BRADENTON, Fla. — Standard & Poor’s junked 10 series of performing Florida community development district bonds on Wednesday in a repercussion from its recent downgrade of National Public Finance Guaranty Corp.
S&P said the CDDs have debt service reserves funded with surety bonds provided by National, which was downgraded three notches to BB from BBB on Feb. 28 because of concern over the municipal insurer’s capital adequacy position and financial-risk profile.
Because of National’s credit enhancement, the ratings on 10 series of CDD bonds were dropped to BB, affecting about $65 million of outstanding debt. Most of the districts’ bonds were in the A rating category.
“In our opinion, the speculative-grade credit quality of the debt-service reserve provider raises concerns about the availability of this liquidity should it be needed to make debt-service payments, and weakens a security feature we consider essential to maintaining investment-grade ratings on these bonds,” said S&P analyst Andrew Teras.
Special assessments on property in CDDs are levied to match debt service payments with very limited excess-cash flow, according to Teras. With limited cash, the debt-service reserve is “an important security feature that provides additional liquidity if assessments are not received in full or on a timely basis,” he said.
While the Florida CDD sector as a while has struggled in the wake of the recession and housing market bust, none of the development district bonds Standard & Poor’s downgraded to junk are in default, Teras said.
The rating outlook on all of the bonds is positive based on the developing outlook on National’s rating.
When Standard & Poor’s downgraded National in late February, the agency also downgraded to CCC from B the rating on sister company MBIA Insurance Corp., which insures structured finance products.
Standard & Poor’s said it dropped National’s rating because of a loan it made to MBIA Insurance, which may not be repaid as required or it may not be repaid before New York regulators take over the insurer.
“If MBIA Corp. does fall under regulatory control, National’s ability to claim the perfected security interest is uncertain, in our view,” Standard & Poor’s said in its report. “We have, therefore, included a 100% charge for the intercompany loan in our analysis of National’s capital adequacy.”
On Thursday, MBIA Inc. spokesman Kevin Brown declined to comment on the downgrade of the Florida CDDs linked to National’s surety bonds, but reiterated earlier statements that National will meet its obligations to policyholders.
Since the collapse of the housing market in the recent economic downturn, more than 168 of Florida’s CDDs have defaulted on $5.1 billion of bonds, according to the Florida CDD Report.
Its report includes districts that have dipped into reserves because it signals financial difficulties, though in many cases using reserves is not considered a default under bond covenants.
The community development districts that are affected by Standard & Poor’s downgrade on Wednesday, and their ratings, are:
• Brooks of Bonita Springs CDD, Series 2006 bonds downgraded to BB from A-minus.
• Brooks of Bonita Springs CDD II, Series 2006 bonds dropped to BB from A-minus.
• Oakstead CDD, Series 2006A-1 and 2006A-2 bonds lowered to BB from A-minus.
• Westchase CDD, formerly Westchase East CDD, Series 2007-1 and 2 bonds downgraded to BB from A.
• Westchase CDD, formerly Westchase East CDD, Series 2007-3 dropped to BB from BBB.
• Hamal CDD, Series 2006A lowered to BB from BBB-plus.
• Lakewood Ranch 5, Series 2007 downgraded to BB from BBB.
• Waterchase CDD, Series 2007 dropped to BB from A-minus.
• Tampa Palms Open Space and Transportation CDD, Series 2004 lowered to BB from A-minus.