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U.S. Housing Finance Agency Ratings Hold Strong Despite Pandemic Pressure

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Rating actions for U.S. state housing finance agencies (HFAs) have been a mixed bag in 2020 and 2021 to date, with mostly positive movement. Since S&P Global Ratings' previous report card, "What A Difference A Decade Makes: Housing Finance Agency Rating Stability In Uncertain Times," published Oct. 26, 2020, on RatingsDirect, we raised one HFA issuer credit rating (ICR) to 'AA-' from 'A+' (Colorado Housing and Finance Agency); and revised three outlooks to positive from stable(the District of Columbia HFA, Virginia Housing Development Authority, and Utah Housing Corp.). During the same period, we downgraded one HFA, the Michigan State Housing Development Authority (MSHDA), to 'AA-' from 'AA'. In the case of the Colorado Housing and Finance Agency, five years of consecutive growth in leverage ratios, combined with strength in profitability and liquidity as well as very strong management and governance, resulted in the upgrade. The three agencies that saw an outlook revision to positive exhibited similar trends leading up to the revision: steadily increasing equity and improving asset quality.

The sole downgrade of 2020, despite the timing, was neither COVID-19-related nor attributable to other exogenous pressures. Rather, the one-notch downgrade of MSHDA followed years of marginally thinning equity, a byproduct of the authority's growth strategy in pursuit of its social mission. As the authority significantly expanded its single-family loan portfolio in recent years through regular bond issuances--culminating in a single-family mortgage loan balance in 2020 that had grown more than 105% since 2016--total net debt outstanding increased by 62%. While we believe this growth has been instrumental in the achievement of MSHDA's mission to deliver quality, affordable housing to the residents of the State of Michigan, the sustained contraction of key leverage ratios such as total and net equity to total assets to levels below our criteria benchmarks, together with profitability and asset quality metrics that exhibited some variability, weakened our view of MSHDA such that it more closely aligns with 'AA-' rated peers.

Chart 1

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Chart 2

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The Pandemic Brought Both Pressure And Relief To The Affordable Housing Sector

Unlike the Great Recession, the pandemic-induced recession was not solely bad news for the housing sector and HFAs. Remote work, demographics, and low interest rates drove demand for single-family homeownership and HFA mortgage products, direct federal support to individuals helped avert massive missed mortgage and rent payments, and added funding for the Emergency Rental Assistance program and Homeowner Assistance Fund, once fully deployed, should help alleviate the somewhat elevated delinquency.

Higher Home Prices Present Opportunities And Challenges

Housing prices soared in most markets, as the desire for single-family homes pushed housing sales to their highest since 2006. This demand, coupled with a limited supply and low interest rates, also pressured nationwide home prices, which grew by 13.2% in March 2021 compared with 4.6% in the first quarter of 2020, according to the S&P CoreLogic Case Schiller index. This price increase has threatened affordability, with some HFAs reporting a decline in applications as first-time buyers are priced out of the market. This may provide a silver lining for those homeowners unable to resume their mortgage payments, by creating added equity that can cover their missed payments and mitigate losses, akin to what occurred during the Great Recession.

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Financial Metrics Held Steady In 2020

HFAs navigated the challenges of 2020 with little erosion in balance sheets and key credit metrics. The CARES Act provisions allowing nonpayment of mortgages or rents clearly posed a challenge to mission-driven lenders whose low- and moderate-income customers were more likely to face employment pressure during the worst of the pandemic. Although single-family delinquencies have increased, they are nowhere near Great Recession levels.

Despite the substantial financial headwinds, HFAs reported growth in equity and assets for the seventh consecutive year in 2020, with mixed performance in other key HFA ICR ratios: profitability, asset quality, and liquidity. This report card includes such information for each of the 23 HFAs that we rate. We note that the financial analysis for some HFAs may have been updated and that average metrics may differ from our previous report card.

