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Criteria | Governments | U.S. Public Finance: Methodology For Rating U.S. Public Finance Rental Housing Bonds

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Criteria | Governments | U.S. Public Finance: Methodology For Rating U.S. Public Finance Rental Housing Bonds

OVERVIEW AND SCOPE

1. These criteria outline S&P Global Ratings' methodology for rating bonds backed by rental income from residential properties that serve a public purpose in the U.S. (rental housing bonds). All terms followed by an asterisk are defined in the glossary (see Appendix A). We intend the methodology to be read in conjunction with the related guidance (see "Guidance: Methodology For Rating U.S. Public Finance Rental Housing Bonds," April 15, 2020).

2. In particular, our definition of rental housing bonds includes bonds backed by revenues from:

  • Affordable multifamily housing* (including mobile home parks);
  • Age-restricted independent* or assisted-living* rental housing;
  • Privatized military housing*; and
  • Pools* of loans secured by affordable multifamily housing.

3. The methodology does not apply to:

  • Continuing care retirement communities (CCRCs) or multifacility organizations where CCRCs comprise the majority of the organization. These organizations are operating entities, and require a different approach to the project-based framework described in this methodology. They are rated based on "Senior Living" criteria, published June 18, 2007;
  • Securitizations backed by multifamily properties where the provision of affordable housing is not a primary driver of the development, which are rated under "Rating Methodology And Assumptions For U.S. And Canadian CMBS," published Sept. 5, 2012; and
  • Federally enhanced housing bonds (FEH bonds) (housing bonds where full credit enhancement from U.S. federal government agencies is available on the mortgage loans, mortgage-backed securities, or directly on the FEH bonds), which are rated under "U.S. Federally Enhanced Housing Bonds Rating Methodology" published Nov. 12, 2019.

Key Publication Information

  • Effective date: April 15, 2020.
  • This article is related to "Guidance: Methodology For Rating U.S. Public Finance Rental Housing Bonds," April 15, 2020.
  • This updated methodology follows our "Request For Comment: Methodology For Rating U.S. Public Finance Rental Housing Bonds," published Nov. 4, 2019. For the changes between the RFC and the final criteria, see "RFC Process Summary: Methodology For Rating U.S. Public Finance Rental Housing Bonds," April 15, 2020.
  • These criteria supersede the criteria articles listed in the "Fully Superseded Criteria" and "Partly Superseded Criteria" sections at the end of this article.

FRAMEWORK OVERVIEW

4. The analytical framework consists of five steps, summarized below and illustrated in the chart.

  • Step 1: Our legal and operational framework analysis focuses on typical legal provisions covered in transaction documents necessary to assign and maintain a rating to the bonds under these criteria.
  • Step 2: We assess three key credit factors: coverage and liquidity reserves, management and governance, and market position. We assess each factor as "very strong," "strong," "adequate," "weak," or "very weak," which equal numeric scores of '1' to '5', respectively. The assessments for any factor can also be a midpoint between two assessment levels: for example, we may assess a factor as "very strong/strong," which equals a numeric score of '1.5'.
  • Step 3: We determine the anchor based on a weighted-average of the numeric scores for the three key credit factors. Because we believe that some factors are more likely to affect credit quality than others, we assign different weights to each of the three key factors.
  • Step 4: We adjust the anchor to capture unusual credit factors, by applying any relevant overriding factors and caps, to determine the stand-alone credit profile (SACP). Furthermore, we apply our holistic analysis to help capture a broader view of creditworthiness.
  • Step 5: We apply any other relevant criteria to arrive at the final rating--for example, to capture U.S. sovereign risk, financial counterparty risk, and/or operational risk.

