S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Public Housing Authority Debtinvestment grade should be in place. This amount,coupled with the DSRF, should be sufficient tocover debt service during any potential delays inclaims payment by the property insurer. In allinstances where insurance proceeds can potentiallybe paid to IRP bondholders, Standard & Poor’s willlook for assurances that bondholders either areparty to a mortgage on the property or have an“insurable interest” giving them rights to thoseinsurance proceeds.Property conditionStandard & Poor’s will look for public agency representationsthat the upfront and ongoing physicalneeds of the property will be met fully as a result ofthe financing. As part of the condition assessment,Standard & Poor’s will look for evidence from thepublic agency of sufficient demand to make theproject viable going forward.Standard & Poor’s may also request third-partyreports (engineering and environmental) to supportthe current and future condition of the project, aswell as a market study and appraisal to gaugedemand and financial viability. Any property insurancepolicies or business interruption insurancepolicies will be reviewed to ensure proper coverage,eligible uses, and the sufficiency of the provider’srating level.Site visits will be part of the ratings process asdetermined on a case-by-case basis. Where the qualityof the property or the capacity of the oversightagency is in question, a site visit is warranted togain necessary information. ■Public Housing Authority DebtPublic housing authorities (PHAs) can use futureannually appropriated modernization funding tosecure long-term debt due to legislative changes putinto effect in 1998 that permit PHAs to borrow thefunds sufficient to accelerate the modernization andrepair of the aging and deteriorated housing stockin their portfolio.The U.S. Department of Housing and UrbanDevelopment (HUD) administers the Capital FundFinancing Program (CFFP).The greatest risk to bondholders investing inPHA debt secured by capital funds is that thismoney would not be appropriated by the federalgovernment in amounts sufficient to pay debt service.This risk cannot be eliminated by the federalgovernment except through direct support of debtservice through some form of full-faith-and-creditpledge, which has not been part of CFFP transactionsto date. However, this risk can be offset, asdiscussed below, through reserves and debt servicecoverage that anticipate funding cuts.Standard & Poor’s Ratings Services rates PHAdebt backed solely by the annually appropriatedHUD Capital Fund program in the investment gradecategory based on the following critical factors:■ Strong and extensive history of the federal government’ssupport for public housing programs;■ Significant ongoing need for affordable rentalhousing for the lowest income segment of therental population;■ Predictable mechanisms for allocating CapitalFunds to individual housing authorities;■ Potential for strong support by HUD; and■ Bond structures that provide adequate reserves,additional bonds tests, and segregation of CapitalFunds needed to support bond debt service.The main factors that affect where the rating willfall are:■ The level of debt service coverage on the bonds,evidenced both by appropriation trend stresses,revenue projections and the coverage provided bythe additional bonds test. All investment gradestructures should include at least a six monthdebt service reserve fund based on maximumannual debt service;■ PHA’s track record of HUD funding and creationof mechanisms to enhance predictability of fundinglevels;■ Evaluation of PHA’s past performance in its modernizationactivity, including its obligation andexpenditure history;■ Evaluation of the PHA’s capital improvementplan, including ongoing Capital Fund leveragingas well as management’s ability to undertake thescope of work;■ Strength of legal structure, including how thefinancing insulates bondholders from recaptureor withholding of the Capital Funds (to theextent that the law permits) for any reasons,www.standardandpoors.com285