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Ratings Roundup:

Third Quarter 2013 U.S. Public Finance Ratings Trended Up On Revenue Growth And Budgetary Restraint
Primary Credit Analyst: Gabriel J Petek, CFA, San Francisco (1) 415-371-5042; gabriel.petek@standardandpoors.com Secondary Contacts: Robin L Prunty, New York (1) 212-438-2081; robin.prunty@standardandpoors.com Valerie D White, New York (1) 212-438-2078; valerie.white@standardandpoors.com Geoffrey E Buswick, Boston (1) 617-530-8311; geoffrey.buswick@standardandpoors.com Horacio G Aldrete-Sanchez, Dallas (1) 214-871-1426; horacio.aldrete@standardandpoors.com Jeffrey J Previdi, New York (1) 212-438-1796; jeff.previdi@standardandpoors.com

Table Of Contents
Upgrades Continue To Lead The Way Performance Among The Sectors Was Mixed Multiple-Notch Downgrades Increased Significant Third Quarter Rating Actions Ratings Should Hold Steady Despite Budgetary Uncertainties

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Third Quarter 2013 U.S. Public Finance Ratings Trended Up On Revenue Growth And Budgetary Restraint
A combination of sustained -- albeit gradual -- revenue growth and restrained budget management contributed to another quarter in which upgrades outnumber downgrades across the U.S. public finance sectors. Credit quality performance, as reflected in rating trends, is generally aligning with what Standard & Poor's Ratings Services had forecasted for the year. It had been our view that even a slow economic recovery, as long as growth stayed in positive territory, would allow for credit quality throughout the public finance sectors to hold-up if not improve. And that is what we have seen. We had also noted the potential for some bifurcation of credit quality between higher-rated and lower-rated obligors. In our view, this has also materialized in the form of an uptick in defaults among lower-rated obligors. In fact, the five defaults brought the number of defaults to 14 so far this year. This is the highest number of defaults we have seen since 1986, when we began tracking the metric. The uptick in defaults despite the overall favorable rating trends reflects the divergence in credit quality we expected. But we are cautious about drawing conclusions from these numbers. Considering our overall portfolio of 20,527 ratings, the 15 defaults are essentially inconsequential from a statistical standpoint. Overview The trend of positive rating actions gained steam during the third quarter, mainly because of upgrades in the state and local government sector, some of which reflected our criteria revision. However, the higher education, health care, and housing sectors all experienced more downgrades than upgrades. Some bifurcation of credit quality between higher-rated and lower-rated obligors materialized in the form of an uptick in defaults among lower-rated obligors.

Looking ahead, a softening of credit conditions could temper the currently positive credit trends. In our view, the cumulative effects of federal sequestration (mandatory, across-the-board cuts) began to take their toll on the macro economy more noticeably beginning in July. Although we don't think sequestration alone should derail the broader arc of ongoing fiscal repair, which is driving rating trends, other potentially larger threats remain. For example, the recent discord emanating from Washington, D.C., has potential to exert both direct and indirect negative pressure on credit quality throughout U.S. public finance.

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Upgrades Continue To Lead The Way


The trend of positive rating actions gained steam during the third quarter, with 2.81 upgrades for each downgrade (excluding housing, which includes many ratings that reflect credit substitution from third-party banks or government-sponsored entities). During the second quarter, the upgrade ratio was 2.05 to 1.0, which was also up from 1.57 to 1.0 in the first quarter. As of the end of September, we rated 41.05% of U.S. public finance obligors 'AA-' or higher (excluding housing), up slightly from 40.4% at the end of the second quarter. Rating trends generally reflect that credit conditions have continued to gradually improve for state and local governments although the federal government's sequestration cuts, which began in the second quarter, intensified in the third quarter. In our July Ratings Roundup report, we stated that although sequestration could dampen economic momentum, we anticipated the fallout on U.S. public finance credit quality would be relatively mild. The numbers now bear this out.
Table 1

Third Quarter 2013 Upgrades And Downgrades


Sector Total USPF State and local* Tax secured Appropriation Utility Health care Higher education Transportation Housing Upgrades 320 280 164 116 24 7 6 3 12 Downgrades 114 83 49 34 12 8 9 2 13 Defaulted 5 5 2 3 0 0 0 0 0

*Includes tax secured and appropriation sectors.