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5. This framework applies for both stand-alone and multifamily pool transactions. The main difference in the framework for these two transaction types is the analysis of coverage and liquidity reserves: For stand-alone transactions, we focus primarily on the rated debt's debt service coverage (DSC); for multifamily loan pools, we focus primarily on the sufficiency of available overcollateralization to withstand credit losses and other risks. For very concentrated multifamily loan pools (generally, consisting of about 10 or fewer loans), we would generally weak link the final pool rating to the rating that would be assigned to the weakest loan in the pool, were that loan to be rated as a stand-alone transaction under this methodology. However, we may assign a higher pool rating on the basis of structural elements that mitigate the exposure to the weakest loan (such as overcollateralization).

6. We base our assessment of all factors in this methodology on our forward-looking view of performance, built on an analysis of historical and current performance metrics, including the volatility and trend of historical results. In some cases, our view of future performance may differ from historical or current results. Our forward-looking view is informed by our opinion of macro conditions such as economic, legislative, environmental, and regulatory; our view of transaction-specific factors such as revenue and expenditure trends, occupancy trends, support level from related parties, and management actions; and the borrower's own forecast when available.

LEGAL AND OPERATIONAL FRAMEWORK ANALYSIS

7. The legal framework is important to the transactions in scope, because it links the duties of the key transaction parties (KTPs) with the proper execution of the program. If, in our view, typical legal provisions are not present in the transaction documents or the associated legal risks are not mitigated, the transaction would not be eligible to be rated under this methodology. Typical legal provisions include security and collateral, flow of funds, events of default, acceleration and redemptions, among others.

8. Our legal analysis also focuses on bankruptcy and other legal risks that could adversely affect the ability to pay full and timely debt service. These concepts are analyzed differently, as compared with the approach we take in our analysis of U.S. structured finance transactions, because of the unique nature of U.S. public finance housing transactions (for example, more flexible, diverse, and dynamic structures that are often actively managed and affiliated with a U.S. municipal or quasi-municipal entity, and hence, there may not be formal separateness covenants or requirements for independent directors).

9. Where we deem appropriate to analyze whether these legal risks are mitigated, we may request legal opinions that address one or more issues such as: automatic stay risk, preference risk, trust estate parameters, Chapter 9 status, non-consolidation, perfected security interest, enforceability of the transaction documents, or other applicable risks.

10. In addition, to be rated under this methodology, issues must meet the following conditions:

  • KTPs must meet the eligibility conditions specified under the criteria "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published Oct. 9, 2014. Specifically, KTPs must have sufficient experience to perform their role in the transactions; KTP roles, responsibilities, and rights must be clearly defined in transaction documents; and KTP resignations may only be effective if a successor is in place, unless we have assessed that a KTP's resignation would not materially and adversely affect the securitization's performance; and
  • Where a transaction is backed by leased property, the lease term extends through the bonds' maturity, and we have concluded that risks of abatement and lessor bankruptcy are mitigated (as specified under "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness," published Nov. 20, 2019).

DETAILS OF KEY CREDIT FACTORS

Coverage And Liquidity Reserves

11. The coverage and liquidity reserves assessment evaluates two factors:

  • Coverage: The capacity for the transaction to withstand temporary declines in rental revenues and/or increases in expenses; and
  • Built-in liquidity reserves: The ability to withstand revenue interruption or stress. The focus is on protection provided by liquidity in the form of a debt service reserve fund or other available required reserves. For pools, the analysis considers liquid assets (for example, indenture investments for managed pools). The liquidity component has only a neutral or negative effect on the initial coverage factor assessment, because our calibration of the initial coverage factor assessment assumes coverage of liquidity risks.
Determining the initial coverage factor assessment for stand-alone transactions

12. We start this assessment by using the metrics in Table 1 to determine the initial coverage factor assessment. We generally calculate the DSC ratio starting from the historical financial information. We regularly make adjustments to the reported financials to arrive at adjusted net cash flow. These adjustments aim to reflect our forward-looking view (for example, based on forecast changes to vacancy rates or expenses), to capture specific risks, and to normalize our analysis across transactions. If our calculation of the DSC ratio is at or close to a cut-off point between two assessment levels, we generally assign a midpoint assessment level. For instance, a DSC of 1.25x generally corresponds to an "adequate/weak" assessment (that is, a numeric score of '3.5').