Equity and assets break records once again

We calculate average HFA equity as $1.02 billion in 2020, compared with $948 million in 2019--a 7.6% increase. This outpaced growth in the average HFA asset base, which increased by 6.7% year over year to $3.8 billion amid the expansion of loan and investment portfolios. Accordingly, average total equity to total assets improved to 31.3% in 2020, continuing a trend of stability and modest growth from 2019 (30.9%) and 2018 (30.5%). Although the forward sale of loans in the to-be-announced (TBA) market continues to be a popular strategy for some rated HFAs looking to bolster short-term profitability, many have aimed to balance TBA sales with the retention of whole loan or mortgage-backed security (MBS) assets on their respective balance sheets. Furthermore, some agencies that have utilized a MBS strategy throughout the post-recession era have recently pursued the addition of whole loan assets. Regardless of strategy, much loan portfolio growth was debt-financed in 2020, translating to an average debt-to-equity ratio that marginally increased to 238% from 235% yet remained below the 241% of 2016. We expect that HFAs will continue to improve their balance sheets in the near term, through debt financing or otherwise, but that proportionately larger growth in equity will strengthen leverage ratios.

Chart 3

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Fluctuating profitability trends add volatility

Return on average assets (ROA) demonstrates the effectiveness of an HFA's assets to generate income, in our view, and has largely trended upward since 2010--more than doubling since 2014. However, concurrent with the growth in HFA asset bases, an 8.8% contraction in average net income culminated in a decline in average ROA to 1.57% in 2020 from a recent peak of 1.7% in 2019, continuing a four-year trend of oscillating increases and decreases. Although we attribute much of the improvement in ROA over the past decade to reductions in HFA asset bases, factors also include diversification of income and high one-time premiums from the sale of assets in the secondary TBA market. In 2020, softer loan and investment income resulting from pandemic-related interest rate compression uniquely challenged net income and therefore ROA.

Chart 4

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In 2020, the average HFA net interest margin (NIM)--the profitability indicator of an HFA's core lending activity--decreased for the first time in a decade, to 1.6% from the record 1.8%. Nevertheless, we believe interest margins remain strong for the sector and indicate the diversified funding sources for HFAs, including the broader use of taxable financing at very low interest rate spreads when compared with tax-exempt financing. HFAs still use on-balance-sheet lending as a primary income source, supporting a strong NIM, and we expect this will remain the case in the near term.

Chart 5

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Asset quality is resilient in the face of COVID

The average loan balance on HFA balance sheets grew to $2.3 billion in 2020 from $2.2 billion in 2019. For most rated HFAs, this loan balance includes a mix of single-family and multifamily loans. However, as a result of pandemic-related pressures on borrowers and renters alike, the nonperforming assets ratio (the percentage of loans and real estate owned more than 60 days delinquent and in foreclosure) spiked to nearly 3% in 2020 from a 10-year low of 1.9% in 2019. This average remained far below the levels seen in the Great Recession, largely as a result of the higher degree of agencies that utilize an MBS asset-based strategy in lending programs and are thus shielded from realizing losses. Agencies with whole-loan-based single-family programs bore the brunt of the higher rates of delinquency and forbearance in 2020, yet still avoided the heights seen in the post-recession era.

The strong loan-level underwriting and required reserves in HFA programs have helped keep many multifamily borrowers current during the eviction moratorium since March 2020. Generally, delinquencies in multifamily portfolios have remained in line with historical levels. HFAs received a small percentage of requests and entered into forbearance on very few loans in their multifamily portfolios, many of which have since resumed regular payments. Furthermore, the multilayered financing structures for multifamily properties as well as federal enhancement of multifamily loans provide additional safeguards to HFA multifamily resolution ratings.

