OREANDA-NEWS. Fitch Ratings affirms the following Philadelphia Housing Authority (PHA) and The Redevelopment Authority of the City of Philadelphia capital fund bonds:

--$34.8 million Philadelphia Housing Authority capital fund program (CFP) revenue bonds, series 2002 A at 'AA-';

--$11.0 million Redevelopment Authority of the City of Philadelphia capital fund program revenue bonds, series 2003 D at 'AA-'.

The Rating Outlook is Stable.

SECURITY
Repayment of the bonds are secured on a parity basis for both series 2002 A and series 2003 D under the indenture primarily by a security interest in a portion of the PHA's capital fund allocations, which are subject to the availability of appropriations, and such funds from HUD are to be paid directly by HUD to the Trustee.

KEY RATING DRIVERS

APPROPRIATION LEVELS: The Stable Outlook is based on the 2016 HUD capital fund appropriation to the Philadelphia Housing Authority.

STABLE DEBT SERVICE COVERAGE: Utilizing the appropriation amount, debt service coverage (DSC) levels are stable. When Fitch's stress scenarios are applied to the 2016 appropriation amount, the DSC decreases to 3.76x from the prior 2015 year stressed level estimate of 3.83x. Based on the 2016 capital fund appropriation amount, the annual appropriation would have to be cut by approximately 30% in the future to warrant a negative rating action.

BOND STRUCTURE: The legal structure allows payments to flow directly to the trustee to pay debt service on the bonds on a first priority basis.

MANAGEMENT OVERSIGHT: Philadelphia Housing Authority's management has consistently submitted capital plans to HUD in a timely manner.

RATING SENSITIVITIES
DECLINES IN FUTURE APPROPRIATIONS: Declines in annual public housing capital fund appropriations may reduce debt service coverage to levels that would negatively impact the current rating. Fitch estimates that if the 2017 capital fund appropriation for the Philadelphia Housing Authority were reduced from 2016 levels, the amount of the decrease would have to exceed 30% or more for the rating to be on the cusp of the minimum threshold for the current rating.

RATING CRITERIA

Fitch's approach for public housing authority (PHA) bonds secured by U.S. Housing and Urban Development (HUD) capital fund annual appropriations involves: a quantitative analysis of annual appropriation amounts and the corresponding debt service coverage level, review of the legal structure of the agreement, and a qualitative analysis of management oversight.

QUANTITATIVE ANALYSIS

Fitch takes a conservative approach to analyzing appropriation amounts and DSC levels by stressing the annual appropriation. That stressed dollar amount of the past appropriations is used to arrive at the Fitch DSC level. Fitch recognized that bonds with longer maturities are exposed to a higher degree of appropriation risk i.e. budget cuts; therefore, Fitch recalculates the DSC level to account for the potential volatility in annual appropriation amounts.

Fitch considers the base appropriation level to be the lower of either the lowest amount received over the past five years or 95% of the previous year's funding. This base amount is then adjusted further depending on the remaining years to maturity, with a 10% decrease for bonds five years to maturity, a 15% decrease for 10 years to maturity, a 20% decrease for 15 years to maturity, and a 25% decrease for 20 years to maturity.

The final Fitch stressed appropriation amount is then used to calculate the adjusted debt service coverage level. A minimum stressed DSC of 4.0x typically corresponds with a 'AA' rating, 3.0x a 'AA-' rating, 2.0x an 'A+' rating and 1.5x an 'A' rating, respectively.

LEGAL STRUCTURE

In addition to quantitative measures, Fitch also reviews the legal structure of the bonds. The annual contributions contract (ACC) between the PHA and HUD are reviewed for any items that would help mitigate the risks associated with the PHA's ability to pay bondholders. Fitch specifically looks for the following items in an ACC: provisions for debt service payments going directly from HUD to the trustee on a predetermined schedule usually three days in advance of the debt service payment date and provisions such that administrative sanctions cannot delay payments of the debt service or recapture funds approved for debt service payments.

QUALITATIVE ANALYSIS

The final component Fitch reviews is management performance and their ability to meet HUD's deadlines and requirements to receive annual appropriations. Each year HUD requires public housing authorities to submit one-year and five-year capital fund plans and funds are only allocated after HUD's approval of the plans. Since the start of the capital fund program, agencies have been successful in submitting plans in a timely manner since appropriations are predicated upon an agency's ability to submit plans on time. Fitch confirms with individual public housing authorities that plans were submitted to HUD.

Fitch also discusses the current progress of modernization projects and the authority's ability to finish the work to completion. Fitch monitors the authority's current number of housing units since that is a prime component in the capital fund appropriation formula because if the number of housing units decline, the portion of funds appropriated to a public housing authority could also decline if there is no replacement housing plan in place.

CREDIT PROFILE

Fitch's review is based on the HUD Capital Fund 2016 appropriation amount and the expectation that the PHAs will receive approximately the same proportion of the total HUD appropriation as received previously. The affirmation is based on the current debt service coverage level, which utilizes the 2016 appropriation amount.

Credit concerns revolve around the volatility of appropriation amounts. Prior to sequestration, appropriation amounts had drastically decreased which quickly eroded debt service coverage levels. Philadelphia Housing Authority has seen debt service coverage levels drop to 3.83x from 6.30x from fiscal year (FY) 2010 to FY 2015.

The appropriation amounts, under HUD's budget, are part of the U.S. government's general fund and are reliant upon the federal budget process. In December of 2015, the U.S. budget was agreed to at a slightly higher spending level for the next year (2016), with no sequestration, another sign of stabilization. Appropriation volatility concerns are somewhat mitigated by the legal structure of the bonds, and the fact that the federal government has provided Public Housing Authorities funds every year since 1937.

Fitch recognizes that Philadelphia Housing Authority is one of the moving to work (MTW) agencies, which allows them flexibility in spending. However, these funds are not pledged to the bondholders and therefore Fitch awards no credit to Philadelphia Housing Authority for being a MTW agency and subsequently does not include any funds other than the annual capital fund appropriations into the calculation of debt service coverage levels.