Table 1

Determining The Initial Coverage Factor Assessment For Stand-alone Transactions
Coverage factor assessment Debt service coverage ratio (x)
1 - Very strong >=2.0
2 - Strong 1.50 - 2.0
3 - Adequate 1.25 - 1.50
4 - Weak 1.10-1.25
5 - Very weak <=1.10
Examples Of Adjustments That May Affect The Coverage Factor Assessment To The Extent That They Are Not Incorporated Into The Assessment Above
Factors that could have a positive effect Factors that could have a negative effect
We expect coverage to improve We expect coverage to deteriorate
Expected high stability of net cash flows over time Expected high volatility of net cash flows over time 
Expected substantial financial flexibility to meet debt service payments, that is not already captured in the debt service coverage ratio More limited financial flexibility to meet debt service payments than is suggested by the debt service coverage ratio
The debt is exposed to unhedged interest rate risk
We assess that atypical structural features may negatively affect recoveries following a default

13. We generally calculate the DSC ratio for the assessment in Table 1 as adjusted net cash flow divided by maximum annual debt service (MADS). However, if a development is in a ramp-up phase, and we have assessed that construction risk is fully mitigated, we generally calculate the DSC ratio with current net cash flow divided by current actual debt service, but may also consider our projection for net cash flow during the outlook period, divided by MADS.

14. Finally, we may apply adjustments to arrive at the initial coverage factor assessment, if relevant. The examples of adjustments in Table 1 do not have specific numeric weights and generally would not change the initial coverage factor assessment by more than one assessment level each, or two assessment levels for cumulative adjustments.

Determining the initial coverage factor assessment for multifamily loan pools

15. Multifamily loan pools generally include overcollateralization, in particular as a mitigant to credit risk on the underlying loans. Our analysis compares available overcollateralization to a credit loss assumption that reflects loan concentration and pool characteristics. We assume a higher credit loss at stronger assessment levels: The initial coverage factor assessment is the strongest assessment level at which available overcollateralization is sufficient to cover this credit loss assumption (i.e., assets exceed liabilities after subtracting the relevant credit loss assumption).

16. We assess available overcollateralization at the level of the indenture (in the case of managed pools) or transaction (in the case of static pools). We generally measure available overcollateralization as the lower of: the current (or opening) asset-to-liability parity ratio; and the minimum projected asset-to-liability parity ratio, based on our review of cash flow scenarios to ensure that pledged assets are sufficient to cover liabilities and able to withstand stress scenarios. The relevant cash flow scenarios are described in "Criteria Guidance: Cash Flow Scenarios And Assumptions For U.S. Public Finance Housing Bonds," published Sept. 4, 2019.

17. We compare available overcollateralization to our credit loss assumption for each assessment level, in order to determine the strongest assessment level at which available overcollateralization is sufficient to cover our credit loss assumption. Our calculation of the credit loss assumption for each assessment level starts with a base assumption, which reflects a typical diversified affordable multifamily loan pool. Table 2 shows the base credit loss assumption commensurate with each initial coverage factor assessment. We then apply adjustments to this base credit loss assumption, where applicable and as described below, before determining the strongest assessment level supported by available overcollateralization.

Table 2

Base Credit Loss Assumptions For Multifamily Loan Pools
Coverage factor assessment Base credit loss for a typical affordable multifamily loan pool (before adjustments; as % of loan pool balance)
1 10.00
1.5 8.75
2 7.50
2.5 6.25
3 5.00
3.5 3.75
4 2.50
4.5 1.25
5 0.00

18. As the base credit loss assumptions in Table 2 reflect a diversified pool, we apply an upward adjustment to capture loan concentration risks in more concentrated pools. Specifically, we set a loan concentration threshold of 5% of the total loan pool balance. For each loan in a pool, we apply the base credit loss assumption on the balance of the loan that is up to this threshold. For any loan balance that exceeds the threshold, we apply an additional multiple to the excess balance. The applicable multiple varies with the creditworthiness of each loan, measured by the loan's DSC ratio, as shown in Table 3. We would then calculate the balance-weighted average credit loss assumption for the loan pool.