Performance Among The Sectors Was Mixed


During the three months ended Sept. 30, three of the public finance sectors exhibited positive rating change ratios, and three had negative ratios. The state and local governments sector (which includes tax-secured and appropriation-backed debt) led the way with 3.37 upgrades for each downgrade. Contributing to the favorable ratio for state and local governments was the release of our revised rating criteria for local governments, which alone led to 63 upgrades and four downgrades during the quarter. In the utilities sector, the ratio remained positive, at 2 upgrades per downgrade, but slightly less so than during the second quarter when the ratio was 2.67 to 1. The transportation sector was also positive, with three upgrades and two downgrades for a ratio of 1.5 to 1. Rating trends in the not-for-profit health care sector, weakened for the third consecutive quarter. In fact, downgrades outnumbered upgrades by 1.14 to 1, after showing 1.50 and 1.67 upgrades for each downgrade in the second and first quarters, respectively. The higher education sector experienced 1.5 downgrades for each upgrade during the third

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quarter, representing a modest deterioration from 1.25 to 1 in the second quarter. The housing sector shifted to a more balanced but still modestly negative ratio of 1.08 downgrades for each upgrade, after having two downgrades for each upgrade in the second quarter. The third quarter is a marked weakening from the much more favorable rating trends during the first quarter, with 2.5 upgrades for each downgrade.

Multiple-Notch Downgrades Increased


The number of multiple notch downgrades rose to 32 in the third quarter, up from 10 in the second quarter and 20 during the first. The 32 multiple-notch downgrades represent just 6.8% of rating actions during the quarter and a very minor 0.001% of our rated universe.

Significant Third Quarter Rating Actions


State and local governments
Benefitting from 15 consecutive quarters of year-over-year tax revenue increases, state and local governments continue to exhibit resilient and strengthening credit quality in our view. The sector experienced 280 upgrades and just 83 downgrades during the quarter. But standing in stark contrast to the generally positive rating trends in the quarter was Detroit, which filed for bankruptcy. Also, several obligors defaulted during the quarter, including the Riverbank Redevelopment Agency, Calif.; Stockton, Calif.; and the Bradford Academy Charter School, Mich. At the other end of the spectrum is Texas, which became our 14th 'AAA' rated state on Sept. 27. Although the rating action incorporates Texas' postrecession economic performance, which has been more robust than for most other states, it also highlights the effects strong cash and budget management can have on our view of credit quality. Regarding its economy, not only has Texas seen enough job growth to erase its recession era losses, but employment now exceeds the pre-recession peak by 5.6% (596,900 jobs). This compares favorably to the nation, which has only recovered about 78% of the 2 million jobs lost during the recession. Just as important, however, has been the state's fiscal management: Cautious forecasting and spending restraint have helped it to accumulate very strong budgetary reserves. At the end of fiscal 2013, the state's rainy day reserve had reached nearly $8 billion, or 9.1% of general fund expenditures, in fiscal 2013. We also view favorably the state's proposal to dedicate a portion of its excess oil and gas tax collections to state transportation-related infrastructure projects. If voters approve the constitutional amendment in November, we believe the state's reserves will remain at comparatively very strong levels while helping to provide a source of funding for necessary infrastructure investment. On the other hand, if voters reject the measure, the state may simply continue to hold higher reserves. Alternatively, if the reserve reaches 10% or more of general fund revenue, the legislature may spend the excess collections. Upgrades of local government entities have increased this quarter, due at least in part to the mid-September rollout of our new criteria for rating local general obligation debt, which led to upgrades on 63 obligors and downgrades on four through the end of the quarter. One such change under our new criteria came for East Providence, R.I., which we upgraded to 'A' from 'BB+' to reflect the city's improved financial performance, flexibility, and liquidity. The city's finances have benefitted from improved management under state oversight and the presence, until recently, of a local

