NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Idaho Housing and Finance Association's (IHFA, the Association) single-family mortgage class I bank bonds (2003 Indenture):
--Series 2003 A;
--Series 2003 B;
--Series 2003 C;
--Series 2003 D;
--Series 2003 E;
--Series 2004 A;
--Series 2004 B;
--Series 2004 C;
--Series 2005 D;
--Series 2005 E.
The 'A+' rating is being assigned to the various IHFA bank bonds in connection with the upcoming substitutions of liquidity facilities for the above referenced series to Barclays Bank (rated 'A/F1' with a Stable Outlook) from the Temporary Credit and Liquidity Program. For more information regarding this substitution please see the Fitch press release titled, 'Fitch to Downgrade Idaho Hsg & Fin Assoc S-F Mtge Class I VRBs (2003 Indenture) to 'F1'', dated June 24, 2014.
Additionally, in conjunction with the assignment, Fitch is affirming the 'AAA' rating on approximately $174.2 million class I bonds (2003 Indenture), the 'AA' rating on approximately $8.9 million in class II bonds (2003 Indenture) and the 'A+' rating on approximately $98 million in class III bonds backed by IHFA's general obligation pledge (see full list below).
The Rating Outlook for the bonds and the general obligation (GO) pledge of the Association is Stable.
SECURITY
The single-family mortgage bonds were issued under a master indenture that pledges revenues, investment earnings, reserves, and other trust funds to secure the bonds. The class I and II bonds have asset parity maintenance requirements directing revenues to be used to call bonds of those classes respectively prior to paying debt service of the next junior class. The class III bonds are secured by the assets and revenues of the indenture and are general obligations of the Association.
Upon certain events detailed in the above referenced press release, various class I bonds can be converted to bank bonds and the accelerated principal and interest payments would become general obligations of IHFA, secured by its full faith and credit pledge.
KEY RATING DRIVERS
2003 Indenture:
HIGH OVERCOLLATERALIZATION LEVELS: As of Sept. 30, 2013, the class I and II bonds had overcollateralization levels of 120% and 114%, respectively.
FEDERALLY INSURED PORTFOLIO: The program's loan portfolio is 76% insured by FHA, VA, or RD, mitigating concerns over loan performance.
INDENTURE PROVISIONS: The indenture has a debt subordination structure which provides credit enhancement to the class I and II bonds. Additionally, the bonds have minimum indenture asset requirements.
General Obligation Pledge:
STRONG MANAGEMENT OVERSIGHT: IHFA has a strong management team that has demonstrated financial flexibility over the years and has effectively addressed bond and housing market challenges.
FINANCIAL POSITION MAINTAINED: Despite weakened profitability from their housing programs, IHFA has maintained its relatively moderate financial position amongst SHFAs. IHFA management has contributed to the maintenance of their financial position through the continuation of originating and selling loans monthly, which contributed $28.8 million in revenue in fiscal year (FY) 2013.
VULNERABLE LOAN PORTFOLIO: IHFA's largest indenture (2006 Indenture) is mainly secured by a loan portfolio which is only 38% federally insured and is experiencing higher than average delinquency rates. The composition of the loan portfolio as it concerns mortgage insurance leaves the portfolio susceptible to potential loan losses which may create a need to tap GO funds.
WEAK DEBT STRUCTURE: IHFA has been unable to economically redeem certain variable rate bonds due to the termination fees of existing hedging contracts associated with the debt that would be incurred upon redemption. For some IHFA housing indentures, particularly the 2006 Indenture, this has put a strain on profitability ratios and has the potential to put negative pressure on IHFA's GO rating.
RATING SENSITIVITIES
2003 Indenture:
ASSET PARITY SHORTFALL: There will be negative pressure on the bonds' rating if the asset parity levels on the class I and II bonds fall below minimum indenture requirements; however, this is remote given bond legal covenants and IHFA management oversight.
PROLONGED FAILED REMARKETING: There could be negative pressure on the VRO's long-term rating if there is a failed remarketing of the 2009 A VRO bonds and IHFA is unable to refund the debt for a prolonged duration. However, Fitch believes that the possibility of this is remote given the duration of the remarketing window and IHFA's long-term credit rating.
