Summary: Health Educational & Housing Facility Board of Memphis, Tennessee Global Ministries Fellowship; Section 8 Primary Credit Analyst: Karen M Fitzgerald, CFA, New York (1) 212-438-4858; karen.fitzgerald@standardandpoors.com Secondary Contact: Mikiyon W Alexander, New York (1) 212-438-2083; mikiyon.alexander@standardandpoors.com Table Of Contents Rationale Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 19, 2016 1 1581131 301740986 Summary: Health Educational & Housing Facility Board of Memphis, Tennessee Global Ministries Fellowship; Section 8 Credit Profile Hlth Educl & Hsg Fac Brd of Memphis, Tennessee Global Ministries Fellowship, Tennessee Series 2011A Long Term Rating CCC+ (sf)/Watch Neg Downgraded, On CreditWatch Negative Rationale Standard & Poor's Ratings Services lowered to 'CCC+ (sf)' from 'A- (sf)' and kept on CreditWatch with negative implications its rating on Memphis Health Educational and Housing Facility Board, Tenn.'s multifamily housing revenue bonds, series 2011A, issued on behalf of Global Ministries Fellowship (GMF) for the Warren/Tulane Section 8 affordable housing project (Warren/Tulane project). The rating was placed on CreditWatch with negative implications on Feb. 2, 2016. (For more information, see the article published on Feb. 2, 2016, on RatingsDirect.) GMF is a Tennessee#?based non#?profit corporation that specializes in the development and preservation of affordable housing. On Feb. 8, 2016, GMF confirmed that, on Feb. 3, 2016, it had received a "Notice of Abatement" from the Department of Housing & Urban Development (HUD) indicating that HUD was abating its Section 8 Housing Assistance Payment (HAP) contract for the Warren/Tulane project, due to a default under the HAP contract by GMF. Since a default under the HAP contract triggers cross-defaults under both the loan agreement and the trust indenture, the bond trustee sent a notice of default under the trust indenture to the project owner, an affiliate of GMF, on Feb. 12, 2016. According to the Notice of Abatement, HUD's decision to abate the HAP contract for the project was based on the project's two prior failing "REAC Physical Inspection Report" scores in 2015, as well as evidence from HUD's three inspections of the properties, which revealed significant health and safety deficiencies and GMF's "systemic failure to maintain the property in decent, safe, and sanitary condition." As a result, HUD abated the Section 8 subsidy payments for all units at the project site ordered the relocation of all residents to safe and sanitary housing. Relocation costs will be partially funded by abated Section 8 subsidy payments that would have otherwise been made to the project. The Notice of Abatement also provided that GMF had received a Notice of Default from HUD on May 21, 2015, under the HAP contract for the project due to violations of GMF's contractual obligations to maintain the property in decent, safe, and sanitary condition. Pursuant to that notice, HUD had advised GMF that if it failed to correct these violations to HUD's satisfaction, HUD would seek any and all remedies provided in the HAP contract, which include abating WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 19, 2016 2 1581131 301740986 Summary: Health Educational & Housing Facility Board of Memphis, Tennessee Global Ministries Fellowship; Section 8 Section 8 subsidy payments. We did not learn of HUD's May 21, 2015, Notice of Default on the Warren-Tulane project until after the issuance of the Feb. 3, 2016 Notice of Abatement. The 'CCC+' rating reflects our opinion that the bonds are vulnerable to nonpayment. Section 8 subsidy payments represented the project's primary source of revenue. We expect that HUD's abatement of the Section 8 HAP contract will lead to operating losses on the project for the foreseeable future. In our view, this in turn will likely result in insufficient funds available to pay debt service, and ultimately a default on the rated bonds, within the next two years, unless the project can be sold in an amount sufficient to redeem bonds in full or the project's cash flow deficiency is otherwise mitigated. The project currently has a debt service reserve fund (DSRF) sized at maximum annual debt service, which may be drawn upon by the trustee if there are insufficient funds available in the bond trust's funds and accounts to pay debt service. We estimate that the amount on deposit in the DSRF is approximately $917,000. The next debt service payment is due on July 1, 2016, for an amount we estimate at approximately $459,000. Absent a sale of the project or the occurrence of some other mitigating factor before that payment date, we anticipate that the trustee will be required to draw on the DSRF to satisfy that payment. At that time, we would likely lower the rating to 'CC' or lower. We also anticipate that the trustee would be required to draw on the DSRF to satisfy subsequent debt service payments. We currently estimate that there are sufficient funds on deposit in the DSRF to service the debt for the next 12 months. Alternatively, if GMF is able to sell the project, then as provided in the bond documents, the sale proceeds would be required to be used to redeem outstanding debt. However, due to our expectation that the project will experience operating losses, we are unable at this time to estimate the project's value based on a discounted net cash flow analysis as outlined in our criteria. In the event of a sale of the project, if the proceeds from such sale were insufficient to redeem the bonds in full, we would lower the rating to 'D'. The rating remains on CreditWatch with negative implications. During the CreditWatch period we will continue to evaluate developments with the project. We will also monitor whether we are receiving sufficient information of satisfactory quality to maintain our rating. For related information on the 24 other rated bond issues secured by properties owned by affiliates of GMF, see our article published Feb. 19, 2016, on RatingsDirect. Related Criteria And Research Related Criteria • General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 • USPF Criteria: Rating Methodology And Assumptions For Affordable Multifamily Housing Bonds, June 19, 2014 • USPF Criteria: Methodology: Definitions And Related Analytic Practices For Covenant And Payment Provisions In U.S. Public Finance Revenue Obligations, Nov. 29, 2011 • Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 • General Criteria: Methodology: Industry Risk, Nov. 20, 2013 • Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 19, 2016 3 1581131 301740986 Summary: Health Educational & Housing Facility Board of Memphis, Tennessee Global Ministries Fellowship; Section 8 • • • • • • Structured Finance Criteria: Asset Isolation And Special-Purpose Entity, May 7, 2013 Structured Finance Criteria: CMBS Global Property Evaluation Methodology, Sept. 5, 2012 Structured Finance Criteria: Insurance Criteria For U.S. And Canadian CMBS Transactions, June 13, 2013 Structured Finance Criteria: Rating Methodology And Assumptions For U.S. And Canadian CMBS, Sept. 5, 2012 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Related Research • Standard & Poor's Assigns Industry Risk Assessments To 38 Nonfinancial Corporate Industries, Nov. 20, 2013 • Application Of CMBS Global Property Evaluation Methodology In U.S. And Canadian Transactions, Sept. 5, 2012 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 19, 2016 4 1581131 301740986 Copyright © 2016 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 19, 2016 5 1581131 301740986