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budget commission. Nevertheless, we believe that the dissolution of the budget commission will test the city's ability to manage on its own over the next several years and beyond, even in light of continuing state oversight. Other notable upgrades based on the new local GO criteria include Sacramento County, Calif. (A/Stable) and Monroe County, N.Y. (A/Stable). During the same three-week period following the application of our new criteria, however, we downgraded or revised our outlook negatively on a handful of obligors , including Omaha, Neb., which we downgraded to 'AA+' from 'AAA', and Chicago (A+/Negative), whose outlook we revised to negative. Both cities have sizeable direct debt and unfunded pension liabilities and Chicago currently faces an impending increase in pension contribution rates that is likely to place additional stress on the city's finances in the shortterm. Rating changes that occurred for reasons other than the application of our new criteria include Harris County Metropolitan Transit Authority, Texas' sales tax bonds and contractual obligations, to 'AA+' from 'AA', based on improving underlying sales tax trends. We also raised the rating on North Forest Independent School District, Texas to 'AA+' from 'B', following its annexation into Houston Independent School District. Meanwhile, we lowered the rating and outlook on San Francisco Community College District,to A/Negative from A+/Stable, due to the district's potential loss of accreditation in fiscal 2015, which would result in a loss of state aid for its core operations and a likely negative effect on student enrollment. Notwithstanding these few exceptions, upgrades have increased as a share of all rating changes on tax-backed debt of state and local governments over the past quarter. We expect this trend to continue as credit conditions improve throughout the sector and as we continue to review ratings that fall under the scope of the new local GO criteria. Sarah Sullivant, 415-371-5051

Utilities
Public power, public gas, and electric cooperatives. Credit quality was relatively stable for the U.S. public power and gas subsector, as well as rural electric cooperatives. We took three rating actions, all positive: two in public power and one in the cooperatives. In August, we raised the rating on Grant County Public Utility District No. 2, Wash.'s retail electric system debt to and the identical rating action on the district's wholesale electric system bonds issued for the Priest Rapids hydroelectric project to 'AA' from 'AA-'. The upgrade on the district's retail system reflects our view of the district's strengthened financial profile, including very strong fixed-charge coverage and liquidity. The upgrade of the Priest Rapids Hydroelectric Project reflects our view of the project's continued very strong operations, strong availability, extremely low production costs, and improved liquidity. On Sept. 20, 2013, we raised the rating on Vermont Electric Cooperative Inc. to 'A' from 'A-'. The higher rating reflects our view that the cooperative's management has achieved a sustainable level of credit metrics that are comparable to other utilities carrying the 'A' rating. This has been achieved through a combination of cost management, moderate growth, and regulatory support. Peter V. Murphy, 212-438-2065; Paul Dyson, 415-371-5079 Water, sewer, and solid waste. Rating activity among U.S. municipal water, wastewater, and solid waste issuers was more active than in the previous quarter. We raised 21 ratings and lowered 12 However, while rating activity within the sector was noticeable, the sector as a whole remains stable in terms of credit quality.

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No issues moved up to 'AAA' this quarter, but notable high-profile upgrades included Atlanta and San Diego, Calif. Atlanta issued new water and wastewater bonds that we rated 'A+' and we raised raised the rating on the existing debt to 'A+' from 'A'. This rating action reflects a number of positive credit factors, specifically, clarity about the system's long-term capital needs and the impact of those needs on rates and future financial performance. We raised the rating on San Diego's senior sewer revenue bonds, to 'AA-' from 'A+', based on our view of the wastewater system's history of maintaining strong debt service coverage and a strong liquidity position. However, we still believe its financials may come under pressure in the future if the city is required to enhance treatment to a secondary level at its largest treatment plant. The most prominent negative action was the downgrade of Detroit's senior and second lien water and sewer bonds. We lowered all of these ratings to 'BB-' and placed them on CreditWatch with negative implications. Prior to the bankruptcy filing, the ratings were in the 'A' category. The downgrades were due to uncertainties surrounding a proposal by the city's emergency manager to restructure the city's water revenue and sewer revenue debt. A restructuring could mean that the repayment terms could be different than the existing repayment terms, including amounts of principal and interest due and the amortization schedule. After seeking clarification from city officials on the likelihood of a debt restructuring, we determined that a restructuring or negotiated agreement for payment of the city's water revenue debt cannot be ruled out. In our opinion, however, it is not clear whether the emergency manager would be able to act in lieu of the Board of Water Commissioners with regard to a debt restructuring. Nevertheless, we believe that the existence of this possibility is not consistent with an investment-grade rating. Another negative rating action involved Aliceville Governmental Utility Services Corp., Ala. We lowered the rating four notches, to 'BBB', due to a recent unplanned draw on the debt service reserve fund. We also placed the rating on CreditWatch with negative implications. The rating actions affected about $9.18 million of revenue bonds. The CreditWatch placement reflects political uncertainty over whether the Federal Bureau of Prisons will fully use a $250 million facility to which the GUSC provides utility services. The solid waste sector had two rating actions, both downgrades. We lowered rating on bonds issued by Merced County Regional Waste Management Authority, Calif., and by San Joaquin County, Calif., both due to a weakened financial position. James Breeding, 214-871-1407