Chart 6

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Liquidity strategies still vary, but short-term investments remain central

Continued diversification of HFA programs in recent years has improved liquidity ratios overall, as measured by total loans to total assets and by short-term investments to total assets. Total loans to total assets decreased for the sixth consecutive year to 62.3% in 2020, from 63.3% in 2019. The ongoing decline is primarily due to the post-recession shift toward MBS origination, but has slowed in recent years, resulting from increases in whole loans. As a result of differences in HFA portfolio composition and overall strategy, this ratio has varied greatly across rating categories (see table 1) and is not the sole determinant of our view of liquidity. Other factors such as the ratio of short-term investments to total assets, asset-to-liability management, investment portfolios, liquidity policies, internal and external liquidity sources, and market access are also important.

Chart 7

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Short-term investments to total assets again increased in 2020, to 16.9%, as HFAs held more in cash and investment portfolios amid pandemic-related uncertainty, but remained within the recent historical range of 15% to 17%.

Chart 8

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Environmental, Social, And Governance (ESG)

As the intersection between ESG factors and credit ratings becomes an ever-increasing focus in the municipal market, many HFAs have responded by issuing sustainable or social impact bonds that meet certain ESG criteria. Our view of ESG risks for HFA ICRs includes an HFA's financial strength, management, legislative mandate, and the local economy.

Environmental risks are generally diversified, with case-by-case adjustments

We evaluate short- or long-term environmental risks in the state, as well as whether location concentration in the HFA's portfolio exposes it to short- or long-term environmental risks. We generally view HFAs as having diversified portfolios, but may consider on a case-by-case basis adjustments to the credit analysis of HFA loan portfolios for geographic concentration in cities or with higher environmental vulnerabilities that could affect portfolio performance.

Financial strength somewhat mitigates elevated social risks resulting from COVID-19

Among the social factors that we consider in HFA ICRs are economic trends that either weaken or bolster equity or profitability, unemployment levels affecting delinquencies, real estate market volatility and housing affordability, economic concentration, loan portfolio characteristics that may expose the HFA to changing social behavior, and alignment of the HFA's social purpose with its mission and strategic initiatives. We view health and safety risks related to the COVID-19 pandemic as social risks that are elevated in the near term given the pandemic's broad economic impact, its effect on unemployment, and the greater likelihood of nonpayment of rent and mortgages. As described throughout this report, the increased federal funding support to individuals and emergency rental and homeowner relief as well as the financial strength that HFAs have built since the Great Recession somewhat insulate them from near-term financial pressures related to the pandemic.

Governance: A key factor in rating stability

Our governance factors include key oversight measures (or lack thereof) that contribute to stability of an HFA's business model; whether qualifications and management experience are matched with an HFA's risk profile; evidence of strategic execution of an HFA's legislative mandate and mission as well as level of support of the state government; federal, state, or legislative actions affecting management's autonomy; and factors that have contributed to an HFA's ability to build or maintain equity or profitability through various economic cycles.

In our view, governance continues to be a critical driver of HFA rating stability. It is clear that lessons learned in the Great Recession prepared HFA management teams in many ways for the challenges that the COVID-19 pandemic presented. Adept at long-term financial planning, HFA management teams have prioritized equity preservation and strengthened intrinsic liquidity for when they need it most. Some HFAs have benefited from forbearance experience given mortgage relief programs after natural disasters, mitigating operational risk during the foreclosure moratorium period. The vast majority of rated HFAs also maintain cyber insurance and have upgraded systems and implemented trainings to safeguard against cyberattacks.

The Road To Recovery Is Long And Bumpy

Our latest economic report, "U.S. Real-Time Data: The Economy Hits A Speed Bump," published Sept. 13, 2021, attributes the slowdown in U.S. economic activity to persistently elevated COVID-19 cases. However, according to the report, the pace of vaccinations doubled to an average of about 1 million doses per day in early September from a low of 500,000 per day in late July.

Despite the slowing general economic recovery, we believe that federal enhanced unemployment support and stimulus checks, as well as some states' use of CARES Act funds to assist homeowners, have helped many households sustain their housing payments. Additionally, we expect the approximately $56 billion of direct federal funding from the U.S. Treasury's Emergency Rental Assistance Program and Homeowner Assistance Fund to support stable loan performance in HFA portfolios. Furthermore, the potential $1 trillion in infrastructure investment proposed by the Biden administration would provide a much-needed boost to help speed up the return to pre-pandemic economic growth, in our opinion. (See "How U.S. Infrastructure Investment Would Boost Jobs, Productivity, And The Economy," published Aug. 23, 2021).