General Obligation Pledge:
HIGHER LOAN LOSSES/LIQUIDITY COSTS: Potential loan losses from the 2006 Indenture and potential overall liquidity costs for outstanding variable rate demand bonds (VRDBs) could put negative pressure upon IHFA's GO rating.
HIGH LOAN PREPAYMENTS/LOW INTEREST RATES: Given the current debt structure and low interest rate environment, if IHFA mortgage loans prepay at accelerated prepayment speeds, certain single-family housing indentures will be subject to negative arbitrage and high swap termination fees which could increase or create indenture operating losses. If this were to occur, these losses would fall upon IHFA's GO and may strain the GO rating.
AGENCY NET LOSSES: IHFA has increased their overall net financial position in FY 2013, despite weak profitability ratios in their housing programs. However, should housing program losses begin to impact IHFA's overall financial position and/or GO assets; a negative rating action may be taken on the IHFA GO rating.
VRO/VRDB FAILED REMARKETING: Any failed remarketing of either the VROs or the outstanding VRDBs would result in accelerated amortization of the bonds which are secured by IHFA's general obligation pledge; therefore, a continuous failed remarketing of either would put negative pressure on their GO rating.
PENDING LITIGATION: The Lehman Brothers Bankruptcy Estate has made a claim alleging that they should have been paid a higher termination amount as a result of IHFA's termination of its interest rate swap agreements. While management represents that any settlement will not have a material effect on their financial position, there could be negative pressure on the GO rating.
CREDIT PROFILE
2003 Indenture:
QUALITY ASSETS
As of Sept. 30, 2013, the asset parity ratios on the 2003 Indenture were as follows: class I bonds had a 120% asset parity ratio, class II bonds had a 114% asset parity ratio, and class III bonds had a 96% asset parity ratio. Additionally, the loan portfolio is 76% federally insured by FHA, VA, or RD which mitigates concerns over loan performance and ultimately loan losses. Delinquency rates for the 2003 Indenture are currently and have historically been below national averages.
STRONG INDENTURE PROVISIONS
The affirmation of the long-term ratings on the class I and II bonds reflects the current high levels of overcollateralization, the credit enhancement provided by the debt subordination structure, and the credit quality of the underlying collateral. Additionally, the class I and II bonds have minimum indenture asset requirements, directing revenues to be used to call bonds of that class prior to paying debt service of the next junior class.
General Obligation Pledge:
RESOURCES ADEQUATE FOR BANK BONDS
Based on a review of the standby bond purchase agreement supporting the substitution and the strong cash levels residing within the program, Fitch IHFA's GO rating can support the additional risk associated with these potential bank bonds. In addition to assigning the ratings on these bank bonds, Fitch is also affirming IHFA's GO rating and all outstanding IHFA GO debt.
SUFFICIENT GENERAL OBLIGATION RESOURCES
The affirmation of the class III bonds solely reflects the credit quality of IHFA's GO debt pledge. As of September 2013, the Association had approximately $125 million in GO bonds, reflecting a 0.68x debt-to-equity ratio when including the bond rating compliance and affordable housing investment trust funds balance totaling $183 million. This ratio is a decrease from the 1.16x coverage in June 2012, illustrating the reduction of GO debt obligations over FY 2013. The bond rating compliance and affordable housing investment trust funds are the Association's primary source of unpledged assets, providing liquidity and credit support to its bond programs. The use of affordable housing investment trust funds are subject to board approval.
DEBT STRUCTURE CONCERNS
GO credit concerns stem from IHFA's debt structure and their exposure to variable rate debt. Concerns revolve around IHFA's ability to redeem certain variable rate debt obligations due to the high termination fees of existing hedging contracts tied to the debt. As mortgages prepay, subsequent moneys are reinvested in highly rated, low interest yielding instruments resulting in negative arbitrage. There will be negative pressure on the Class III bonds and the GO rating should mortgages prepay at an accelerated rate and subsequently increase the negative arbitrage within the various housing programs.
Additionally, in the event that IHFA's outstanding VRDBs or VROs cannot be successfully remarketed, the Association's GO funds are exposed to potential draws from accelerated debt service payments. While a failed remarketing scenario is a concern, Fitch views the possible scenario as manageable over the short term. However, a failed remarketing scenario may put negative pressure on the Association's GO rating and a prolonged inability to remarket or refund the bonds would likely result in a downgrade of IHFA's GO rating and the long-term rating on the 2009 A VRO bonds.
