Fitch Downgrades Philadelphia Hsg Auth & Redevelopment Auth of Philadelphia Cap Fund Revs to 'AA-'

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings downgrades the following Philadelphia Housing Authority and The Redevelopment Authority of the City of Philadelphia capital fund bonds:

--$85.0 million Philadelphia Housing Authority capital fund program (CFP) revenue bonds, series A of 2002 to 'AA-' from 'AA'

--$65.0 million Redevelopment Authority of the City of Philadelphia capital fund program revenue bonds series B of 2002 and series C & D of 2003 to 'AA-' from 'AA'

The Rating Outlook is Negative.

SECURITY

The bonds are secured by the public housing capital fund annual appropriations, as well as debt service reserve fund sureties to cover any timing delays in appropriations.

KEY RATING DRIVERS

DECLINING APPROPRIATION LEVELS: Philadelphia Housing Authority's appropriation amounts have drastically decreased in recent years, falling 24% and 15% in 2011 and 2012 fiscal year (FY), respectively.

DECREASED DEBT SERVICE COVERAGE: Due to the declining appropriation amounts, debt service coverage levels have fallen in 2012 FY to 4.10 times (x) before Fitch's stressed scenarios and 3.31x after Fitch's stressed scenarios are placed.

BOND DEAL STRUCTURE: The structure allows payments to flow directly to the trustee to pay debt service on a first priority basis.

MANAGEMENT OVERSIGHT: Philadelphia Housing Authority's management has consistently submitted capital plans to HUD in a timely manner and has had no severe decrease in housing units.

WHAT COULD TRIGGER A RATING ACTION

DECLINES IN APPROPRIATIONS: Further declines in the capital fund annual public housing appropriations may put debt service coverage levels below current rating thresholds.

RATING CRITERIA

Fitch's rating approach for housing bonds secured by annual appropriations involves: a quantitative analysis of annual appropriation amounts and the corresponding debt service coverage levels, review of the legal structure of the agreement, and a qualitative analysis of management oversight.

Fitch takes a conservative approach to analyzing appropriation amounts and debt service coverage levels by identifying the main credit concern of the bonds, appropriation risk. Fitch recognizes the escalating levels of appropriation risk over time, or bonds with a longer maturity are exposed to a higher degree of appropriation risk, and recalculates the debt service coverage level to account for the volatility in annual appropriation amounts. Fitch accounts for this by considering the base appropriation level to be either the lowest amount received over the past five years or 95% of the previous year's funding, whichever is lower. This base amount is then adjusted further depending on the remaining years to maturity, with a 10% decrease for bonds five years to maturity, a 15% decrease for 10 years to maturity, a 20% decrease for 15 years to maturity, and a 25% decrease for 20 years to maturity.

The final stressed appropriation amount is then used to calculate the adjusted debt service coverage level, with a 'AA' rating yielding a minimum debt service coverage level of 4.0x, 'AA-' rating needing a minimum of 3.0x, 'A+' requiring a minimum of 2.0x, and a 'A' rating having a minimum debt service coverage level of 1.5x.

In addition to quantitative measures, Fitch also reviews the legal structure of the bonds. We review the annual contributions contract (ACC) between the PHA and HUD for any items that would help mitigate the risks associated with the PHA's ability to pay bondholders. Fitch specifically looks for the following items in an ACC: debt service payments going directly from HUD to the trustee on a predetermined schedule usually three days in advance of the debt service payment date, or administrative sanctions not being able to delay payments of the debt service or recapture funds approved for debt service payments.

The last component Fitch looks at is management performance and their ability to meet HUD's deadlines and requirements to receive annual appropriations. Each year HUD requires public housing authorities to submit one-year and five-year capital fund plans, in which funds are only allocated after HUD's approval of the plans. Since the start of the capital fund program, agencies have been extremely successful in submitting plans in a timely manner since appropriations are predicated upon an agency's ability to submit plans on time. Fitch confirms with individual public housing authorities that plans were submitted to HUD. Fitch also discusses the current progress of modernization projects and the authority's ability to finish the work to completion. Fitch monitors the authority's current number of housing units since it factors in the capital fund appropriation formula, meaning if the number of housing units decline, the portion of funds appropriated to an agency could also decline.

CREDIT PROFILE

Credit concerns revolve around the volatility of appropriation amounts. In recent years, appropriation amounts have drastically decreased which has quickly eroded debt service coverage levels. Philadelphia Housing Authority has seen debt service coverage levels drop to 4.10x from 6.30x within the last two years, and under Fitch's stressed scenarios, Philadelphia Housing Authority's debt service coverage levels have fallen to 3.31x from 4.60x. The recent trend of declines in appropriations and the remaining 10 years to maturity on the bonds are the center of credit concerns and basis for the Negative Outlook on the bonds.

The appropriation amounts, under HUD's budget, are part of the U.S. government's general fund and are reliant upon the federal budget process. This could potentially lead to political, economic, or regulatory delays in the timing of the appropriations. All of these concerns are somewhat mitigated by the legal structure of the bonds, the fact that the federal government provided PHAs funds every year since 1937, and the debt service reserves. However, as the pressure mounts for the federal government to lower their deficit, HUD's budget is at risk and may continue to decline.

Fitch recognizes that Philadelphia Housing Authority is one of the moving to work (MTW) agencies, which allows them flexibility in spending. A MTW agency has the ability to combine capital, operating, and voucher funds and spend these funds interchangeably to suit the current needs of the agency. This could potentially add security to the capital fund bonds, as funds could be distributed from the combined funds to pay bondholders. Although the potential security is there, these funds are not pledged to the bondholders and therefore Fitch awards no credit to Philadelphia Housing Authority for being a MTW agency and subsequently does not include any funds other than the annual appropriations into the calculation of debt service coverage levels.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research
--'Revenue-Supported Rating Criteria' (June 20, 2011);
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Municipal Structured Finance Rating Criteria' (Feb. 28, 2012).

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Municipal Structured Finance Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672570

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst:
Charles Giordano, +1-212-908-0607
Senior Director
Fitch Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Ryan Pami, +1-212-908-0500
or
Committee Chairperson:
Douglas J. Kilcommons, +1-212-908-0740
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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