Health care
The number of health care upgrades exceeded downgrades for the third consecutive quarter, by a ratio of 1.14 to 1. However, when excluding one downgrade in the senior living sector and one in the human service provider sector, the ratio drops to 0.9 to 1. While this trend is more positive than we had anticipated, we have upgraded a great number of the organizations we rate this year as a result of mergers and acquisitions. This trend continued through the third quarter, with five out of the seven upgrades due, in part, to mergers and acquisitions. This wasn't the case for all the upgrades, however; we continue to see some organizations perform well, having gained operational efficiencies though expense initiatives and revenue enhancement as they prepare for health care reform. It is still our view that the sector faces a variety of ongoing and emerging issues that could negatively affect credit quality although we believe the responsiveness of many management teams during the past few years has allowed for continued positive results despite the incremental pressures.

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The larger and highly rated providers ('A+' to 'AA+') continue to perform well. Many have significant advantages over smaller providers because of their revenue and geographic dispersion, economies of scale, and stronger management teams. However, in this quarter, the trend has narrowed between the higher and lower rated providers in terms of downgrades with four downgrades out of six actions in the low investment-grade to speculative-grade categories versus seven out of 10 actions in the second quarter. As we've seen in past cycles, providers who generally have weaker financial profiles and are at the lower end of the rating scale tend to see more rating pressure as it is more difficult for them to adjust as they are more vulnerable to the challenges facing the industry. They may not have the scale and expertise to react as swiftly as the larger providers. However, this is not to say that the higher-rated credits are immune to the same pressures, as several providers this quarter appear to have been struggling with lower volumes, resulting in deterioration in their operating performance. While the majority of the upgrades resulted from mergers and acquisitionss, we also raised the ratings on a few other providers because they continued to post solid operating results, improve their balance sheets, and demonstrate dominant market positions. We raised the rating on Upper Valley Medical Center, Ohio, to 'A' from 'A-' due to a very strong balance sheet, three years of solid margins, and its leading market share. We also raised the rating on Princeton Community Hospital, W.V. to 'BBB+' from 'BBB' for similar reasons, with the hospital posting several years of solid operational results and cash flow that improved the balance sheet. The remaining upgrades were due primarily to mergers and acquisitions. We raised the rating on Sibley Memorial Hospital, D.C. to 'AA-' from 'A' as they are now a part of the John Hopkins Health System Obligated Group. We also raised the rating on St. John Health System in Oklahoma, to 'A+' from 'A', which recently consolidated under Ascension Health Alliance. While the outstanding debt will remain solely an obligation of St. John, we believe that St. John's credit profile will strengthen with the benefit of Ascension's administrative and strategic support, as well as from potential refinancing opportunities under favorable terms. We also raised the rating on Halifax Regional Hospital, Va., to 'A' from 'BBB+', as it merged with Sentara Healthcare. In addition, we raised the ratings on AHS Hospital Corp., N.J. and Touro Infirmary, La. due in part to acquisitions and affiliations, but also because of their improving financial profiles. Depressed volumes leading to weaker operating cash flow, increasing competition, and weakening balance sheets were all key factors in the health care downgrades this quarter. We lowered the rating on Akron General Health System to 'BBB-' from 'BBB' due to the hospital's challenged operations, leadership turnover, and increased competition. We also lowered the rating on Proctor Hospital two notches, to 'BB-' from 'BB+', reflecting a considerable drop in cash as a result of required additional spending to install electronic health records (EHR), which also resulted in an increase in receivables and operating losses in fiscal 2012. Other notable downgrades include MaineHealth, to 'A+' from 'AA-' due to challenged year-to-date 2013 operating performance at virtually all of its facilities and a difficult information technology installation at its flagship Maine Medical Center (MMC) and fundamental competitive changes with the potential new ownership of MMC's only competitor in Portland. We also lowered the rating on Catholic Health Services of Long Island, N.Y., to 'BBB+' from 'A-', due to a sizable debt increase that occurred during a period of operating stress, including declining business volumes, which contributed to margin compression and reduced operating profitability and cash flow.