While Fitch assumes IHFA will maintain access to the capital markets for potential refunding debt, should the VRO bonds be unsuccessfully remarketed for three years and IHFA be unable to refund the bonds, the purchase price of the bonds would become a general obligation of the Association which increases the Association's GO exposure. Therefore, any additional VRO bonds would further increase the Association's GO exposure and could put negative pressure on their long-term GO rating.
SOLID FINANCIAL POSITION
IHFA's management oversight and overall financial position have mitigated concerns over the GO rating in the short term. IHFA was able to maintain its moderate financial position amongst SHFAs even through the weak housing market. IHFA continues to post profitability ratios below market averages illustrating the challenges of a prolonged low interest rate environment. While profitability ratios within their housing programs remain below average, IHFA increased their overall net financial position in FY 2013 primarily from generating income by originating and selling mortgages to GNMA and FNMA on a monthly basis. IHFA's ability to increase their net asset position is attributed to their managerial staff which is viewed as a credit positive to the individual bond program and their general obligation rating.
Additionally, Fitch affirms the following ratings:
--$8.440 million IHFA Class I Single-Family Mortgage Bonds, Series 2003A at 'AAA';
--$7.225 million IHFA Class I Single-Family Mortgage Bonds, Series 2003B at 'AAA';
--$5.300 million IHFA Class I Single-Family Mortgage Bonds, Series 2003C at 'AAA';
--$7.525 million IHFA Class I Single-Family Mortgage Bonds, Series 2003D at 'AAA';
--$7.525 million IHFA Class I Single-Family Mortgage Bonds, Series 2003E at 'AAA';
--$7.300 million IHFA Class I Single-Family Mortgage Bonds, Series 2004A at 'AAA';
--$7.560 million IHFA Class I Single-Family Mortgage Bonds, Series 2004B at 'AAA';
--$9.280 million IHFA Class I Single-Family Mortgage Bonds, Series 2004C at 'AAA';
--$9.315 million IHFA Class I Single-Family Mortgage Bonds, Series 2004D at 'AAA';
--$10.425 million IHFA Class I Single-Family Mortgage Bonds, Series 2005A at 'AAA';
--$10.330 million IHFA Class I Single-Family Mortgage Bonds, Series 2005D at 'AAA';
--$10.820 million IHFA Class I Single-Family Mortgage Bonds, Series 2005E at 'AAA';
--$3.140 million IHFA Class I Single-Family Mortgage Bonds, Series 2006B at 'AAA';
--$69.985 million IHFA Class I Single-Family Mortgage Bonds, Series 2009A at 'AAA';
--$435.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2003A at 'AA';
--$370.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2003B at 'AA';
--$320.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2003C at 'AA';
--$410.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2003E at 'AA';
--$395.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2004A at 'AA';
--$270.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2004B at 'AA';
--$360.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2004C at 'AA';
--$630.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005A at 'AA';
--$660.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005B at 'AA';
--$585.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005C at 'AA';
--$430.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005D at 'AA';
--$625.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005E at 'AA';
--$705.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2005F at 'AA';
--$680.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2006A at 'AA';
--$925.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2006B at 'AA';
--$490.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2006C at 'AA';
--$580.0 thousand IHFA Class II Single-Family Mortgage Bonds, Series 2006D at 'AA';
--$40.0 thousand IHFA Class III Single-Family Mortgage Bonds, Series 2000A at 'A+';
--$90.0 thousand IHFA Class III Single-Family Mortgage Bonds, Series 2000B at 'A+';
--$90.0 thousand IHFA Class III Single-Family Mortgage Bonds, Series 2000C at 'A+';
--$110.0 thousand IHFA Class III Single-Family Mortgage Bonds, Series 2000D at 'A+';
