Chicago student housing bonds cut to junk as coronavirus threatens occupancy
A $95 million bond issue to finance a student housing and academic facility at the University of Illinois’ Chicago campus lost one of its investment grade ratings as the COVID-19 pandemic threatens to damage occupancy levels.
S&P Global Ratings cut by two notches to BB from BBB-minus the 2017 student housing revenue bond issue sold through the Illinois Finance Authority on behalf of the not-for-profit CHF Chicago LLC. CHF was established for the sole purpose of financing the construction of an integrated academic and housing facility.
"The rating action reflects our view that though the project is estimated to open in fall 2020 at a 95% occupancy, it experienced a substantial decline in the preleasing rates due to a wave of cancellations associated with the ongoing global pandemic," said analyst Gauri Gupta. “The project will face operating pressures due to loss of rental revenues.”
The facility opened in the fall of 2019 and recorded more than 97% occupancy rates in fall 2019 and spring 2020, according to filings on the Municipal Securities Rulemaking Board's EMMA disclosure website.
As of Aug. 24 it recorded with a 53% occupancy rate, according to S&P, but it could change depending on a tally expected early this month.
The rating outlook is negative reflecting S&P’s view “of the project's narrow revenue stream and the uncertainties surrounding the ultimate economic fallout related to the COVID-19 pandemic," Gupta said.
Classes resumed last month at the university under a hybrid mix of in-person and online offerings.
The Chicago higher education housing project isn’t alone as S&P said all projects in the sector are facing negative economic or fundamental business conditions that could result in further rating action.
“We could lower the rating if the project continues to experience lower-than-targeted occupancy such that net project operating revenues are insufficient to meet covenant debt service coverage,” S&P said. “In addition, we might consider a downgrade if the campus experiences significant declines in undergraduate enrollment, housing demand, or occupancy.”
The bonds financed a 550-bed student residence and academic facility on land leased from the University of Illinois Board of Trustees on the university’s Chicago campus. The project is owned by an affiliate of Collegiate Housing Foundation that develops 501(c)(3)-owned student housing projects nationally. The bonds are secured by a leasehold mortgage and assignment of rents and leases. The project is managed by ACC SC Management LLC.
CHF in a voluntary June investor notice said it had received inquiries requesting information about fund balances in the project’s estate and whether the project’s revenues will be negatively impacted by the Covid-19 pandemic during the fiscal year ending June 30, 2020.
The balances included $979,504.02 in a bond fund, $6,207,468.96 in a debt service reserve, $3,301,035.18 in an operations contingency fund housing account, Operations Contingency Fund Academic Account $138,498.36, $76,923.20 in a replacement fund housing account, $37,703.08 in a repair & replacement fund academic account, $4,533,253.55 in one construction account and $8,801.74 in another construction fund.
Revenues were not expected to fall in fiscal 2020 as a result of any action taken in the operation of the project or in response to the Covid-19 pandemic other than the loss of revenue budgeted for the project over the summer months which was $277,000.
“With capitalized interest for 6 months following completion of construction, the manager expects the project will nonetheless meet the rate covenant that it be operated in a manner sufficient to produce a fixed charges coverage ratio of 1.20” times, the notice says.
“Due to the evolving nature of the Covid-19 pandemic and federal, state and local responses thereto, the long-term impacts of the Covid-19 pandemic are unknown and dependent on numerous factors such as the length of any shutdown or partial inaccessibility of the project or other university facilities,” the notice said.