NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on Utah Housing Corporation's (UHC) single-family mortgage bonds (May 2007 Indenture) as follows:
--$159.3 million class I bonds at 'AAA';
--$20 million class II bonds at 'AA'.
The Rating Outlook is Stable.
The 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 and II bonds on a senior basis to the class III bonds (rated 'AA-'; Stable Outlook).
KEY RATING DRIVERS
SUFFICIENT ASSET PARITY LEVELS: As of Dec. 31, 2014, the class I and II bonds had asset parity levels of 120% and 107%, respectively.
STRONG PROGRAM PROVISIONS: The various supplemental indentures provide for strong asset parity requirements and the average requirements for the class I bonds is 111.5% and the class II bonds is 101.5%.
FEDERALLY INSURED PORTFOLIO: The program's loan portfolio is 98% insured by FHA and 2% insured by VA, mitigating concerns over potential loan losses.
SUCCESSFUL MANAGEMENT PERSONNEL: UHC has an experienced management team that has demonstrated their expertise in addressing market challenges that affected their bond programs.
WEAK DEBT STRUCTURE: UHC has been unable to economically redeem certain variable rate debt obligations within the program due to the high termination fees of existing hedging contracts tied to the debt. This has resulted in negative arbitrage, and operating losses, within the program as mortgages prepay and proceeds are invested in lower interest income yielding investments.
HIGH LOAN PREPAYMENTS/LOW INTEREST RATES: Given the current debt structure and low interest rate environment, if UHC mortgage loans continue to experience accelerated prepayments speeds, the program may experience negative arbitrage and/or high termination fees which could increase program operating losses and put negative pressure on the class I and II ratings.
INABILITY TO MAINTAIN PROGRAM PROVISIONS: A failure to meet the asset parity requirements on the class I and II bonds would be viewed as a credit negative and would most likely result in a downgrade of the program ratings.
The affirmation of the class I and II bonds reflects current asset parity ratios, the strong program provisions, and the UHC's on-going financial support for the program. As of Dec. 31, 2014, the class I and II bonds had asset parity levels of 120% and 107%, respectively. The program's assets are primarily comprised of $84 million in program loans and $107 million in investments, which are primarily invested in various money market funds. As of Dec. 31, 2014, the loan portfolio had a delinquency rate of 7.23% which is higher than state and national averages. Concerns over loan losses are mitigated by the insurance on the loan portfolio which is currently 98.4% FHA-insured and 1.6% VA-insured.
Credit concerns stem from the program's operating losses which are attributed to the debt structure as approximately 82% of the debt under this program is variable-rate with all the variable-rate bonds being swapped to a synthetic fixed-rate. All of the variable-rate debt under this indenture is in the form of index bonds with no demand feature. UHC has been unable to economically redeem certain variable-rate debt obligations due to high termination fees of existing hedging contracts tied to the debt. As mortgages prepay, proceeds are reinvested in highly-rated, low interest yielding instruments which has resulted in negative arbitrage within the program. The negative arbitrage has led to operating losses within the program of $3.5 million and $4.4 million in the last two fiscal years, respectively.
Concerns over program operating losses are currently mitigated by UHC's management team. Management has indicated that it will provide financial support to maintain asset parity provisions, if necessary. Despite losses from the program, UHC has reported net income of $14.3 million and $7.7 million in the last two fiscal years, respectively. Additionally, unaudited interim financial statements demonstrate continued agency profitability during the mid-point of FY 2015. Although remote, based on Fitch's view of current management personnel and agency financial statements, if asset parity requirements are not met on the class I and II bonds, there will be negative pressure on the ratings and would most likely result in a downgrade of the bonds.
Additional information is available at 'www.fitchratings.com.'
Applicable Criteria and Related Research:
--'State Housing Finance Agencies: Single-Family Mortgage Program Rating Criteria', (July 25, 2013);
--'Revenue-Supported Rating Criteria', (June 16, 2014).
Applicable Criteria and Related Research:
State Housing Finance Agencies: Single-Family Mortgage Program Rating Criteria
Revenue-Supported Rating Criteria