--$155.0 thousand IHFA Class III Single-Family Mortgage Bonds, Series 2000E at 'A+';
--$1.150 million IHFA Class III Single-Family Mortgage Bonds, Series 2003A at 'A+';
--$1.060 million IHFA Class III Single-Family Mortgage Bonds, Series 2003B at 'A+';
--$0.865 million IHFA Class III Single-Family Mortgage Bonds, Series 2003C at 'A+';
--$1.760 million IHFA Class III Single-Family Mortgage Bonds, Series 2003E at 'A+';
--$1.505 million IHFA Class III Single-Family Mortgage Bonds, Series 2004A at 'A+';
--$0.760 million IHFA Class III Single-Family Mortgage Bonds, Series 2004B at 'A+';
--$1.925 million IHFA Class III Single-Family Mortgage Bonds, Series 2004C at 'A+';
--$2.130 million IHFA Class III Single-Family Mortgage Bonds, Series 2004D at 'A+';
--$1.680 million IHFA Class III Single-Family Mortgage Bonds, Series 2005A at 'A+';
--$1.530 million IHFA Class III Single-Family Mortgage Bonds, Series 2005B at 'A+';
--$2.775 million IHFA Class III Single-Family Mortgage Bonds, Series 2005C at 'A+';
--$1.835 million IHFA Class III Single-Family Mortgage Bonds, Series 2005D at 'A+';
--$2.015 million IHFA Class III Single-Family Mortgage Bonds, Series 2005E at 'A+';
--$2.330 million IHFA Class III Single-Family Mortgage Bonds, Series 2005F at 'A+';
--$3.210 million IHFA Class III Single-Family Mortgage Bonds, Series 2006A at 'A+';
--$2.160 million IHFA Class III Single-Family Mortgage Bonds, Series 2006B at 'A+';
--$2.075 million IHFA Class III Single-Family Mortgage Bonds, Series 2006C at 'A+';
--$1.160 million IHFA Class III Single-Family Mortgage Bonds, Series 2006D at 'A+';
--$3.400 million IHFA Class III Single-Family Mortgage Bonds, Series 2009A at 'A+';
--$3.560 million IHFA Class III Single-Family Mortgage Bonds, Series 2006E at 'A+';
--$3.925 million IHFA Class III Single-Family Mortgage Bonds, Series 2006F at 'A+';
--$2.485 million IHFA Class III Single-Family Mortgage Bonds, Series 2006G at 'A+';
--$0.490 million IHFA Class III Single-Family Mortgage Bonds, Series 2007A at 'A+';
--$1.470 million IHFA Class III Single-Family Mortgage Bonds, Series 2007B at 'A+';
--$3.760 million IHFA Class III Single-Family Mortgage Bonds, Series 2007C at 'A+';
--$2.585 million IHFA Class III Single-Family Mortgage Bonds, Series 2007D at 'A+';
--$3.220 million IHFA Class III Single-Family Mortgage Bonds, Series 2007E at 'A+';
--$4.885 million IHFA Class III Single-Family Mortgage Bonds, Series 2007F at 'A+';
--$3.170 million IHFA Class III Single-Family Mortgage Bonds, Series 2007G at 'A+';
--$4.990 million IHFA Class III Single-Family Mortgage Bonds, Series 2007H at 'A+';
--$3.585 million IHFA Class III Single-Family Mortgage Bonds, Series 2007I at 'A+';
--$3.805 million IHFA Class III Single-Family Mortgage Bonds, Series 2007J at 'A+';
--$2.535 million IHFA Class III Single-Family Mortgage Bonds, Series 2007K at 'A+';
--$6.430 million IHFA Class III Single-Family Mortgage Bonds, Series 2008A at 'A+';
--$6.635 million IHFA Class III Single-Family Mortgage Bonds, Series 2008B at 'A+';
--$6.100 million IHFA Class III Single-Family Mortgage Bonds, Series 2008C at 'A+';
--$3.455 million IHFA Class III Single-Family Mortgage Bonds, Series 2008D at 'A+';
--$8.400 million IHFA Class III Single-Family Mortgage Bonds, Series 2009B at 'A+';
--$2.090 million IHFA Class III Single-Family Mortgage Bonds, Series 2009C at 'A+';
--$2.255 million IHFA Class III Single-Family Mortgage Bonds, Series 2010A at 'A+';
--IHFA Class I Bank Bonds, Series 2004 D at 'A+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', (June 16, 2014);
--'State Housing Finance Agencies: Single-Family Mortgage Program Rating Criteria', (July 25, 2013);
--'State Housing Finance Agencies General Obligation Rating Criteria', (Feb. 27, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
State Housing Finance Agencies: Single-Family Mortgage Program Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712476
State Housing Finance Agencies General Obligation Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=736598
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836312
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