- We have reviewed all ratings placed under criteria observation following the release of our Rental Housing Bonds criteria, published April 15, 2020.
- Overall, the direction of rating actions has met our expectations, though the magnitude of negative rating actions was more muted than expected.
- The rating actions with the largest magnitude occurred in Section 8 and age-restricted housing projects.
- Upgrades were concentrated in mobile home parks and subordinate classes of military housing.
- While application of the criteria resulted in material rating actions in the sector, we expect far greater rating stability under the new framework.
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.
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).
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).
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).
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;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.