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U.S. Rental Housing Bond Ratings UCO Follow-Up: Section 8 And Seniors Housing Transactions Are Most Affected

On April 15, 2020, S&P Global Ratings published its Rental Housing Bonds (RHB) criteria, superseding its Affordable Multifamily Housing Bonds criteria. Subsequently, we published a list of 110 ratings placed under criteria observation (UCO) (see "Certain U.S. Rental Housing Bonds Ratings Placed Under Criteria Observation Following Criteria Revision," published May 1, 2020. In third-quarter 2020, we completed our review of these ratings.

At the time of the criteria publication, we expected the effect on the ratings to be as follows:

  • 17% raised,
  • 42% affirmed or lowered by one notch,
  • 41% lowered by two or more notches.

Criteria Application Results

As of Oct. 30, 2020, 107 of the 110 ratings are still outstanding. We withdrew the ratings on two age-restricted projects after the transactions defaulted, and withdrew one rating as a result of the transaction's refinancing. We took the following actions on the rest:

  • 15% raised,
  • 55% affirmed or lowered by one notch,
  • 30% lowered by two or more notches.

Chart 1


We expected downgrades would be concentrated primarily in stand-alone transactions backed by unenhanced affordable multifamily and age-restricted housing and where deteriorating financial performance led to a tight debt service coverage (DSC) ratio, as well as those backed by smaller-scale properties (generally fewer than 300 units).

Section 8 And Age-Restricted Affordable Housing

While there were downgrades across numerous transaction types, the largest magnitude occurred in Section 8 and age-restricted affordable housing projects. We downgraded several of these more than one rating category. In all instances of these multinotch downgrades, we observed additional and severe deterioration of credit characteristics compared with the previous reviews, where the application of the RHB criteria often directly contributed to the downgrade but was not the only factor. This was particularly the case for age-restricted properties, as the coronavirus is disproportionately harmful to the elderly; at these properties, operating expenses rose and effective gross income fell. The RHB criteria provide for a negative adjustment where cash flow volatility is observed, which has been the case in many of these transactions. Of the 14 downgrades to Section 8 transactions, seven were due to weaker financial performance in fiscal 2019. The remainder reflected our volatility adjustments, liquidity scores, or asset quality assessments under the RHB criteria.

Under the RHB criteria, our assessment assigns the most weight (50% of its total score) to a transaction's coverage and liquidity, which reflects a project's ability to withstand declines in net cash flow as well as the resources available to pay debt service in the event of financial stress. Downgrades were also evident in the senior tranche of multiclass transactions where the senior tranche was structured without a dedicated debt service reserve fund, limiting the liquidity assessment.

Other transactions performed better than expected under the new criteria. Of the 16 that performed better than the predicted two-or-more-notch downgrade, we affirmed our ratings on six and downgraded 10 by one notch.

Before criteria application, the median rating on the obligors/transactions placed on UCO was 'BBB+'; the current median rating is lower by one notch at 'BBB' (see chart 2). The median rating on Section 8 obligors was lowered two notches to 'BB+' from 'BBB' (chart 3); the median rating on age-restricted obligors fell by three notches to 'B+' from 'BB+' (chart 4).

Chart 2


Chart 3


Chart 4


Military Housing

We placed 24 ratings on 13 military housing transactions on UCO. After our review, we affirmed eight of those ratings, lowered six, and raised 10 (see chart 5).

Chart 5


As of April 1, 2020, seven of the 10 raised ratings carried a positive outlook, due to increasing DSC and improving rates in their basic allowance for housing (BAH), the housing payment that military service members receive as a component of their compensation. The three remaining upgrades were also related to improving DSC and positive occupancy trends, such as the planned transfer of Army personnel from foreign installations to Fort Knox.

We lowered six ratings in part due to the recalibration of our coverage bands, where projects with DSC above 2x receive a score of very strong, and projects with DSC between 1.5x and 2x receive a score of strong. We classify projects with DSC between 1.25x and 1.50x as adequate. One of the projects downgraded the most, to 'A' from 'AA', was West Point Housing. The project's DSC had declined significantly, to 1.29x in 2019, after reporting average DSC of about 1.82x in the previous two fiscal years.

Criteria Application To The Remainder Of The Rental Housing Group

We have also completed reviews of some of the remaining transactions and not surprisingly, we expect fewer upgrades and more downgrades, primarily due to the social and economic effects of the COVID-19 pandemic. The CARES Act and subsequent eviction moratorium have allowed tenants to remain in their units even when they are unable to pay their rent. While this should not affect properties with rental support such as Section 8 or military housing issuers, it may strain the ratings on other entities. Where historical performance might have previously indicated a potential upgrade under the new criteria, for many entities, current conditions and performance now constrain the ratings. As we did in April, we anticipate the least impact on ratings on managed pools of multifamily affordable housing loans (see chart 6).

Chart 6


This report does not constitute a rating action.

Primary Credit Analysts:Joan H Monaghan, Centennial + 1 (303) 721 4401;
Marian Zucker, New York + 1 (212) 438 2150;
Secondary Contacts:Raymond S Kim, New York + 1 (212) 438 2005;
Jessica L Pabst, Centennial + 1 (303) 721 4549;

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