NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Maryland Community Development Administration (MCDA) capital fund bonds:
--Approximately $5.5 million MCDA capital fund securitization revenue bonds, series A 2003 at 'A+'.
The Rating Outlook is Stable.
The bonds are secured by the pledged public housing capital fund annual appropriations of the three individual public housing authorities (PHAs). Appropriation amounts for each project are not cross-collateralized. All pledged funds are subject to available annual appropriations, are not guaranteed, and are subject to changes in law or Housing and Urban Development (HUD) regulations.
KEY RATING DRIVERS
APPROPRIATION LEVELS: The Stable Outlook reflects current budgetary agreements which increased U. S. capital fund appropriation levels for FY 2016. These agreements provide short-term security to the rating and reverse multiple years of uncertain appropriation amounts.
STABILIZED DEBT SERVICE COVERAGE LEVELS: The affirmation reflects current debt service coverage (DSC) levels which support the 'A+' rating.
BOND STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service for each respective PHA on a first priority basis.
MANAGEMENT OVERSIGHT: MCDA acts as a conduit issuer and provides oversight to the individual PHAs which mitigate concerns with management's timely submission of capital fund plans.
DECLINES IN FUTURE APPROPRIATIONS: Declines in annual public housing capital fund appropriations may reduce debt service coverage to levels that would negatively impact the current rating. Fitch estimates that if the 2017 appropriation were reduced from enacted 2016 levels in an amount that is 35% or greater, this would put debt service coverage (DSC) on the cusp of the threshold ratio appropriate for its 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 analysing appropriation amounts and DSC levels by stressing the annual appropriation. That stressed dollar amount of the past appropriations is used to arrive at the Fitch DSC level. Fitch recognized that bonds with longer maturities are exposed to a higher degree of appropriation risk. Therefore, Fitch recalculates the DSC 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 typically corresponds with a 'AA' rating, 3.0x a 'AA-' rating, 2.0x an 'A+' rating, and 1.5x an 'A' rating, respectively.
In addition to quantitative measures, Fitch reviews the legal structure of the bonds. Fitch also 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: provisions for 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 provisions such that administrative sanctions cannot delay payments of the debt service or recapture funds approved for debt service payments.
Fitch's review is based on the 2016 capital fund appropriation. Agreements with each PHA in the Maryland issuance provide short-term stability to the rating and seem to have stabilized. The affirmation is based on FY 2016 DSC levels which stayed approximately the same as FY 2015. In FY 2016, the individual PHAs' Fitch stressed coverage levels ranged from 2.0x-3.0x for all three PHAs. While concerns are mitigated in the short term, U.S. budgetary pressures still exist. Therefore, if annual capital fund 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 the deficit, HUD's capital fund budget is at risk and may decline.
Maryland Community Development Administration acted as a conduit issuer when issuing the bonds and used the bond proceeds to make loans to five individual PHAs. Two PHAs recently redeemed their bonds and these bonds are no longer part of this analysis. It is important to note that the loans are not cross collateralized, meaning if one PHA fails to make debt service payments it puts all the bonds at risk for default. Fitch views MCDA acting as a conduit issuer as a credit strength due to their ability to mitigate many of the concerns associated with management oversight and an individual PHA's ability to adhere, in a timely manner, to the regulations of HUD.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form