Standard & Poor’s adjusts an agency’s unrestricted
assets based on the level of reserves needed to sup-
port GO debt and surpluses available from secured
bond resolutions that are available for transfer to the
agency’s general fund. The “adjusted” unrestricted
assets position is then divided by total debt and GO
debt (rating dependent) in order to gauge the level of
assets available to all bondholders.
HFAs with an investment-grade ICR are expect-
ed to maintain a minimum leverage ratio of 4%,
with available liquid assets equal to 2% of total
loans outstanding.
GO debt exposure is a good measure of the poten-
tial dispersion of an agency’s unrestricted assets in
the event a call to the agency is required for debt
service on GO debt. The ratio is derived by dividing
GO debt (rating dependent) by total agency debt
outstanding. Exposure is classified as low (0%-
20%), moderate (21%-50%) and high (above 50%).
Standard & Poor’s is concerned with an increasing
GO debt exposure ratio in conjunction with deterio-
ration in unrestricted assets, as measured by the
leverage ratios and the GO debt leverage ratio.
Asset quality
In light of the fact that HFAs cannot levy taxes or
raise user fees, the assessment of asset quality, in
tandem with earnings quality, is of paramount
importance in determining an appropriate ICR.
This is important even for HFAs that have no GO
debt outstanding. Many HFAs have built up consid-
erable equity in their general funds and bond pro-
grams and have significant control of these assets.
In order to determine the likelihood of asset accu-
mulation over time and the likelihood of availabili-
ty, Standard & Poor’s evaluates the quality of the
agency’s mortgage collateral, focusing on portfolio
size, dwelling type, loan types, payment characteris-
tics, mortgage insurance and guarantees, loan
underwriting criteria, and location. The agency’s
loan portfolio performance is measured against
comparable agency and Mortgage Bankers
Association (MBA) delinquency statistics to deter-
mine relative performance, and historical losses are
measured to determine the effect on net assets.
Standard & Poor’s also evaluates the quality of
the agency’s investment portfolio. In many
instances, investments make up a significant por-
tion of an agency’s asset base. In general,
Standard & Poor’s analysis focuses on the invest-
ment of net assets, restricted and unrestricted, as
well as bond funds. The amount of funds being
invested, who manages the money, how daily
investment decisions are made, and the guidelines
that are in place are reviewed. The agency’s
investments should meet Standard & Poor’s stan-
dard permitted investment guidelines. Principalprotection and liquidity should be the primary
goals of an HFA’s investment policy.
Standard & Poor’s must feel comfortable that a
municipal issuer, such as an HFA, has specific guide-
lines and systems in place to manage its exposure to
derivative products and interest rate volatility.
If an HFA invests in intergovernmental pools,
these investments can further the goal of principal
protection and liquidity by using the same guide-
lines outlined for HFA bond and general funds.
Debt levels
Since HFAs are generally highly leveraged entities, an
agency’s GO debt philosophy—as it relates to the
other ICR rating factors—is a crucial determinant of
credit quality. If an HFA serves as a conduit and
issues limited or special obligation bonds backed
only by mortgages, risk associated with debt repay-
ment is unlikely to pose risk to the HFA’s unrestrict-
ed assets. In cases when an agency pledges its general
obligation as ultimate credit support, risk to the
agency is potentially increased. This will be particu-
larly true if the HFA is issuing GO bonds to finance
non-earning assets. Standard & Poor’s refers to this
risk as GO debt exposure. This exposure may be
quantified through the GO debt exposure ratio as
discussed above. Another factor is the agency’s expo-
sure to interest rate and other risks through the
issuance of variable rate debt and hedging instru-
ments. Standard & Poor’s Debt Derivative Profile
(DDP) evaluates an issuer’s risks related to debt-asso-
ciated derivatives. A discussion of the methodology is
included in the Municipal Swap Criteria.
Management and legislative mandate
Standard & Poor’s assesses the operating perform-
ance of HFAs, focusing on organization, philoso-
phy, strategies, and administrative procedures.
Standard & Poor’s assesses the continuity of man-
agement and the agency’s ability to resolve difficult
situations during its operating history. The agency’s
administrative capabilities, such as portfolio over-
sight, loan-servicing capability, planning proce-
dures, and sophistication of technology, are key
factors in evaluating management.
Next, financial management is considered
through historical financial performance, as well as
the experience and qualifications of financial per-
sonnel and overall management. Although some
aspects of financial management, such as cash flow
generation, may be contracted out, effective man-
agement includes active review and oversight of all
financial operations.
In evaluating an HFA’s legislative mandate,
Standard & Poor’s needs to be assured that the
long-term viability of the agency has the full sup-
port of public officials. Security of agency net assets
and continued management autonomy are essential.Housing292 Standard & Poor’s Public Finance Criteria 2007