Standard & Poor's Rating Services said it lowered its underlying rating on the Alabama Public Housing Finance Corp.'s (APHFC) series 2003B bonds to A from A-plus.
The outlook is stable.
"The lower rating reflects the downward trend of the debt service coverage (DSC)," said Standard & Poor's credit analyst Moraa Andima. These bonds are insured by Assured Guaranty Municipal Corp. (AA-minus).
The lowering of the SPUR reflects these weaknesses: reduced appropriations of capital fund program monies by Congress; changes in the allocation formula for capital fund program moneys that could reduce an authority's receipts; each authority's obligation to pay debt service on the bonds is a several, not joint, obligation and limited to its proportionate share of each respective series; and the lack of any secondary security for bondholders.
The aforementioned weaknesses are offset by these strengths: the strong security of pledged federal public housing modernization funds (the "capital fund") that each authority receives annually from HUD; demonstrated HUD support for the transaction, limiting the risk of any sanctions that can jeopardize the flow of funds to bondholders; a history of excellent administrative oversight of the authorities provided by the APHFC; a fully funded debt service reserve fund sized at maximum annual debt service (MADS) for each authority; the sound legal structure of the transaction, which serves to insulate bondholders from the risks of each authority's management of their respective redevelopment plans; bond DSC between 3.29x and 1.93x for the series B pool; and after assuming a compounded 5% annual cut in appropriations starting in 2014 for the life of the bonds, and an additional 5% annual cut due to the distribution of high-performer bonuses, anticipated DSC is at least 1x through maturity.
"The stable outlook hinges on capital fund appropriations remaining sufficient to support the 'A' rating on the bonds," added Andima. The 2013 congressional appropriation for public housing modernization is down about 5% from one year prior; this marks the third consecutive year public housing modernization funding has been cut.
The anticipated DSC reflects the authority's 2013 allocation, followed by an annual 5% compounded reduction in available capital funds due to appropriation risk, and an additional 5% cut each year due to potential funding reallocations to award high-performer bonuses.
While modernization funding is still within the parameters to yield an investment-grade rating on the bonds, continued appropriation declines over the long term could lead to a lowering of the rating.