Table 3

Determining The Concentration Risk Multiple
Loan DSC band* Concentration risk multiple applied to the loan balance exceeding the concentration threshold
>= 2.0x 1.5x
[1.50 - 2.0x) 2.0x
[1.25x - 1.50x) 2.75x
[1.10 - 1.25x) 3.75x
[1.00 - 1.10x) 5.0x
Below 1.0x 10.0x
*The symbol "[" denotes the inclusion of the first data point in the range, and the symbol ")" denotes the exclusion of the last data point in the range.

19. The following example considers the calculation of the credit loss assumption for a "very strong" assessment level. The base credit loss assumption for a "very strong" assessment level is 10% (as per Table 2). For all loans in a pool with a balance up to 5% of the loan pool balance, we would apply the base credit loss assumption of 10%. If a pool includes one loan representing 25% of the loan pool balance, we would apply the base credit loss assumption of 10% to the balance of this loan that is below the 5% threshold. For the excess amount (20% of the loan pool balance), we would apply a multiple that is dependent on the loan's DSC. If the loan's DSC is 1.4x, we would apply a credit loss assumption of 2.75 x 10% = 27.5%. Assuming all other loan balances are below the concentration threshold, we would calculate the weighted-average credit loss for the pool as: 80% x 10% + 20% x 27.5% = 13.5% of the loan pool balance. We would assign a "very strong" initial coverage factor assessment if available overcollateralization exceeds 13.5% of the loan pool balance, subject to additional considerations described below.

20. After application of the loan concentration adjustment to the base credit loss assumptions in Table 2, if relevant, we may apply an additional adjustment for pools exhibiting further credit risks or strengths. Specifically, we may adjust the assumed credit loss for the pool at each assessment level, by applying a multiple, generally within a range of 0.8x-1.5x, further to the application of the aforementioned loan concentration adjustment to the base credit loss numbers shown in Table 2.

21. Examples of negative credit factors that lead to an upward adjustment (multiplier above 1.0x) include, but are not limited to:

  • Atypically high weighted-average loan-to-value;
  • Atypically weak historical performance of loans originated by the originator;
  • Atypically low pool weighted-average DSC;
  • High geographical concentration of the pooled assets;
  • Atypical loan provisions that we consider increase risk; and
  • Presence and percentage of construction loans and assessment of construction-related risks.

22. Examples of positive credit factors that lead to a downward adjustment (multiplier below 1.0x) to the base credit loss include, but are not limited to:

  • Atypically low calculated weighted-average loan-to-value;
  • Additional oversight at the loan level that could increase stability and performance (for example, Low Income Housing Tax Credit);
  • Presence of required loan-level reserves, such as operating reserves and repair and replacement funds, that we consider mitigate risk;
  • Atypically strong historical performance of loans originated by the originator;
  • Atypically high pool weighted-average DSC;
  • High geographical diversification of the pooled assets; and
  • Atypical loan provisions that we consider mitigate risk.

23. In some multifamily loan pools, the pool may benefit from credit enhancement in the form of mortgage insurance, government guarantees, or other guarantees. When applicable, we adjust the loss assumption applied to the underlying loans on a per loan basis according to our "Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds", published Dec. 7, 2014.

24. Finally, we may apply a further negative adjustment to the initial coverage factor assessment, if we identify credit risks that we believe are not sufficiently mitigated through overcollateralization. For example, we may apply such an adjustment if we assess that the largest loans in a pool include further significant credit risks, beyond what is captured in the credit loss assumption described above. As a further example, we may apply such an adjustment if we assess that available overcollateralization is limited relative to the balance of nonperforming or poorly performing loans in the pool.