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Higher education and other not-for-profits


Higher education experienced a more than 50% jump in the number of rating changes over each of the previous three quarters. Ratings changes were also slightly more negative, with nine downgrades and six upgrades. The downgrades affected issues in all of our rating categories except the high investment grade. These affected several different types of institutions and securities, including two private universities, one public university auxiliary issue, one public university unlimited student fee issue, two nonprofit institutions, and three specialty colleges. Six of those downgrades involved a move to a new rating category, with notable actions including Eastern Michigan University Board of Regents, Please Touch Museum, Thomas Jefferson School of Law, and Franklin Pierce University. We lowered the rating on Eastern Michigan University Board of Regents to 'BBB+' from 'A-' because of significant event-driven risk, with increased liquidity exposure from a recent debt restructuring, and a large full-accrual deficit during fiscal 2012 due. The deficit was, in part, due to state funding constraints. We lowered the bond rating on Please Touch Museum, Pa., to 'CC' from 'BB-', on management's decision to miss a bond payment to the trustee despite the presence of available resources. We downgraded Thomas Jefferson School of Law, Calif., (to 'B+' from 'BB') on the failure to meet its financial covenants and reliance on bondholder waivers, with a national downturn in law school applicants inhibiting management's ability to expand enrollment to service the institution's very high debt burden. We lowered the rating on Franklin Pierce University, N.H., (to 'B' from 'BB') based on its heavy reliance on a line a credit for cash flow, with poor financial operations, a weakening enrollment profile, and increased discounting. The six upgrades were on two public universities, three private universities, and one nonprofit institution. Reasons for the rating changes varied, but improved operational performance resulting from higher demand and improved financial resources relative to the medians were common themes. The upgrade of the University of Houston, Texas' bonds, to 'AA' from 'AA-', reflects our view of the university's impressive enrollment growth and diversification of programs, consistently strong financial operations, and nearly 50% growth in liquidity as reflected by cash and investments. We also raised the underlying rating (SPUR) on the Ball State University Board of Trustees, Ind. debt to 'AA-' from 'A+', based on the strength of available resources pledged under the double-barreled security pledge on the outstanding parking revenue bonds. We also considered the balance sheet to be strong relative to the rating category, and financial operations on a full-accrual basis are consistently positive. The upgrade on Syracuse University, N.Y., to 'AA-' from 'A+', reflects our view of its consistently strong operating performance, improved demand profile, growing enrollment, and adequate financial resource ratios relative to the category medians. Improving operations was an important factor in our upgrades of both Carroll University, Wis. (to 'BBB+' from 'BBB') and Gwynedd-Mercy College, Pa. (to 'BBB' from 'BBB-'). Despite flat enrollment for both institutions, the management teams were able to boost revenue by managing discount rates. Strong financial resources and a proven ability to absorb an increased expense base contributed to The Poetry Foundation's upgrade to 'AA-' from 'A+'. In contrast, increased debt drove many of our downgrades. Fayetteville State University, N.C.'s rapid increase in debt and low level of financial resources relative to the category medians, despite consistently solid operating and capital support from North Carolina, contributed to our downgrades of its unlimited student fee bonds (to 'A-' from 'A') and auxiliary ratings (to 'BBB+' from 'A-'). The St. Louis College of Pharmacy has aggressive capital and strategic plans that will require a substantial debt issuance. We believe the downgrade, to 'BBB+' from 'A-' better reflects the increased risks to its enterprise and financial profiles. Likewise, Vaughn College of Aeronautics and Technology, N.Y.'s expected

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$15 million private placement combined with a limited capacity for enrollment growth and weak resources drove its rating down to 'BB' from 'BB+'. Repeated negative full-accrual basis deficits and low capital fundraising caught up to Orange County Performing Arts Center, Calif.'s rating, which we lowered to 'A-' from 'A'. The cultural center benefits from its prominent role in a wealthy and growing region, but it has not been able to leverage its position and has had to extend its capital campaign. Furthermore, its debt level and debt burden are high, and financial ratios are not improving as we had previously expected. Robert Dobbins, 415-371-5054; Jessica Matsumori, (415) 371-5083

