BRADENTON, Fla. -Standard & Poor'slast week dropped to junk status the ratings for several affordable housing bond issues, citing surging interest rates due to auction-rate market disruptions and increasing losses on swaps.
Standard & Poor's lowered Atlantic Housing Foundation Inc.'s auction-rate Series 2005A and 2005A-T bonds to BB from AA-minus. The agency also lowered the rating on its Series 2005B bonds to CCC from A, and its Series 2005C bonds to CC from BBB, and placed all of Atlantic's bonds on CreditWatch with negative implications.
The bonds were sold through the Florida's Capital Trust Agency.They were issued as $23.1 million of senior Series 2005A bonds, $71.14 million of taxable senior Series 2005A-T, $30.5 million of subordinate Series 2005B bonds, and $21.85 million of junior subordinate Series 2005C bonds.
The rating agency also downgraded its rating on American Housing Foundation's Series 2003C bonds to BB from BBB-minus. Capital Trust Agency issued the $30 of million multifamily housing revenue bonds in December 2003.
Both Atlantic and American are headquartered in Texas. Atlantic has locations in the Dallas area in Grapevine and Southlake, according to its Web site. American's main headquarters is in Amarillo, but it also has a location in Dallas, according to its Web site. Both nonprofit agencies have sold bonds through various conduit agencies to purchase or build affordable housing in various states, including Florida and Texas. But the agencies have different management staffs.
"The negative rating actions reflect the unfavorable market conditions in the auction-rate market, which have led to increased rates on the project's series 2005A and 2005A-T bonds," said Standard & Poor's analyst Renee Bersonin a report on Atlantic Housing. "The auction-rate bonds account for more than 58% of the $161.6 million in debt issued for this project."
Berson said the negative rating actions also reflected Atlantic's exposure to interest rate swaps, which are projected to cost the project more than $1.8 million in 2008.
"As of now, we have no comment," Atlantic compliance manager Elida Cernosaid yesterday in response to the downgrade. Cerno indicated that Daniel French is no longer president of the nonprofit company. French is listed as president on disclosure documents.
In a material event notice dated Oct. 18, 2007, Atlantic said its Series 2005 bonds were subjected to turmoil relating to subprime mortgages. It said the effect upon the broader mortgage industry generally has "disrupted the orderly process of periodic repricing for auction rate bonds."
The noticed went on to say, "This market-wide phenomenon has created a significant increase in the interest rates accruing on such bonds, including the 2005A Bonds. The foundation has initiated discussions with the [Capital Trust] Agency to pursue a plan for restructuring the financing of the housing portfolio."
Ed Gray, executive director of Capital Trust Agency, could not be reached for comment yesterday. A spokesperson in his office said he was attending meetings.
Citing similar reasons last Thursday, Standard & Poor's downgraded its rating on American Housing Foundation's $29.9 million of Series 2003C fixed-rate bonds to BB from BBB-minus, which were issued by Capital Trust Agency.
Standard & Poor's revised its rating outlook on the foundation's series 2003A, 2003A-T, 2003B, and 2003B-T auction-rate bonds to negative from stable. Those bonds were issued by three conduit agencies in Texas - Capital Area Housing Finance Corp., Housing Options Inc., and THEOP LLC, as well as Tulsa County Industrial Authority in Oklahoma, and the Maricopa County Industrial Development Authority in Arizona.
According to American's president, Steve Sterquell, the downgrade of the 2003C bonds came because the debt is deeply subordinated to the auction-rate debt, which also is subject to underperforming swaps. All the bonds are structured as a cross-collateralized and cross-defaulted pool.
Sterquell said American is evaluating several avenues to take out the auction-rate securities, including converting the debt to variable-rate. He also said recent auctions have begun to reset at some of the lowest rates in more than a year.
