating of UHC. UHC continues to perform favorably despite recent operating losses within its single-family housing programs. As of FY 2015, UHC had an adjusted debt-to-equity ratio of 5.8x and a net interest spread of 10.5%. UHC has a strong loan portfolio which is entirely federally insured by the following providers: FHA (99.03%), VA (0.96%), and RD (0.01%). Additionally, UHC has increased its available capital base to $83 million in June 2015 from $76 million in December 2013. As of July 31, 2015, UHC's loan portfolio had a 60+ day delinquency rate of 9.2%.

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.

The issuance of these 2015 series D bonds and the corresponding restructuring of the 2000/2007 Indentures are expected to reduce or eliminate the negative arbitrage and program operating losses within the indentures. In conjunction with this upcoming issuance, UHC will take out a $25 million GO loan from Barclays which is expected to be primarily used for terminating hedging contracts tied to variable-rate debt. The termination of these hedging contracts should help reduce or eliminate the negative arbitrage within UHC's indentures. However, there will be negative pressure on the Corporation's GO rating if mortgages prepay at an accelerated rate which could increase the negative arbitrage within the various housing programs.

Additionally, UHC's management oversight and overall financial position have mitigated concerns over the GO rating in the short-term. In FY 2015, the Corporation reported $26 million in operating income (before fair market adjustments) despite weak profitability ratios within their single-family housing programs and the prolonged low interest rate environment. UHC's strong FY 2015 results are largely attributable to their originating and selling of mortgages on a monthly basis which generated $33 million in operating revenue for FY 2015. 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

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

State Housing Finance Agencies General Obligation Rating Criteria (pub. 26 Feb 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862355

State Housing Financing Agencies: Single Family Housing Criteria (pub. 01 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867779

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996708

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996708

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Charles Giordano
Senior Director
+1-212-908-0607
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Charles Giordano
Senior Director
+1-212-908-0607
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com