Transportation
U.S. public finance transportation ratings remained relatively stable. Standard & Poor's took five rating actions , three upgrades and two downgrades. On July 12, we lowered the Ohio Turnpike's senior-lien rating to 'AA-' because of the planned issuance of turnpike debt over the next five years that will fund nonturnpike projects. This marks the first time the commission has used turnpike revenues as leverage for non-turnpike assets, marking a departure from the commission's mission. The other toll sector rating change was the upgrade of the E-470 Public Highway Authority, Colo.'s bonds to 'BBB' from 'BBB-' on July 24. The upgrade reflects our view of recent growth in transactions, which have passed the previous peak in 2007. An additional factor is the authority's debt management plan, which, since 2004, has reduced maximum annual debt service (MADS) to $136 million from approximately $160 million with plans to further reduce MADS to $120 million. We raised the rating on the Brownsville Navigation District, Texas (Port of Brownsville) to 'A-' from 'BBB+' on Aug. 22, based on their improved senior and junior lien debt service coverage levels and its good competitive position. On July 23, we raised the rating on Charleston County Airport District, S.C.'s senior lien revenue bonds to 'A+' based on their very strong projected debt service coverage through final maturity in 2015, with no possibility of a new issuance now that the lien is closed. The other airport sector rating change of the quarter occurred on Sept. 12, when we lowered the rating on Colorado Springs Airport, Colo.'s airport revenue bonds to 'BBB+' from 'A-'. A weakened competitive position and continued declining enplanements contributed to lower debt service coverage, which was no longer commensurate with that of 'A' category airports. Peter V. Murphy, 212-438-2065; Anita Pancholy, 214-871-1402

Housing
Standard & Poor's changed 25 ratings within the housing sector: 12 upgrades and 13 downgrades. The majority of the downgrades were due to declining financial performance. On Aug. 13, we lowered the issuer credit rating (ICR) on Pennsylvania Housing Finance Agency (PHFA), and all debt supported by the agency's general obligation pledge to 'AA-' from 'AA'. This change to the ICR reflects our view of the agency's declining profitability ratios to levels below its peers, increases in delinquency and foreclosure rates, and the weakened economic base due to job losses brought on by the economic downturn. Although the agency reported a $29.5 million net gain as of its fiscal year ended June 30, 2012, this was down 30% from $42 million in net income reported in fiscal 2011. We mainly attribute the drop to declining interest income from loans and investments, along

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with rising expenses. Consistent with this decline, PHFA's profitability in terms of return on assets declined to 0.52% in 2012, from 0.71% in 2011. Over the past couple of years, the housing and mortgage markets have strained the profitability of housing finance agencies across the board. Despite the steps PHFA took to boost its profitability, such as selling and servicing Ginnie Mae mortgages and reducing its variable-rate debt exposure, combined with its loan portfolio's low-to-moderate risk profile and low-risk investments, the agency's profitability and leverage ratios remain below those of 'AA' rated housing finance agencies and are more in line with its 'AA-' rated peers. We lowered Ohana Military Communities LLC military housing (Marine Corps Hawaii Housing Privatization Project) Class II & Class III bonds to 'A' from 'AA-' and to 'A-' from 'A+', respectively, due to the overall deterioration in the property's performance. The debt service coverage ratio declined significantly, to 1.16x in 2012 from 1.34x in 2011 on the class II bonds and to 1.14x from 1.33x on the class III bonds, due to an increase in fiscal 2012 expenses mainly arising from a 31% rise in utility costs. As a result net operating income (NOI) in fiscal 2012 was $104 million, 12% lower than pro forma NOI projections of $117 million. The project owner has taken initial steps to mitigate the increases in utility expenses by implementing renewable-energy initiatives. In addition, we lowered the rating on Chesterfield County Industrial Development Authority, Va.'s series 1999 multifamily housing revenue bonds (issued for the Winchester Greens Townhouses) to 'A+' from 'AA-' due to the downward trend in debt service coverage over the past five years. Despite higher gross revenue as of fiscal year-end 2012 (Dec. 31), the property's overall financial performance is down compared with previous fiscal years. The debt service coverage ratio, including interest earned, was 1.78x in fiscal 2012, down from 1.91x, 1.99x, 2.08x, and 2.18x in fiscals 2011, 2010, 2009, and 2008, respectively. In addition, expenses rose approximately 13% in 2012, fully offsetting the revenue increase and resulting in an overall net income decline. The rise in expenses is primarily due to higher maintenance and repair, tax, and payroll costs. As a result, the expense ratio rose to 64.63% in 2012, from 59.71% in 2011, and 58.13% in 2010. The remaining downgrades resulted from either declines in debt service coverage to levels that could potentially trigger a draw on reserves or from a debt service reserve fund in the form of a surety policy issued by Ambac Assurance Corp., which Standard & Poor's no longer rates. A significant upgrade was the ICR on Illinois Housing Development Authority (IHDA), which we raised to 'AA-' from 'A+', as well as the ratings on all debt supported by the authority's general obligation pledge. This change reflected our view of the authority's strong levels of equity and comfortable measures of leverage compared with 'AA-' rated HFAs. The authority's total equity to total assets stood at 20% in fiscal 2012, which we consider strong. A number of equity metrics have improved since 2011, and the authority's five-year averages in equity ratios slightly outperformed those of some higher-rated peers at the new 'AA-' level. Overall, we believe IHDA's excess capital cushions have enabled the authority to preserve its overall financial strength in spite of reduced bond issuance and loan originations since the financial market crisis began in 2008. Furthermore IHDA's profitability as measured by return on assets remained strong in our view, at 0.48% in fiscal 2012. The authority's net interest margin improved to 0.50% in 2012, compared with 0.42% in 2011. The remaining upgrades included local housing bond issues with asset-to-liability coverage we consider strong and sufficient revenues, based on our current stressed reinvestment rate assumptions (as set forth in the related criteria

