LOS ANGELES — Moody's Investors Service plans to downgrade $68 million of Idaho Housing & Finance Association bonds a notch from AAA to Aa1 (sf) on April 9 to coincide with a remarketing of variable rate bonds to the variable-rate remarketed obligation mode.

Moody's analysts said they will maintain a stable outlook on the single family mortgage Series 2009A bonds impacted by the rating change.

"The downgrade to Aa1(sf) is solely based on the remarketing of the variable rate bonds to the VRO mode and not a result of program credit deterioration," according to Moody's analysts Omar Ouzidane and Florence Zeman. "The change to a VRO mode results in holders of the bonds having a security that is weaker than that of other Class I bondholders under the 2003 Indenture, therefore meriting a one notch rating distinction."

The bonds will change from a weekly rate mode to an alternative mode referred to as VRO mode. Following the mode change, the current long-term enhanced AAA rating and short-term enhanced VMIG 1(sf) rating, which are based on the temporary credit and liquidity facilities provided by Fannie Mae and Freddie Mac, will be withdrawn.

The Aa1 rating reflects the fact that principal and interest, including the step-up, on the bonds are on parity with all Class I bonds, but the payment of principal on the VRO special mandatory tender date is payable from the general obligation of the IHFA. The housing and finance association has three years to take out the VROs, which was considered ample time by analysts.

"We view the likelihood of bondholders being paid from general fund monies at the mandatory tender date as remote," analysts said.

Management was described by analysts as "sophisticated with a track record of actively addressing challenges facing its single family programs."

The step-up rate also is punitive enough to provide management with an incentive to quickly act upon a failed remarketing, analysts said.

The stable outlook was based on analysts' expectation that the financial position will remain in line with the assigned rating. This stance was supported by signs of improving loan portfolio performance; the importance of IHFA's lending activities in the state, and management's active role in reducing the stress of variable rate debt on the program, according to the report.

Credit challenges include the concern that the VRO mode will put downward pressure on IHFA's A1 issuer rating, which carries a negative outlook.

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