Fitch Rates Idaho HFA's Class I and Class II Hsg Bonds 2016 Series A 'AAA' & 'AA'
--$25,000,000 2016 Series A-1 Class I bonds;
--$29,810,000 2016 Series A-2 Class I bonds;
--$30,355,000 2016 Series A-3 variable-rate Class I bonds.
Fitch assigns an 'AA' to the $21,565,000 2016 Series A-4 variable-rate Class II bonds.
In addition, Fitch affirms the 'AAA' rating on approximately $140 million in Class I bonds (2003 Indenture) and the 'AA' rating on approximately $28 million in Class II bonds (2003 Indenture).
The Rating Outlook on all bonds is Stable.
Fitch will be assigning a short-term rating to the 2016 A-3 Class I and 2016 A-4 Class II variable-rate bonds closer to the bonds' pricing on or about July 6, 2016.
The single-family mortgage bonds are issued under a master indenture that pledges revenues, investment earnings, reserves, and other trust funds to secure the bonds. The Class I and II bonds have asset parity maintenance requirements directing revenues to be used to call bonds of that class prior to paying debt service of the next junior class. The master indenture also allows for Class III bonds, which are secured by the assets and revenues of the indenture and are general obligations of the Association. Following the 2016 Series A refunding, there will be no Class III bonds outstanding under the 2003 Indenture.
KEY RATING DRIVERS
SUFFICIENT ASSET PARITY: Consolidated cash flows incorporating the issuance of the 2016 Series A bonds demonstrate that the Indenture Class I and Class II bonds maintain asset parity levels of 110% and 102% respectively under a variety of Fitch stress scenarios. With this financing, IHFA's general obligation (GO) will be pledged to the 2016 Series A-4 Class II bonds, however, given the fact that the Class II bonds are self-supporting in all cash flow stress scenarios, the GO pledge does not provide any additional credit enhancement.
SPECIFIED PROGRAM PROVISIONS: The supplemental indentures for the bonds that will be outstanding after the 2016 Series A refunding provide for asset parity requirements, which range from 106%-110% for the Class I bonds and are 102% for the Class II bonds. This is lower than the asset parity requirements of previous supplemental indentures prior to the refunding (which averaged 118% for Class I bonds and 112% for Class II bonds); however, the reduced levels provide the association with greater flexibility to financially manage the program. Though the Issuer has the ability to optionally redeem bonds without meeting the asset parity requirements, the current Indenture cash flows projections demonstrate maintenance of these levels throughout the term of the bonds under all prepayment stress scenarios.
STRONG LOAN PORTFOLIO: As of April 30, 2016, the loan portfolio was approximately 82% whole loans and 18% GNMA mortgage-backed securities (MBS). The well-seasoned whole loan portfolio was insured by the following federal providers as of Dec. 31, 2015: FHA (65.5%), VA (4.5%), and RD (10.5%). The remaining portion of the whole loan portfolio was insured by unrated PMI providers (13.5%) and uninsured (6%). The portfolio has performed well to date and has had minimal loan losses and low delinquency rates. The 2016 A-1 bonds will be used to originate an additional $25 million in loans which will be collateralized into MBS, strengthening the loan portfolio.
IMPROVED DEBT STRUCTURE: The 2016 refunding will allow for fixed-rate debt service savings, which should improve the Indenture's profitability. In addition, the existing swap contracts tied to the variable-rate debt in the 2003 Indenture are now amortizing at a rate that is more consistent with the mortgage prepayment speeds that the loans in the Indenture have been experiencing. Following the 2016 Series A refunding, the Issuer will have more flexibility in redeeming debt tied to these swap contracts given that only three series of variable-rate bonds will remain. This strategy should minimize the negative arbitrage and program losses to the Indenture. Following the refunding, the variable rate bonds will be 61% of the Indenture, a slight decrease from 64% prior to the refunding.
CONTINUITY IN MANAGEMENT: IHFA has an experienced management team and the Association has a long history of operating bond-financed affordable housing programs.
ABILITY TO MAINTAIN PROGRAM PROVISIONS: Any failure to meet and maintain the asset parity requirements on the Class I and Class II bonds would be viewed as a credit negative and would most likely result in a downgrade of the program ratings.
The 2016 Series A Class I and Class II single-family mortgage bonds are to be issued on parity with the other Class I and Class II obligations of the 2003 Indenture. The 2016 A-1 Class I bonds will provide financing for the purchase of new GNMA MBS. The 2016 A-2 and A-3 Class I bonds and the 2016 A-4 Class II bonds will be issued to refund prior debt obligations under this Indenture, including all existing Class III debt.
The ratings on the 2016 Series A bonds and the affirmation of the Indenture Class I and II bonds reflect current asset parity ratios, strong program provisions as reflected in the cash flow projections, and the Indenture's strong loan portfolio. Cash flow projections, which incorporate various Fitch loan loss, prepayment speed, and variable-rate stress scenarios, illustrate maintenance of minimum asset parity levels of 110% and 102% for the Class I and II bonds, respectively.
As of March 31, 2016, the loan portfolio had a delinquency rate (60+ days) of 1.7%, which is below the state and national averages of 2.59% and 5.18% respectively as of the same date. Concerns over loan losses are minimal given the deep mortgage insurance coverage on the loan portfolio, past performance, and the portfolio's long seasoning.
The program's percentage of variable-rate debt, 61% of the portfolio following the refunding, is relatively high. Minimizing credit concerns over the variable-rate debt is the fact that all of the variable-rate bonds outstanding under the Indenture are swapped to a synthetic fixed-rate, and the cash flow projections incorporate variable-rate stress scenarios. In the past, IHFA has been unable to economically redeem certain VRDOs due to the high termination fees of existing hedging contracts tied to the debt. Following the 2016 Series A refunding, the Issuer will have more flexibility in redeeming debt tied to these swap contracts given that only three series of variable-rate bonds will remain. Going forward, this should reduce the negative arbitrage and program losses that the Indenture experienced when mortgages prepaid and IHFA opted to invest proceeds in lower interest yielding investments rather than redeeming debt (due to the high termination fees of the swap contracts).
Though the lower asset parity requirements provide for less overcollateralization of the program, the reduced levels also give the Association greater financial flexibility to manage the Indenture. The combination of the cash flow strength, the low loan loss expectations on the whole loan portfolio, and the addition of another $25 million in MBS to the Indenture mitigate concerns over the reduced asset parity requirements. Consolidated cash flow projections incorporating the new issuance and refunding demonstrate the financial strength of the program.