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articles), to pay full and timely debt service on the bonds plus fees assuming no reinvestment risk through bond maturity. We upgraded New York City Housing Development Corp. capital fund program revenue bonds to 'AA+' from 'AA-' following the defeasance of the bonds through the deposit of U.S. Treasury securities and cash in an escrow fund. Strong debt service coverage, an increase in the military's basic housing allowance, and strong occupancy that prompted us to raise the rating to 'AA-' on Capmark Military Housing Trust XXXIV's series 2007 A-1 bonds issued for the U.S. Air Force's Air Combat Command (ACC) Group 2 military housing privatization project. Stephanie Morgan, 212-438-5141

Ratings Should Hold Steady Despite Budgetary Uncertainties


While the president and congress have agreed upon a continuing resolution, it's only a temporary solution. Government funding is now in place, and the debt limit has been lifted, but only until Jan. 15 and Feb. 7 of 2014, respectively. Standard & Poor's estimates that the two-week closure likely shaved 0.6% off of annualized fourth quarter GDP (see U.S. Weekly Financial Notes: Hitting The Snooze Button On Capitol Hill, published Oct. 18, 2013 on RatingsDirect). The instability that these ongoing budget uncertainties have caused, as along with the impact of sequestration, makes the economic climate for public finance tough to predict, especially those subsectors that are more dependent on the general economy. However, we do not anticipate that these factors will spur a quick decline in overall U.S. public finance credit quality although the strain may continue the bifurcation between strong and weak obligors that has increased in the past few months.
Table 2

Upgrade/Downgrade History
USPF Up Down 2001Q1 666 2001Q2 748 2001Q3 129 2001Q4 106 2002Q1 195 2002Q2 111 2002Q3 80 47 106 49 14 38 106 39 123 67 44 135 97 98 69 118 54 33 65 Tax secured Appropriation Up Down 573 89 50 57 98 62 43 62 45 52 45 53 57 53 47 61 72 53 14 4 4 3 4 9 3 13 6 10 9 14 17 11 16 10 11 10 Up Down 68 624 41 21 66 22 11 31 17 6 20 28 11 19 103 23 41 21 1 66 3 4 1 65 10 71 31 1 81 31 57 33 84 18 12 43 Utilities Up Down 14 25 13 14 15 19 21 11 10 12 11 16 12 16 28 19 15 10 9 4 5 2 7 6 3 14 3 1 4 7 3 8 0 7 2 1 Health care Higher education Transportation Up Down 5 3 2 3 4 1 2 4 4 6 2 12 13 7 5 10 16 17 21 20 22 4 6 9 18 19 18 21 11 31 18 10 10 14 7 10 Up 4 5 7 7 7 1 1 2 7 6 2 13 3 3 1 5 20 5 Down 2 12 6 1 5 5 1 5 8 7 28 9 3 5 6 5 1 1 Up 2 2 16 4 5 6 2 2 3 4 0 0 4 0 1 1 2 3 Down 0 0 9 Housing* Up Down 0 0 0 0 0 0 34 0 0 0 48 0 0 0 82 0 0 0 68 0 0

0 315 15 12 4 1 1 4 2 5 0 2 2 0 0 0 29 0 0 0 36 0 0 0

2002Q4 112 2003Q1 2003Q2 2003Q3 86 86 80

2003Q4 122 2004Q1 100 2004Q2 98

2004Q3 185 2004Q4 119 2005Q1 166 2005Q2 109

0 295 0 0 0 0

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Table 2

Upgrade/Downgrade History (cont.)


