Jul. 7, 2011 (Business Wire) -- Fitch Ratings has affirmed the 'AA-' rating on $799.5 million outstanding State of California Veterans general obligation (GO) bonds and $546.7 outstanding California Department of Veterans Affairs (Cal Vets, or the Department) home purchase revenue bonds. The Outlook for the GO and revenue bonds remains Negative.
RATING RATIONALE:
--The Negative Outlook is based on credit concerns regarding the declining financial performance of the program as it experienced a $37.8 million loss in fiscal year (FY) 2010 and a $22.3 million loss in FY 2009. There is still the potential for further erosion of retained earnings due to foreclosure losses and management reports that it expects a loss for FY 2011.
--The 'AA-' rating is based on the program's retained earnings in 2010 which are still equal to 9.7% of total bonds outstanding and 10.8% of contracts outstanding (down from 10.7% and 11.7% respectively in 2009) despite net annual operating losses.
--While cash flow projections which incorporate Fitch's loan loss assumptions demonstrate retained earnings declining until 2017, the asset parity position never falls below 1.01% under a loan loss stress scenario which is adequate for current rating level.
--Approximately 27% of existing loans in the portfolio have a VA guarantee and eligible new loans will either be VA guaranteed, FHA insured or may be uninsured if below 80% loan to value (LTV).
--Approximately 36% of the program's portfolio was originated from 2005 to the present (26% in years 2006 & 2007), making these loans vulnerable to significant LTV volatility given pronounced declines in single-family housing valuations within the state of California.
--The program also has the potential for loss exposure since there is only one PMI provider for 33% of the existing portfolio which is Radian. Fitch withdrew its rating on Radian in May 2008 and there are concerns about Radian's creditworthiness and claims paying ability.
--There is still a high level of program loans in REO status (154 loans as of May 2011).
WHAT COULD TRIGGER A DOWNGRADE?
--Future program operating losses which will necessitate additional draws on the program's retained earnings;
--Increases in program delinquencies and foreclosures which may trigger increased program losses;
Additional credit concerns which could impact the performance of the underlying contract portfolio focus on the state of California and the following:
--Pronounced declines in single-family housing valuations;
--High levels of delinquencies and foreclosures;
--The state's high unemployment levels and broad economic weakness.
SECURITY:
Veterans General Obligation bonds of the State of California are payable in accordance with the various veterans bond acts by the state general fund. The full faith and credit of the state of California is pledged for the payment of both principal and interest. All general obligation bonds have an equal claim against the general fund of the State of California. While the GO Veterans bonds carry the full faith and credit of the State of California, their source of payment are monies from the 1943 Fund.
Home Purchase Revenue Bonds are special obligations of the department payable solely from, and by a pledge of, an undivided interest in the assets of the Fund and the Veterans Debenture Revenue Fund, a separate fund of the department.