S&P Drops Moldy Florida College Housing Project to D

BRADENTON, Fla. — Standard & Poor’s on Monday downgraded the underlying rating on $128 million of student housing revenue bonds sold by Florida’s Capital Projects Finance Authority to D, the lowest junk rating possible.

The underlying rating was lowered from C in response to the project’s reliance on insurance to make debt-service payments, Standard & Poor’s said.

The agency has dropped what was an investment-grade rating of BBB-minus since 2010 after water damage and mold problems were discovered in the project adjacent to the University of Central Florida in Orlando.

Moody’s Investors Service has also lowered its investment-grade rating to junk levels over the past few years.

In May, Moody’s affirmed its Caa3 underlying rating and stable outlook to reflect defaults covered by $9.9 million in insurance draws to make the most recent bond payments in April and last October, according to Moody’s analyst Thomas Song.

“It is anticipated that the bond insurer will also pay the Oct. 1, 2012, payment of principal and interest,” Song said.

Bond counsel William Zvara, the contact for the authority, could not be reached for comment.

Some $158.3 million of Series 2000 bonds were sold to acquire the existing project, which consisted of 63 three-story apartment buildings with 3,756 beds and four one-story clubhouses.

The debt was originally insured by MBIA Insurance Corp., and now by National Public Finance Guarantee Corp. The credit’s insured ratings are BBB from Standard & Poor’s and Baa2 from Moody’s.

The bonds are limited obligations of the Capital Projects Finance Authority, and secured by revenues from Knight’s Circle and the Pointe at Central, student housing buildings previously known as Pegasus Landing and Pegasus Pointe.

Since the water and mold damage was found, occupancy levels have dropped, and National agreed to loan up to $36.7 million for remediation work. The remediation is expected to be finished in August.

Moody’s said its Caa3 rating was based on expected loss estimates over the next 12 months to 24 months, as well as the loan by National.

The loan repayment is on par with the outstanding senior bonds, which have maturities though 2031.

National has directed the trustee to have all pledged revenues go to pay debt service on the bonds first, and then repay the insurer’s loan, Song said.

After the mold and water damage was found, the university began diverting students from Pegasus and occupancy dropped to 66%.

With reduced rental revenue, the project began tapping the debt service reserves to help make bond payments in October 2010. Reserves were depleted a year later and a default occurred, though bond insurance covered the shortfall.

Moody’s said its stable outlook on the bonds reflects uncertainty around the expected recovery of the project, though the risks are balanced by improvements in occupancy rates after the University of Central Florida instated a student referral agreement.

In a default report on higher education and privatized facilities in March, Moody’s said that it is not known if the projects will recover but they are “undergoing physical remediation and may ultimately be restored to financial health.”

Unlike other distressed housing projects with weak submarkets, these projects still have a strong occupancy potential with the proximity of the university, Moody’s default report said.

Some of the bonds are actively trading at high levels, which may reflect seamless payments due to bond insurance.

On Tuesday, a customer bought $100,000 of the bonds maturing in 2031 for 99 cents on the dollar at a yield of 5.04%.

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