Fitch Rates Idaho Housing and Finance Assoc's 2009 Series B Single-Family Bonds; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to Idaho Housing and Finance Association's (IHFA) single-family mortgage bonds, 2009 series B:

2009 Series B (2006 Indenture)

--$18.2 million class I fixed-rated bonds 'AAA';

--$57 million class I variable-rate bonds 'AAA/F1+';

--$710,000 class II bonds 'AA';

--$20.5 million class III bonds 'A+' (GO pledge)*.

*All Fitch-rated IHFA single-family bond programs include a series of class III bonds which are secured by the assets and revenues of the respective trust estates and are additionally secured by an IHFA general obligation (GO) pledge. The 'A+' rating assigned to the class III bonds reflects the 'A+' rating assigned to the creditworthiness of IHFA GO pledge.

The 2009 series B bonds are being issued to finance the purchase of $37.9 million in fixed-rate bonds sold to the association by bondholders. The previous bonds were purchased so that IHFA could achieve economic savings. Furthermore, IHFA is refunding $57 million in variable-rate bonds under the 2006 indenture with this issuance. While no new loans will be made in conjunction with the 2009 series B issuance, the bonds will be payable from revenues from existing mortgage loans and reserves, which would have been used to pay the refunded bonds.

The 'AAA' and 'AA' ratings on the classes I and II bonds reflect the credit quality of the trust estate's collateral, the adequacy of projected revenues to pay debt service, the credit enhancement provided by the 19% debt subordination at time of issuance underlying the class I bonds, and the 13% debt subordination underlying the class II bonds. In addition, the classes I and II bonds have minimum asset requirements of 116% and 111%, respectively, directing revenues to be used to call bonds of that class prior to paying debt service of the next junior class.

As detailed in the special report "State HFA Outlook for 2009" (dated May 4, 2009, available on the Fitch Ratings web site at www.fitchratings.com), Fitch is now assigning Rating Outlooks to its tax-exempt housing ratings. Fitch has assigned a Stable Rating Outlook to the 2009 series B and all outstanding IHFA single-family mortgage bonds under the general indenture dated Sept. 1, 2006 as well as on the GO rating of the association. The Stable Outlook reflects the available general fund reserves, historically strong operating performance of IHFA, the low loan loss expectations for the programs based on the underlying quality of the assets, and the substantial asset parity requirements for the class I and class II bonds.

The short-term 'F1+' rating assigned to the class I bonds is based on the liquidity support provided by a Standby Bond Purchase Agreement (SBPA) issued by Barclays Bank PLC (rated 'AA-/F1+' by Fitch as of April 9, 2009). The SBPA provides for payment of the purchase price of tendered bonds and is sized to cover the principal portion of the purchase price and 186 days of interest, initially at a rate of 12%, based on a year of 365 days. However, if the interest rate on the bonds rises above 12%, as authorized under a formula contained in the trust indenture, the interest coverage of the SBPA will also correspondingly automatically increase to cover such increased interest rate. The short-term rating will expire on July 8, 2010, the stated expiration date of the SBPA, unless such date is extended or upon any earlier expiration or termination.

The variable-rate bonds will be issued with an initial interest rate extending to July 14, 2009. Thereafter, such bonds will be in a weekly interest rate mode but may be converted to a daily, monthly, quarterly, auction, semiannual, or fixed interest rate mode. During the daily and weekly rate modes, bondholders have the option to tender their bonds for purchase on any business day with prior notice. During the monthly, quarterly and semiannual rate modes, bondholders can tender bonds on the effective date of a new interest rate, following specified advance notice. The bonds are subject to mandatory tender upon conversion of the interest rate mode and on the fifth business day prior to the expiration or termination of the SBPA. Optional and mandatory redemption provisions also apply to the bonds, pursuant to the terms of the documents.

As of Jan. 1, 2009, there was $244.2 million in GO-backed debt outstanding, reflecting a 1.93x debt-to-equity ratio when considering the bond rating compliance and loan guaranty trust funds of $126.3 million as of Dec. 31. 2008. The ratio has increased from 1.77 times (x) in fiscal 2006 and 1.44x in fiscal 2005, reflecting the increase in the amount of GO debt issued over the past few years. The bond rating compliance and loan guarantee trust is the association's primary source of unpledged assets, providing liquidity and credit support to its commercial paper (CP) and bond programs. The trust is derived from various reserve accounts.

Key credit concerns for the GO pledge include IHFA's need to obtain replacement liquidity at affordable rates for its outstanding variable-rate demand bonds (VRDOs) under the 2000, 2003, and 2006 indentures as SBPA contracts expire. For the 2000, 2003, and 2006 indentures, eight contracts totaling $131.3 million in bond principal expire in 2009 and 17 contracts totaling $318.7 million in bond principal expire in 2010, thus increasing the renewal risk in an environment already short on liquidity and at rates that are less than ideal. As a result of the variable-rate refunding associated with the 2009 series B bonds, IHFA is replacing Lehman Brothers Commercial Bank (LBCB) as liquidity provider on the 2008 series B variable-rate bonds, in the amount of $30 million, and $27 million of the 2008 series A variable-rate bonds, both of which were previously in the bank bond mode and would have resulted in an accelerated amortization schedule on the respective bonds. Fitch views IHFA's replacement of the SBPA providers as a credit strength. At the same time, Fitch recognizes that the new short-term contract does not match the long-term nature of the bonds and subjects the GO pledge to renewal risk when the contracts expire in 2010.

In the event that variable-rate bonds are put back to the bank and are in the bank bond mode, the additional costs become general obligations of IHFA. While the bank bond scenario is a concern that will be monitored closely, Fitch views a potential draw on the general fund as manageable over the medium term. However, an inability to secure favorable SBPA contracts as the current ones expire, sustained draws on the general fund as a result of accelerated debt service payments due to bonds being put back to the bank, and increases to the debt backed by the GO pledge of IHFA, could result in negative pressure on the GO rating.

Mitigating factors include a loan portfolio that is internally serviced, solid levels of insurance, strong historical loan performance, and an experienced staff, with senior management averaging more than 16 years of experience in relevant fields and industries. Moreover, management has demonstrated its ability to adequately address current market conditions as evidenced by its involvement in securing new swap contracts with Barclays for all of its previous swaps with Lehman Brothers' entities as a result of the bankruptcy.

As of the June 30, 2008 audited financial statements, the 2006 Indenture bonds demonstrated an asset parity ratio of 130% for class I and 123% for class II. For the same period, the 2003 Indenture bonds demonstrated an asset parity ratio of 132% for class I and 125% for the class II bonds.

The delinquency rates for IHFA loans have historically been below state and national figures. IHFA had a total single-family loan portfolio of 18,196 at March 31, 2009 with loans delinquent by two or more payments at 2.07% of the entire loan portfolio. This is a decrease from 2.63% at Sept. 30, 2008, and still well below the 4.64% of FHA fixed-rate loans in the state and 8.99% of FHA fixed-rate loans in the U.S. with two or more delinquent payments at March 31, 2009.

Based on the June 30, 2008 audited financial statements, IHFA's financial performance remains stable though down from previous years. Net interest spread decreased in fiscal 2008 to 14.7% from 19% in fiscal 2007 and 18.4% in fiscal 2006. While the audited financials show negative net operating revenues of $12.1 million, adjusting for unrealized losses, net operating revenues were $15.2 million. IHFA was created by the state Legislature in 1972 to promote affordable housing opportunities in the state through the issuance of notes and bonds. IHFA is an independent public body with its main office in the city of Boise, where most of its staff of roughly 125 is located.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.