NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the following Puerto Rico Housing Finance Authority (PRHFA) capital fund bonds:
--$384.475 million Puerto Rico Housing Finance Authority capital fund program (CFP) bonds, series A & B of 2008 at 'A'.
The Rating Outlook is Negative.
SECURITY
The bonds are secured by the capital fund annual public housing appropriations; however, appropriations are first used to pay off the senior 2003 capital fund bonds, with the remaining amount being used to pay the 2008 capital fund bonds. 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. The 2008 series A & B capital fund bonds are subordinate to the 2003 capital fund bonds, which were issued under a separate indenture. In addition, debt service reserve funds covering half of the maximum annual debt service payment are invested to cover any timing delays in appropriations.
KEY RATING DRIVERS
DECLINING APPROPRIATION LEVELS: PRHFA's appropriations have decreased in recent years, falling 17% and 7% in fiscal years (FY) 2011 and 2012, respectively. Additionally, an Office of Management and Budget (OMB) report release March 1 shows a 5% reduction to the Public Housing Capital Fund as a result of sequestration.
DECREASED DEBT SERVICE COVERAGE: Due to the declining appropriation amounts, debt service coverage (DSC) levels have fallen in FY 2012 to 2.24 times (x) before Fitch's stressed scenarios and 1.70x after Fitch's stressed scenarios are placed.
BOND STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service on a first priority basis.
MANAGEMENT OVERSIGHT: PRHFA's management has consistently submitted capital plans to HUD in a timely manner and has had no material decrease in housing units.
RATING SENSITIVITY
DECLINES IN FUTURE APPROPRIATIONS: Further declines in the annual capital fund public housing appropriations may reduce debt service coverage to levels that would negatively impact the current rating. Fitch estimates that if the 2013 appropriation were reduced from 2012 levels in an amount that is 14% or greater this would put debt service coverage on the cusp of the threshold ratio appropriate for its current 'A' rating.
RATING CRITERIA
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 analyzing appropriation amounts and debt service coverage levels by evaluating the appropriation risk. Fitch recognizes that bonds with longer maturities are exposed to a higher degree of appropriation risk. Therefore, Fitch recalculates the debt service coverage 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 stressed appropriation amount is then used to calculate the adjusted debt service coverage level. A minimum stressed DSC of 4.0x is typical for an 'AA' rating, 3.0x is typical for an 'AA-' rating, 2.0x is typical for an 'A+' rating, and 1.5x is typical for an 'A' rating.
In addition to quantitative measures, Fitch also reviews the legal structure of the bonds. Fitch 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: 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 administrative sanctions not being able to delay payments of the debt service or recapture funds approved for debt service payments.
The final component Fitch reviews is management performance and their ability to meet HUD's deadlines and requirements to receive annual appropriations. Each year HUD requires public housing authorities to submit one-year and five-year capital fund plans and funds are only allocated after HUD's approval of the plans. Since the start of the capital fund program, agencies have been extremely successful in submitting plans in a timely manner since appropriations are predicated upon an agency's ability to submit plans on time. Fitch confirms with individual public housing authorities that plans were submitted to HUD. Fitch also discusses the current progress of modernization projects and the authority's ability to finish work to completion. Fitch monitors the authority's current number of housing units since that factor into the capital fund appropriation formula because if the number of housing units decline the portion of funds appropriated to an agency could also decline. Additionally, Fitch views a state housing finance agency acting as a conduit issuer as a credit strength.
CREDIT PROFILE
According to the Office of Management and Budget's (OMB) report, dated March 1, 2013, the potential aggregate reduction to the Public Housing Capital Fund is expected to be 5% from sequestration; however, the actual reduction in capital allocations to housing authorities may vary depending on how the reduction is applied. If the application of sequestration causes a reduction of 5% to PRHFA's capital fund appropriation, Fitch does not believe that this 5% reduction, in and of itself, will have a negative impact on this rating. However, Fitch estimates that a 14% decrease in the 2013 appropriation amount from the 2012 amount would put debt service coverage levels on the cusp of the threshold ratio appropriate for its current 'A' rating. Therefore, Fitch will monitor the appropriation amounts as they become available and any reduction in PRHFA's appropriation amount greater than 14% will prompt a new review by Fitch.
Given that the 2013 capital fund appropriation is not yet available, Fitch's review is restricted to prior appropriation amounts. The affirmation recommendation is based on the current debt service coverage level, which utilizes the 2012 appropriation amount. Credit concerns revolve around the volatility of appropriation amounts. In recent years, appropriation amounts have drastically decreased which has quickly eroded debt service coverage levels. Puerto Rico Housing Finance Authority has seen debt service coverage levels drop to 2.24x from 2.76x within the last two years, and under Fitch's stressed scenarios, PRHFA's debt service coverage levels have fallen to 1.70x from 2.07x. The recent trend of declines in appropriations and the remaining 15 years to maturity on the bonds are the center of credit concerns and basis for the negative outlook on the bonds.
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 mounts for the federal government to lower their deficit, HUD's capital fund budget is at risk and may continue to decline.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', (June 12, 2012);
--'Tax-Supported Rating Criteria', (Aug. 14, 2012);
--'U.S. Municipal Structured Finance Rating Criteria', (Feb. 28, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Municipal Structured Finance Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=701570
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=788806
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.