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

HousingHousing Finance AgenciesHousing finance agencies (HFAs) have built up aconsiderable level of expertise in real estatefinance, development, and portfolio management.Because of their prudent and conservative approachand many successful years of bond issuance, manyHFAs have built up significant net assets in their owngeneral funds or under various bond resolutions.Standard & Poor’s Ratings Services has givenvarying levels of credit support to an HFA’s bondprograms, particularly if an agency has a proventrack record in management and substantial financialresources outside of an indenture. To determineif an HFA is eligible for this flexibility, Standard &Poor’s considers:■ Agency’s managerial expertise■ Issuer’s financial strength■ Purpose of investment or credit support, and■ Portfolio performance and cash flow strength ofthe bond program.Rated HFAs may pledge their GO to financingsto cover all or a portion of security for bonds.External evaluators, such as U.S. government agencies,credit enhancers, and government-sponsoredenterprises, also look to issuer credit ratings as away to assess the overall capacity and credit qualityof an agency.HFA ICR CriteriaStandard & Poor’s analytical approach to assessingan issuer credit rating (ICR) for an HFA takes market,as well as agency-specific, risks into account,particularly when evaluating how an agency generatesrevenues and what factors could adverselyaffect its ability to service its GO debt. In assigningHFA ICRs, Standard & Poor’s assesses the stabilityand level of agency capital available to absorb loanlosses and other charges related to its debt structure,as well as the quality and liquidity of itsassets. ICRs entail an in-depth assessment of financialstrength, management, and the agency’s relationshipwith state or local government. Economicfactors endemic to the state or locality in which theagency operates also are considered in light of theagency’s financial position and the loan portfolio.Agency assets consist primarily of mortgage loansfor single-family homeownership and multifamilyrental housing for low-and moderate-income individualsand families. The relatively low tax-exemptinterest rates and access to federal, state, and localhousing assistance programs provide the necessarysubsidy to create high-quality, below-market-rateloans. In addition, HFAs are answerable to statelegislatures and other governmental entities. Thepublic nature of HFAs makes the autonomy of theirmanagement and security of general net assets animportant credit consideration.Standard & Poor’s evaluates the capacity andwillingness of HFAs to repay GO debt by examiningfive basic analytical areas:■ Earnings quality, financial strength, and capitaladequacy,■ Asset quality,■ Debt levels and types,■ Management and legislative mandate, and■ Economy.Earnings quality, financial strength,and capital adequacyIn order to gauge earnings quality and stability,Standard & Poor’s reviews financial performancefor the most recent five years, with emphasis placedon any notable fluctuations. A premium is placedon consistency of performance. However, one badyear is not necessarily a negative factor, unless itsignifies the beginning of a permanent shift.Standard & Poor’s uses income statement analysisto evaluate revenue sources, cost controls, andprofitability in tandem with a balance sheet analysisof liquidity, capitalization, and asset quality as discussedbelow. Both approaches require evaluationof an agency’s cash accumulation levels, types ofinvestments, interfund borrowing, historical use ofdebt, loan loss reserves, REO, net charge-offs, equity,and quality of unrestricted net assets.The principal areas of analysis are leverage, profitability,asset quality and liquidity. While all thesefactors are important, Standard & Poor’s tends toplace the highest emphasis on equity, since it gives anindication of the resources available to sustain operationsin difficult circumstances or fund programs thatfurther the mission of expanding housing affordability.HFAs tend to be well-capitalized entities that havebeen able to build equity in various environments.Profitability indicates how efficiently an agencyoperates. Agencies that are able to grow large loanportfolios typically have higher profitability than290 Standard & Poor’s Public Finance Criteria 2007