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

HousingFederal Funding HistoryTo minimize the effect of this legal directive,HUD agrees in its approval documents to permitPHAs to use unobligated funds from allocationyears to make debt service payments, and said paymentsare a permitted use to cure the obligationsviolations. While this does provide some comfortthat some funds are available to pay debt service ina withholding scenario, there is no way of knowinghow much money will be available for debt service;if the unobligated funds are sufficient to make thedebt service payment that would be missed due toallocations withholding. Therefore, the PHAs pastmodernization funds obligation performancebecomes paramount in determining the likelihoodthat funds will be with held due to a HUD sanctionagainst the PHA.While overall commitment of the federal government to the public housing programis important, examination of modernization funding is the main focus in understandingCapital Fund transactions. Because development funding for public housing did notinclude ongoing reserves for improvements, by 1968 Congress needed to addressthe severe deterioration in the housing stock through a modernization funding program.That early program has grown from initial appropriation to fund specific modernizationneeds of $35 million in 1977 to the Capital Fund program of today, which was fundedat about $2.4 billion in 2006. Since 1977, Congress has appropriated almost $60 billionfor public housing modernization. Because of the severe modernization needs ofpublic housing, the long history of funding, and the importance of the program tothe federal government, it is reasonable to assume that some funding will continuefor many years. However, recent history shows a declining trend of Congressionalappropriations for modernization funding over the last five fiscal years. Therefore,prudent leveraging and reserve sufficiency are very critical components of allinvestment grade PHA Capital Fund transactions.The Role Of ReservesReserves are necessary to ensure that no bond paymentsare missed due to government shutdowns,resulting late appropriations, and/or temporary severereductions in appropriations. All investment gradetransactions should include a debt service reservefund (DSRF) sized at least six months debt servicebased on maximum annual debt service on the bonds.The reserve fund can be funded from bond proceeds,should be funded upfront, and, if invaded, should bereplenished in the flow of flows before any CapitalFunds can be released to the PHA, and replenishedprior to the next interest payment date.The DSRF also serves to protect against anyadministrative delays in the receipts of Capital Fundsby PHAs. Typically, the funds appropriated byCongress for Capital Fund become available in theOctober/November of the year following the beginningof the federal fiscal year (Oct. 1). The carefultiming of debt service payment dates, coupled withthe DSRF, can provide a significant cushion to bondholdersand insulate them against the risk of latebudgets or other delays impacting debt service.Also viewed favorably are representations fromHUD that protect debt service against any delayscaused by the process whereby PHAs requisitionand receive approval for their allocation of CapitalFund. This occurs as part of the PHA’s annual plansubmission to HUD, which could be subject todelays either at HUD or the PHA.Key Legal FeaturesInvestment grade transactions include certainlegal provisions. To achieve an investment-graderating, issuers and their advisors should considerincorporating the following features in theirtransaction documents:■ The PHA grants the indenture trustee or collateralagent on behalf of the bondholders a perfectedsecurity interest in the Capital Fund programmoneys to be received by the PHA;■ Debt service payments are legally separate fromall other Capital Funds received from HUD. Debtservice payments and any replenishment ofreserve funds are clearly delineated and have apriority of payment only to bondholders, if possiblebefore any remaining funds are released tothe PHA;■ Capital Fund monies flow directly from HUD tothe indenture trustee or collateral agent to paydebt service without passing through the PHA;■ Capital Fund monies to be used for debt serviceare held under the indenture or deed of trust andare not be commingled with any other funds ofthe PHA;■ The pledge to bondholders includes not onlyCapital Fund monies but also the PHA’s contractrights pursuant to which the Capital Fundmonies are paid as well as the PHA’s rights underany successor program;■ An “additional bonds” test demonstrating thatthe lesser of (i) the prior fiscal year’s allocation ofCapital Fund; or (ii) the average Capital Fundreceipts for the prior three years, will providecoverage of maximum annual debt service(including the proposed bonds) at a coveragelevel determined by Standard & Poor’s at thetime of the rating for any additional bonds to beissued that will be on parity with the existingdebt; and,■ HUD stipulates in its approval documentationthat (1) use of Capital Funds for debt servicepayments is a permissible use of funds, (2) nosubsequent change in the permitted use ofCapital Fund monies will affect HUD’s obligation288 Standard & Poor’s Public Finance Criteria 2007