Liquidity reserves analysis (for stand-alone and multifamily loan pool transactions)

25. Our analysis of liquidity reserves focuses primarily on liquidity stemming from legal provisions in the transaction documents and available for debt service payments on the rated bonds. We generally count other sources of liquidity only if those sources are legally pledged and required to be available for debt service payments.

26. We compare available liquidity to the applicable 12 months of debt service--expressed as MADS for stand-alone* transactions and static pools, and expected debt service over the next 12 months for managed pools:

  • We make no adjustment to the initial coverage factor assessment if we assess that liquidity available for debt service is equal to or greater than the applicable 12 months of debt service;
  • We add 0.5 to the initial coverage factor assessment if we assess that liquidity available for debt service is lower than MADS, but equal to or greater than 50% of the applicable 12 months of debt service;
  • We add 1.0 to the initial coverage factor assessment if we assess that liquidity available for debt service is lower than 50% of the applicable 12 months of debt service.

27. If our final coverage and liquidity reserves assessment is "very weak", we cap the anchor in the 'bb' category. If our final coverage and liquidity reserves assessment is "weak" or "weak/very weak", we cap the anchor in the 'bbb' category.

Transactions with multiple tranches of debt

28. For transactions that include multiple classes of debt of varied seniority, we generally assign a separate coverage and liquidity reserves assessment to each class, whereas we generally assign the same management and governance and market position assessments to each class of the same transaction. In determining the coverage and liquidity reserves assessment for each class of a stand-alone transaction, we consider the debt service for that class and any prior or equal ranking class in our calculation of the DSC ratio. For multifamily loan pools, we consider the debt balance of that class and any prior or equal ranking class in our calculation of available overcollateralization. We will also consider the availability of liquidity for each class separately.

Management And Governance

29. The term management and governance encompasses the range of oversight and direction conducted by an entity's owners, board representatives, executives, and functional managers. We assess how management and governance is likely to affect a transaction's ability to service debt over time. Management's strategic competence, operational effectiveness, and ability to manage risks shape the owner's competitiveness in the marketplace and credit profile. If we believe that a borrower is able to manage important strategic and operating risks, and that its management plays a positive role in determining its operational and financial success, then we would likely assess management and governance as "strong" or "very strong." Alternatively, if we believe that management has a flawed operating strategy or is unable to execute its business plan effectively, and its actions would likely substantially weaken the likelihood of sustained success, we would likely assess management and governance as "weak" or "very weak."

30. Overall, the assessment focuses on key parties' (owner, sponsor, developer, manager, servicer, etc., as relevant) effectiveness, involvement, track record, reputation, and quality of financial policies, reports, and disclosures. For multifamily loan pool transactions, our assessment of management and governance generally focuses on transaction-level related parties (state housing finance agencies, master and special servicers, etc.), rather than the property-level parties. This reflects these transactions' dependency on the collective performance of multiple properties controlled by separate owners and managers, and the transaction parties' typical level of due diligence on the property-level parties.

31. Our analysis of management and governance is qualitative, supported by evidence, and considers relative strength compared with that of industry peers. When there is insufficient evidence of characteristics related to a stronger or weaker assessment, we typically assign a score in the middle range (numeric scores of '2.5', '3.0', or '3.5'). However, if a key party fails to disclose material management and governance information, the management and governance assessment is "weak" to "very weak."

32. Key management and governance assessment factors are:

  • Property/Asset management overall operational effectiveness assessment. This evaluates the quality and track record of strategic planning and execution as well as day-to-day operations, competitive position, and sophistication of financial and risk management. We consider operational effectiveness as it relates to the rated transaction as well as other properties with which the management is associated. Where applicable, we consider the board representatives and executives of the management company in the evaluation. We evaluate operational effectiveness in the context of complexity of the transaction.
  • Owner/Sponsor/Related party role, responsibilities, involvement, and incentives in the transaction. We consider their experience with the specific program/property type and their track record in all phases of the transaction (for example, developing, construction, market study, marketing, pricing, maintenance, subsidy renewal, ongoing operations); the level of oversight and incentive for transaction success; and the link to, and support (including formal documentation of such support) from, any related party. We consider the reputation and track record of the owner/sponsor/related party as they relate to the rated transaction as well as to other properties with which the relevant party is associated.
  • Financial policies, reporting, and transparency assessment. We evaluate the completeness, timeliness, accuracy, and transparency of disclosures, financial audits, and communication.