2005Q3 185 2005Q4 149 2006Q1 113 2006Q2 252 2006Q3 392 2006Q4 187 2007Q1 175 2007Q2 166 2007Q3 139 2007Q4 163 2008Q1 233 2008Q2 626 2008Q3 590 2008Q4 653 2009Q1 753 2009Q2 624 2009Q3 381 2009Q4 454 2010Q1 677 2010Q2 575 2010Q3 251 2010Q4 240 2011Q1 437 2011Q2 181 2011Q3 2011Q4 95 81 42 107 42 22 27 37 27 58 27 49 32 28 27 41 198 83 27 62 265 91 35 60 282 95 117 109 83 138 144 82 123 94 114 52 69 42 73 325 92 95 79 70 75 137 419 300 279 518 326 220 316 515 446 157 147 240 96 37 22 41 72 66 69 81 107 164 8 42 9 10 7 13 11 28 6 12 12 7 5 6 15 17 3 14 47 53 16 28 76 59 43 53 36 70 78 39 80 45 49 98 24 43 137 20 35 52 42 37 35 37 99 233 64 142 130 76 76 93 71 36 19 107 32 16 9 23 32 26 21 77 37 116 10 22 11 1 1 4 1 13 2 11 2 0 1 12 21 9 15 24 22 17 24 10 24 35 94 39 3 9 2 2 2 6 2 2 2 1 1 1 1 0 4 1 4 1 7 4 2 3 4 5 5 17 10 12 8 10 11 9 12 14 20 12 14 14 12 4 11 9 10 7 5 4 7 3 5 2 12 9 9 8 20 13 20 15 9 11 14 14 6 10 18 7 8 17 13 6 17 10 12 8 16 20 15 19 19 28 26 21 12 12 10 15 10 6 2 8 11 14 10 8 8 11 6 12 8 9 13 6 10 8 13 3 9 8 15 11 9 11 4 2 11 11 13 2 8 9 20 17 2 3 9 2 8 3 4 5 4 6 6 10 7 3 0 4 1 4 0 4 1 0 0 4 3 4 1 3 2 2 2 1 6 3 5 6 3 7 6 5 4 5 9 0 2 1 3 1 13 4 1 5 4 6 0 3 6 3 6 6 1 3 1 0 4 6 8 0 2 2 5 4 6 0 3 3 7 7 0 0 0 0 0 3 1 1 1 1 1 1 7 0 4 4 2 0 96 9 48 93 47 52 4 37 7 1 1 4 40 22 11 6 18 4 0 185 10 8 16 20 14 2 10 9 11 75 38 28 159 62 13 35 99 129 38 83 45 171 1835 33 78 13 44 14 10 24 13

2 293 143 85

40 146 3 28 197 15 2 20 190 19 52 15 24 41 44 16 21 22 34 66 36 55 40 41 30 54 23 24 30 42 47 23 26 20 24 24

2 133 3 2 4 1 1 4 0 0 0 1 1 1 2 5 30 46 5 16 13 8 18 3 16 25 12 12

2012Q1 121 2012Q2 178 2012Q3 136 2012Q4 132 2013Q1 193 2013Q2 193 2013Q3 320

*Only tracked annually prior to 2006.

Table 3

Rating Distribution (as of Oct. 1, 2013)


Number of ratings USPF Tax secured Appropriation Utilities Health care Higher education Transportation Housing AAA AA A 812 7,521 10,165 527 4,280 6,266 81 1,821 1,955 154 976 1,057 126 301 48 259 425 2 59 161 2,817 5,660 1,394

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Table 3

Rating Distribution (as of Oct. 1, 2013) (cont.)


BBB BB B CCC/C Totals 1,554 187 40 22 20,301 720 31 21 11 11,856 285 77 8 6 4,233 81 11 0 0 2,279 231 48 7 3 716 176 16 4 2 930 61 4 0 0 287 446 83 35 24 10,459

As percentage (%) AAA AA A BBB BB B CCC/C 4.00 37.05 50.07 7.65 0.92 0.20 0.11 4.45 36.10 52.85 6.07 0.26 0.18 0.09 1.91 43.02 46.18 6.73 1.82 0.19 0.14 6.76 42.83 46.38 3.55 0.48 0.00 0.00 0.00 17.60 42.04 32.26 6.70 0.98 0.42 5.16 27.85 45.70 18.92 1.72 0.43 0.22 0.70 20.56 56.10 21.25 1.39 0.00 0.00 26.93 54.12 13.33 4.26 0.79 0.33 0.23

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