Standard & Poor’s downgraded the underlying rating of the Chicago Housing Authority’s 2006 capital revenue refunding bonds one notch to AA-minus because of lower debt service coverage ratios from federal funds.

The agency assigned a negative outlook. The rating is supported by a strong security of pledged federal public housing modernization funds the CHA receives annually from the Department of Housing and Urban Development.

The bonds also are backed by Assured Guaranty Municipal Corp.

Debt service coverage is currently at 2.44 times and is expected to remain at least at one times through bond maturity.

HUD’s support for the transaction and the city of Chicago’s plan to transform public housing — supported through a moving-to-work agreement with the CHA — are also considered credit strengths.

Credit risks include reduced appropriations of capital funds from Congress, a bond maturity that extends beyond the MTW agreements, and the potential for HUD sanctions that could affect available revenues for debt service.

“The downgrade is based on our view of lower debt service coverage on the bonds,” said Standard & Poor’s analyst Moraa Andima.

The 2006 sale refunded $270 million of the agency’s 2001 sale that helped finance pieces of the transformation plan unveiled in 2000.

The agency demolished its crime-ridden high-rises and is redeveloping remaining units and building new mixed-use units alongside market rate housing in partnership with private developers.

The plan will reduce units overseen by the CHA to approximately 25,000 from 38,000. The plan is behind schedule because of housing market struggles that have hampered private investment.

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