33. The relevance and importance of each factor may differ based on the property type, as well as specific property characteristics. Therefore, our assessment is based on the relative relevance of factors for a given property type, rather than specific weights assigned to each factor.

34. If our final management and governance assessment is "very weak," we cap the anchor in the 'bb' category. If our final management and governance assessment is "weak" or "weak/very weak", we cap the anchor in the 'bbb' category.

Market Position

35. Our market position assessment captures factors that affect the supply and demand dynamics for the rental units of a specific housing development or pool of housing properties.

36. We determine an initial assessment level by assessing each of the following factors:

  • Property-specific characteristics (such as the physical condition of the property, its curb appeal, and occupancy trends); and
  • The demand and supply considerations that may affect the market position of the property or pool of properties (such as property rents versus market rents, trends in target population, and competition).

37. The relevance and importance of each factor may differ based on the property type, as well as specific property characteristics. Therefore, our assessment is based on the relative relevance of factors for a given property type, rather than specific weights assigned to each factor.

38. When applicable, we may modify the initial market position assessment based on the presence of additional positive or negative adjustment factors, such as expected improvement or deterioration in current market position conditions not already captured in the initial assessment or the presence of material and partially mitigated environmental, seismic, or construction risk. The adjustments do not have specific numeric weights and generally would not change the market position assessment by more than one assessment level each, or two assessment levels for cumulative adjustments.

39. The presence of significant unmitigated environmental, seismic, or construction risk results in a market position assessment that is no better than "weak," with the exact assessment depending on our view of the severity of the risk.

DETERMINING THE ANCHOR

40. For both stand-alone and pool transactions, we derive the anchor by calculating the weighted-average score of the three key assessments (coverage and liquidity at 50%; management and governance at 30%; and market position at 20%) and applying the anchor listed in Table 4.

Table 4

Determining The Anchor
Weighted-average factor score Anchor
1.00-1.30 aaa
1.30-1.60 aa+
1.60-1.90 aa
1.90-2.20 aa-
2.20-2.50 a+
2.50-2.80 a
2.80-3.10 a-
3.10-3.40 bbb+
3.40-3.70 bbb
3.70-4.00 bbb-
4.00-4.25 bb+
4.25-4.50 bb
4.50-4.75 bb-
4.75-5.00 b category

41. When the weighted-average factor score falls at or near a cutoff, we generally assign the higher anchor if credit trends are improving or we believe performance will improve, and the lower anchor if credit trends are declining or we believe performance will weaken. For scores greater than 4.75, we determine the anchor within the 'b' category based on our views of the relative strengths and weaknesses of the obligation and whether trends and performance are stable, declining, or improving. Ratings below the 'b' category are based on other criteria, such as "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012.

OVERRIDING FACTORS, CAPS, AND HOLISTIC ANALYSIS

42. The overriding factors and caps in Table 5 apply after arriving at the anchor. If several factors apply to any given transaction, we adjust the rating to account for the lowest applicable cap or override. Caps are absolute where the final rating can only exceed the cap through application of holistic analysis as explained below. We may, however, select a rating level below the cap or apply stronger overrides through additional downward notching to reflect further weakness. For example, if the transaction's initial coverage factor assessment is already "very weak," and we assess that liquidity risk would otherwise lead to an additional negative adjustment to the coverage and liquidity reserves assessment, we could apply additional downward adjustments below the 'bb' category rating cap.