The upcoming fiscal 2021 will undoubtedly show the pandemic's longer-term effects on HFA financial statements. Coming out of the foreclosure moratorium, we expect higher prepayments given impending foreclosures and loan modifications in HFA portfolios, which may affect interest income in fiscal years 2021 and 2022. We expect nonperforming assets to trend lower, although profitability may move in a manner similar to the current trend given the lengthened moratoria in 2021. In our view, the strength of HFA balance sheets should help keep ratings steady while the nation slowly recovers. Thus, we expect the majority of HFA ICRs to be unchanged in 2022 and remain in the 'AA' rating category given proactive management, prudent underwriting, risk mitigation, and sufficient financial cushion built over the past decade.

Table 1

U.S. Housing Finance Agency Ratios By Rating
AAA AA+ AA AA- A+ A All (average)
Equity (%)
Total equity/total assets
Five-year average (2016-2020) 55.2 36.2 30.8 24.1 26.0 29.6 30.4
2020 56.2 33.9 29.9 29.5 24.1 N/A 31.3
2019 57.1 35.4 30.6 26.8 24.6 N/A 30.9
2018 57.9 42.8 29.9 22.7 30.3 25.7 30.1
2017 53.5 35.1 32.3 21.5 26.0 35.7 30.6
2016 51.5 34.0 31.4 20.2 25.0 27.5 29.3
Total equity and reserves/total loans
Five-year average (2016-2020) 85.8 56.3 57.4 54.5 50.8 57.2 56.0
2020 88.1 49.5 62.2 70.9 52.5 N/A 62.7
2019 87.7 51.5 61.7 60.5 64.2 N/A 60.4
2018 88.5 65.2 57.1 53.7 51.0 52.3 55.5
2017 84.3 59.4 53.6 47.1 44.5 70.8 52.4
2016 80.6 55.8 52.4 40.2 41.9 48.5 48.9
Profitability (%)
Return on average assets
Five-year average (2016-2020) 1.7 1.1 1.2 1.6 2.7 3.1 1.5
2020 1.7 1.1 1.2 1.9 2.8 N/A 1.6
2019 2.0 1.4 1.5 1.7 3.1 N/A 1.7
2018 1.8 1.0 1.2 1.6 3.2 2.8 1.4
2017 1.6 1.0 1.2 1.7 3.0 3.3 1.5
2016 1.4 1.0 1.0 1.2 1.4 3.3 1.2
Return on assets before loan loss provision and extraordinary item
Five-year average (2016-2020) 1.9 1.1 1.3 1.7 2.7 3.0 1.6
2020 1.8 1.1 1.2 2.0 2.6 N/A 1.6
2019 2.2 1.3 1.6 1.8 3.0 N/A 1.7
2018 2.2 1 1.2 1.8 3.3 2.3 1.6
2017 1.7 0.9 1.2 1.7 3 3.5 1.6
2016 1.6 1 1.1 1.1 1.4 3.3 1.2
Net interest margin (%)
Five-year average (2016-2020) 2.7 1.9 1.4 1.7 1.5 0.7 1.6
2020 2.7 1.8 1.3 1.8 0.9 N/A 1.6
2019 2.9 2.0 1.3 1.9 1.5 N/A 1.8
2018 2.7 1.8 1.5 1.7 1.6 0.8 1.6
2017 2.7 1.9 1.4 1.6 1.7 0.8 1.6
2016 2.6 1.9 1.4 1.4 1.9 0.6 1.5
Asset quality (%)
NPAs/total loans and real estate owned
Five-year average (2016-2020) 4.3 2.2 2.2 3.1 1.6 N/A 2.4
2020 7.7 2.9 1.9 3.5 1.2 N/A 3.0
2019 3.1 1.5 1.8 2.6 0.4 N/A 1.9
2018 3.0 1.5 2.5 3.1 1.7 N/A 2.4
2017 3.5 2.7 2.2 3.0 2.0 N/A 2.3
2016 4.4 2.6 2.8 3.2 2.8 N/A 2.7
Loan loss reserves/total loans
Five-year average (2016-2020) 15.8 3.3 6.5 3.2 1.2 N/A 4.8
2020 15.8 4.5 6.3 3.3 0.3 N/A 5.1
2019 15.9 5.5 6.2 3.1 0.1 N/A 4.8
2018 16.2 2 6.8 3.4 1.8 N/A 4.7
2017 15.6 2.1 6.4 3.2 1.7 N/A 4.5
2016 15.2 2.2 6.7 3.3 1.9 N/A 4.7
Loan loss reserves/NPAs
Five-year average (2016-2020) 408.6 627.8 207.1 226.0 83.5 N/A 305.3
2020 204.9 1524.5 67.5 92.3 23.0 N/A 395.2
2019 510.5 717.2 136.2 130.7 34.7 N/A 287.0
2018 541.5 310.1 247.2 290.1 140.5 N/A 280.7
2017 447.5 300.8 266.5 339 112 N/A 285.8
2016 338.5 286.2 317.9 278.2 107.3 N/A 277.9
Liquidity (%)
Total loans/total assets
Five-year average (2016-2020) 78.8 69.8 64.8 57.5 58.7 52.1 64.5
2020 77.8 74.9 61.0 54.6 58.5 N/A 62.3
2019 79.6 75.8 61.4 57.4 54.0 N/A 63.3
2018 80.2 70.1 64 55.9 59.7 49.1 63.8
2017 77.9 63.7 68.8 58.4 59.6 50.4 66.1
2016 78.7 64.5 68.7 61.4 61.7 56.8 67.1
Short-term investments/total assets
Five-year average (2016-2020) 7.0 12.0 16.9 17.4 23.3 33.3 16.6
2020 7.4 14.6 17.4 18.7 19.8 N/A 16.9
2019 6.5 12.9 17.8 16.9 24.4 N/A 16.5
2018 7.7 9.7 17.3 18.5 21.1 36.7 16.8
2017 7.0 10.9 16.3 16.3 25.4 34.5 16.5
2016 6.6 12.1 15.8 16.5 25.6 28.6 16.2
NPA--Nonperforming assets. N/A--Not appicable; there were no outstanding ratings at that level in that year.

