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

HousingStandard & Poor’s adjusts an agency’s unrestrictedassets based on the level of reserves needed to supportGO debt and surpluses available from securedbond resolutions that are available for transfer to theagency’s general fund. The “adjusted” unrestrictedassets position is then divided by total debt and GOdebt (rating dependent) in order to gauge the level ofassets available to all bondholders.HFAs with an investment-grade ICR are expectedto maintain a minimum leverage ratio of 4%,with available liquid assets equal to 2% of totalloans outstanding.GO debt exposure is a good measure of the potentialdispersion of an agency’s unrestricted assets inthe event a call to the agency is required for debtservice on GO debt. The ratio is derived by dividingGO debt (rating dependent) by total agency debtoutstanding. Exposure is classified as low (0%-20%), moderate (21%-50%) and high (above 50%).Standard & Poor’s is concerned with an increasingGO debt exposure ratio in conjunction with deteriorationin unrestricted assets, as measured by theleverage ratios and the GO debt leverage ratio.Asset qualityIn light of the fact that HFAs cannot levy taxes orraise user fees, the assessment of asset quality, intandem with earnings quality, is of paramountimportance in determining an appropriate ICR.This is important even for HFAs that have no GOdebt outstanding. Many HFAs have built up considerableequity in their general funds and bond programsand have significant control of these assets.In order to determine the likelihood of asset accumulationover time and the likelihood of availability,Standard & Poor’s evaluates the quality of theagency’s mortgage collateral, focusing on portfoliosize, dwelling type, loan types, payment characteristics,mortgage insurance and guarantees, loanunderwriting criteria, and location. The agency’sloan portfolio performance is measured againstcomparable agency and Mortgage BankersAssociation (MBA) delinquency statistics to determinerelative performance, and historical losses aremeasured to determine the effect on net assets.Standard & Poor’s also evaluates the quality ofthe agency’s investment portfolio. In manyinstances, investments make up a significant portionof an agency’s asset base. In general,Standard & Poor’s analysis focuses on the investmentof net assets, restricted and unrestricted, aswell as bond funds. The amount of funds beinginvested, who manages the money, how dailyinvestment decisions are made, and the guidelinesthat are in place are reviewed. The agency’sinvestments should meet Standard & Poor’s standardpermitted investment guidelines. Principalprotection and liquidity should be the primarygoals of an HFA’s investment policy.Standard & Poor’s must feel comfortable that amunicipal issuer, such as an HFA, has specific guidelinesand systems in place to manage its exposure toderivative products and interest rate volatility.If an HFA invests in intergovernmental pools,these investments can further the goal of principalprotection and liquidity by using the same guidelinesoutlined for HFA bond and general funds.Debt levelsSince HFAs are generally highly leveraged entities, anagency’s GO debt philosophy—as it relates to theother ICR rating factors—is a crucial determinant ofcredit quality. If an HFA serves as a conduit andissues limited or special obligation bonds backedonly by mortgages, risk associated with debt repaymentis unlikely to pose risk to the HFA’s unrestrictedassets. In cases when an agency pledges its generalobligation as ultimate credit support, risk to theagency is potentially increased. This will be particularlytrue if the HFA is issuing GO bonds to financenon-earning assets. Standard & Poor’s refers to thisrisk as GO debt exposure. This exposure may bequantified through the GO debt exposure ratio asdiscussed above. Another factor is the agency’s exposureto interest rate and other risks through theissuance of variable rate debt and hedging instruments.Standard & Poor’s Debt Derivative Profile(DDP) evaluates an issuer’s risks related to debt-associatedderivatives. A discussion of the methodology isincluded in the Municipal Swap Criteria.Management and legislative mandateStandard & Poor’s assesses the operating performanceof HFAs, focusing on organization, philosophy,strategies, and administrative procedures.Standard & Poor’s assesses the continuity of managementand the agency’s ability to resolve difficultsituations during its operating history. The agency’sadministrative capabilities, such as portfolio oversight,loan-servicing capability, planning procedures,and sophistication of technology, are keyfactors in evaluating management.Next, financial management is consideredthrough historical financial performance, as well asthe experience and qualifications of financial personneland overall management. Although someaspects of financial management, such as cash flowgeneration, may be contracted out, effective managementincludes active review and oversight of allfinancial operations.In evaluating an HFA’s legislative mandate,Standard & Poor’s needs to be assured that thelong-term viability of the agency has the full supportof public officials. Security of agency net assetsand continued management autonomy are essential.292 Standard & Poor’s Public Finance Criteria 2007