Table 5

Overriding Factors And Caps Applied To The Anchor
Factors that cap the anchor in the 'b' category
There is perceived lack of willingness to honor the obligation(s) in full and on a timely basis.
Our calculation of the debt service coverage ratio is below 1.0x.
Factors that cap the anchor in the 'bb' category
Coverage and Liquidity Reserves assessment of "very weak".
Management and Governance assessment of "very weak".
Factors that cap the anchor in the 'bbb' category
Coverage and Liquidity Reserves assessment of "weak" or "weak/very weak".
Management and Governance assessment of "weak" or "weak/very weak".  
Factors that generally would notch the anchor up
Extraordinary strong coverage, which we generally consider to be a DSC ratio in excess of 4x for stand-alone transactions, or an asset-to-liability parity ratio in excess of 200% for multifamily loan pools, on a forward-looking basis. The anchor would be notched up by generally one notch.
Factors that generally would notch the anchor down
A government subsidy supporting the rental income for a standalone affordable housing property is subject to renewal risk prior to final maturity (for example, the renewal of a Housing Assistance Payments contract for a section 8 property). The anchor would be notched down by generally up to two notches, depending on our view of the particular situation, including the length of time until the next renewal, the likely frequency of renewals prior to maturity, reauthorization history, and our opinion regarding any factors that could affect the likelihood of renewal.
Holistic analysis

43. A holistic analysis is considered after applicable overriding factors and caps to help capture a broader view of creditworthiness. The holistic analysis can have a one-notch impact up or down, and is not limited by any credit specific caps or overrides. It can also result in no rating change at all. The analysis may be based on credit risk factors including our forward-looking view of operating and financial performance, if not already incorporated in the anchor. It may also reflect a comparable ratings analysis, or transaction-specific strengths or weaknesses that are not fully reflected through the application of the methodology.

THE USE OF OTHER APPLICABLE CRITERIA

44. When applicable, we factor in the influence of other criteria to arrive at the final rating. In particular, we apply additional criteria (see "Related Criteria") where relevant to analyze U.S. sovereign risk, financial counterparty risks, operational risk, insurance, and eligible investments.

APPENDIX A: GLOSSARY

45.*Affordable housing.   Properties where low-income households occupy a minimum percentage of units, consistent with the requirements under the U.S. tax code for "qualified residential rental property." Affordable housing includes both developments that benefit from support in the form of federal rental subsidy and those that are reliant solely on tenant rent.

46.*Age-restricted independent-living rental housing.   Age-restricted residential rental properties that also provide access to services such as central dining, housekeeping, dressing, etc. These properties do not include either skilled nursing or a majority of units that provide supervision of medication, bathing, activities of daily living, etc.

47.*Age-restricted assisted-living rental housing.   State-regulated residential rental properties that provide the same services as independent living properties but provide, in a majority of units, supportive care from trained employees to residents who need assistance with activities of daily living. These properties may also include wings or floors dedicated to residents with Alzheimer's or other forms of dementia.

48.*Asset-to-liability parity.   The ratio of total assets to total liabilities, where total assets typically include but may not be limited to, mortgage loans, revenues, investments, reserves, and other fund balances, and total liabilities typically include the amount of debt outstanding in a given period and accrued interest. Asset-to-liability parity of over 100% indicates overcollateralization or net assets.

49.*Multifamily loan pools.   Pools of otherwise unrelated affordable multifamily rental housing loans, generally with different owners, securitized and pledged to make debt service payments on issued bonds. These affordable multifamily housing loan pools are generally backed by multiple loans that are diversified by loan count, guarantee or subsidy (if any), ownership, and/or geographic location.

50.*Privatized military housing.   Properties affiliated with military bases, located in the U.S. and U.S. territories, where active military personnel receive a federally appropriated basic allowance for housing. The privatized military housing developments may be on- or off-base as long as there is a clear and measurable link with the U.S. military and related base.

51.*Stand-alone transactions.   Transactions characterized by a single-property loan or by multiple cross-collateralized/cross-defaulted loans associated with multiple properties but with common ownership.