Table 2

U.S. Housing Finance Agency Issuer Credit Rating And Outlook History
2016 2017 2018 2019 2020 2021 YTD
Alaska Housing Finance Corp. AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable
Arkansas Development Finance Authority AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
California Housing Finance Agency A/Positive A/Positive A+/Positive AA-/Stable AA-/Stable AA-/Stable
Colorado Housing and Finance Authority A/Stable A/Positive A+/Stable A+/Stable A+/Stable AA-/Stable
District of Columbia Housing Finance Agency A/Stable A/Stable A/Positive A+/Stable A+/Stable A+/Positive
Illinois Housing Development Authority AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable
Iowa Finance Authority AA/Positive AA/Positive AA/Positive AA+/Stable AA+/Stable AA+/Stable
Kentucky Housing Corp. AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable
Massachusetts Housing Finance Agency AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable
Michigan State Housing Development Authority AA/Stable AA/Stable AA/Stable AA/Stable AA-/Stable AA-/Stable
Minnesota Housing Finance Agency AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable
Missouri Housing Development Commission AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable
Nebraska Investment Finance Authority AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
Nevada Housing Division AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
New Jersey Housing and Mortgage Finance Agency AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
New York City Housing Development Corp. AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
Pennsylvania Housing Finance Agency AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable
Rhode Island Housing and Mortgage Finance Corp. AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable
Utah Housing Corp. AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Stable AA-/Positive
Virginia Housing Development Authority AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Stable AA+/Positive
West Virginia Housing Development Fund AAA/Stable AAA/Stable AAA/Stable AAA/Stable AAA/Stable AAA/Stable
Wisconsin Housing and Economic Development Authority AA-/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable
Wyoming Community Development Authority AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable AA/Stable

