OREANDA-NEWS. Fitch Ratings has downgraded the Idaho Housing Finance Association (IHFA) single-family mortgage bonds under the 2006 Indenture to 'A+' from 'AAA' as follows:

--$178.4 million refunding bonds series 2012A class I;
--$107.2 million refunding bonds (taxable) series 2013A-1 class I;
--$9.5 million refunding bonds (taxable) 2013A-2 class I.

Fitch revises the Rating Watch to Evolving from Negative.

SECURITY

The single-family mortgage bonds are issued under a master indenture that pledges revenues, investment earnings, reserves, and other trust funds to secure the bonds.

KEY RATING DRIVERS

REDUCED ASSET PARITY; NO OVERCOLLATERALIZATION: The downgrade reflects further reduction in the asset parity ratio of the class I bonds to below 100% and lack of overcollateralization following IHFA's subordinate bond calls.

IHFA's GO RATING: Since the indenture in its current state is no longer self-supporting, the bonds now rely upon the support of IHFA's general funds in a stressed scenario, linking the bond program's rating to IHFA's general credit quality. Fitch maintains a general obligation (GO) rating of 'A+'/Stable Outlook for IHFA.

RATING WATCH EVOLVING: The Rating Watch Evolving reflects Fitch's opinion that the rating could be upgraded, affirmed or downgraded depending on the course of action IHFA pursues in the near future with respect to the 2006 Indenture.

DEBT SERVICE RESERVE FUND: The fully-funded debt service reserve fund, equal to 5% of bonds outstanding, provides a satisfactory cushion against any short term liquidity needs.

RATING SENSITIVITIES

UPGRADE UPON IMPROVED ASSET PARITY: Resolution of the Rating Watch Evolving would result in an upgrade under a scenario where IHFA enhances the asset parity ratio to a level sufficient to support a higher category rating.

AFFIRMATION UPON GO PLEDGE OR EQUITY: Resolution of the Rating Watch Evolving may result in an affirmation of the 'A+' rating upon IHFA formally providing a GO pledge to the bonds, provided structural changes do not have a negative impact on the GO rating, or upon the addition of equity to the indenture to a level sufficient to support an 'A+' rating.

DOWNGRADE UPON INACTION: Failure on the part of IHFA to implement a plan to positively impact the class I 2006 indenture will likely result in a downgrade of the bonds.

CREDIT PROFILE

Fitch placed the bonds on Rating Watch Negative on Oct. 22, 2015 to reflect the decline in asset parity ratios to below minimum indenture provisions. At the time, there was approximately $24 million of outstanding class II and class III debt, one of the key security features for the class I bonds. The downgrade reflects the redemption of the class II and class III bonds under the 2006 indenture on Jan. 1, 2016 resulting in the elimination of overcollateralization for the class I debt and an asset parity ratio of roughly 97%.

The 'A+' rating on the bonds is now tied to IHFA's GO rating as the indenture is no longer self-supporting in a stressed scenario. Though there is not an explicit GO pledge to the class I bonds under the 2006 Indenture, Fitch believes that there is sufficient motivation for management to ensure that any potential shortfalls to the indenture would be covered by GO funds. There is also a fully funded debt service reserve fund pledged to the indenture equal to 5% of outstanding bonds which provides support for any short-term liquidity needs.

Given IHFA's long history of operating bond-financed affordable housing programs, Fitch expects it to develop a plan to ameliorate the stressed cash flow asset parity levels for the class I bonds and enhance bondholder security beyond the current state. Fitch will continue to monitor the situation and resolve the rating watch evolving as more information becomes available.