CHANGES FROM PREVIOUS CRITERIA

52. The primary purpose of the methodology update is to recalibrate our rating analysis, following observed volatility and sharp deterioration in creditworthiness within subsectors of the issues in scope. While the methodology focuses on the same key factors as our previous criteria, it includes the following key changes:

  • A recalibration of our approach to DSC, in particular through the revision of DSC ratio ranges and the introduction of new adjustments, for example, for cash flow volatility or liquidity risks. The use of MADS in the DSC calculation captures overall indebtedness of the transaction and the use of the volatility adjustment captures expectations of relative cash flow stability or volatility.
  • A focus on borrower default risk, whereas our prior methodology focused on property liquidation value determined according to our commercial mortgage-backed securities criteria framework. This is because liquidations are rare for the property types in scope of these criteria, such that we consider characteristics that increase or mitigate borrower default risk are the most relevant differentiators of credit risk.
  • A more flexible approach to the analysis of a property's market position and of management and governance, which we believe better captures nuances across different property and transaction types.

IMPACT ON OUTSTANDING RATINGS

53. S&P Global Ratings maintains approximately 240 ratings on rental housing bonds included in the scope of this methodology. Assuming that the obligations maintain their current credit characteristics, testing indicates that approximately 50% of the ratings would be unchanged, up to approximately 15% would be raised, generally by one notch, and up to 35% would be lowered, generally by no more than three notches, and in rare cases, up to six notches. We expect downgrades primarily among stand-alone transactions backed by affordable multifamily housing and age-restricted housing. Ratings most likely to be lowered due to our change in methodology are those on transactions where deteriorating financial performance has led to a tight DSC ratio, as well as those backed by smaller-scale properties. At the time of publication, we are monitoring developments related to COVID-19, which may affect the credit characteristics of some obligations in scope of this methodology, as discussed in "Credit FAQ: How S&P Global Ratings' Revised Criteria Look At U.S. Public Finance Rental Housing Bonds," published April 15, 2020.

RELATED PUBLICATIONS

Fully Superseded Criteria
  • Rating Methodology And Assumptions For Affordable Multifamily Housing Bonds, June 19, 2014
Related Criteria
  • Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness, Nov. 20, 2019
  • Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
  • Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
  • Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds, Dec. 7, 2014
  • Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
  • Insurance Criteria For U.S. And Canadian CMBS Transactions, June 13, 2013
  • Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
  • Federal Future Flow Securitization, March 12, 2012
  • Methodology: Definitions And Related Analytic Practices For Covenant And Payment Provisions In U.S. Public Finance Revenue Obligations, Nov. 29, 2011
  • Principles of Credit Ratings, Feb. 16, 2011
  • Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
  • Assessing Construction Risk, June 22, 2007
Related Guidance
  • Guidance: Methodology For Rating U.S. Public Finance Rental Housing Bonds, April 15, 2020
  • Criteria Guidance: Cash Flow Scenarios And Assumptions For U.S. Public Finance Housing Bonds, Sept. 4, 2019
Related Research
  • Credit FAQ: How S&P Global Ratings' Revised Criteria Look At U.S. Public Finance Rental Housing Bonds, April 15, 2020
  • Criteria And Guidance: Understanding The Difference, Dec. 15, 2017

This report does not constitute a rating action.

The proposed criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Once proposed criteria become final, their use is determined by issuer- or issue-specific attributes as well as our assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment.

Analytical Contacts:Joan H Monaghan, Centennial + 1 (303) 721 4401;
Joan.Monaghan@spglobal.com
Marian Zucker, New York (1) 212-438-2150;
marian.zucker@spglobal.com
Raymond S Kim, New York (1) 212-438-2005;
raymond.kim@spglobal.com
Criteria Contacts:Olga I Kalinina, CFA, New York (1) 212-438-7350;
olga.kalinina@spglobal.com
Andrew O'Neill, CFA, London (44) 20-7176-3578;
andrew.oneill@spglobal.com
Andrea Quirk, London (44) 20-7176-3736;
andrea.quirk@spglobal.com

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