Table 3

S&P Global Ratings' Economic Outlook for U.S. Public Finance Housing (Baseline)
As of June 2021
2020 2021 2021f 2022f 2023f 2024f
1Q 2Qf 3Qf 4Qf
Key indicator
Residential construction (% change) 6.1 12.7 (6.0) 1.0 (2.5) 11.4 (1.6) 0.1 2.1
CPI (% change) 1.2 1.9 4.7 4.1 3.7 3.6 2.3 2.4 2.3
Unemployment rate (%) 8.1 6.2 5.8 5.3 5.1 5.6 4.5 3.8 3.3
Payroll employment (mil.) 142.3 143.4 145.2 147.0 148.3 146.0 150.7 153.3 155.3
Federal funds rate (%) 0.4 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.9
10-year Treasury note yield (%) 0.9 1.3 1.6 1.8 2.0 1.7 2.3 2.6 2.7
Mortgage rate (30-year conventional, %) 3.1 2.9 3.0 3.1 3.3 3.1 3.8 4.3 4.3
Housing starts (mil.) 1.4 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.5
Federal surplus (Fiscal year unified, bil. $) (3,131.9) (572.9) (1,133.4) (937.2) (454.3) (3,097.8) (1,445.2) (1,513.9) (1,592.9)
Notes: (1) Quarterly percent change represents annualized growth rate; annual percentage change represents average annual growth rate from a year ago. (2) Quarterly levels represent average during the quarter; annual levels represent average levels during the year. (3) Quarterly levels of housing starts and unit sales of light vehicles are in annualized millions. (4) Quarterly levels of Consumer Price Index and core Consumer Price Index represent year-over-year growth rate during the quarter. (5) Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. f--Forecast. Sources: S&P Global Economics forecasts and Oxford Economics.

Table 4

U.S. Public Finance Housing Team
Title Location Telephone E-mail
Caroline West Senior Director and Analytical Manager Chicago (1) 312-233-7047 caroline.west@spglobal.com
Marian Zucker Senior Director and Sector Lead New York (1) 212-438-2150 marian.zucker@spglobal.com
David Greenblatt Director and Lead Analyst New York (1) 212-438-1383 david.greenblatt@spglobal.com
Aulii Limtiaco Director and Lead Analyst San Francisco (1) 415-371-5023 aulii.limtiaco@spglobal.com
Joan Monaghan Director and Lead Analyst Centennial (1) 303-721-4401 joan.monaghan@spglobal.com
Raymond Kim Associate Director New York (1) 212-438-2005 raymond.kim@spglobal.com
Ki Beom Park Associate Director San Francisco (1) 212-438-8493 kib.park@spglobal.com
Daniel Pulter Associate Director Centennial (1) 303-721-4646 daniel.pulter@spglobal.com
Emily Avila Associate New York (1) 212-438-1824 emily.avila@spglobal.com
Sam Krouse Associate Dallas (1) 214-871-1409 sam.krouse@spglobal.com
Bianca Niazi Associate Chicago (1) 312-233-7095 bianca.niazi@spglobal.com
Jessica Pabst Associate Centennial (1) 303-721 4549 jessica.pabst@spglobal.com
John Mariotti Rating Analyst Centennial (1) 303-721-4463 john.mariotti@spglobal.com

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Daniel P Pulter, Centennial + 1 (303) 721 4646;
Daniel.Pulter@spglobal.com
Aulii T Limtiaco, San Francisco + 1 (415) 371 5023;
aulii.limtiaco@spglobal.com
Secondary Contact:Marian Zucker, New York + 1 (212) 438 2150;
marian.zucker@spglobal.com
Research Contributor:Saurabh Khare, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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