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ATLANTA-Standard & Poor’s underlying rating on three series of bonds totaling $8.75 million, issued by Birmingham, AL for two low-income housing properties, all dropped a notch. They include a series A bond for $7.1 million and series B and series C bonds for $825,000 each.

S&P dropped the Birmingham series A bonds from BB to B, and the B and C bonds from B to CCC.

Holders of series B and C bonds are most at risk, because they fall second in line to holders of series A bonds when the trustee makes payments.

Dwindling debt reserve is among the several reasons for S&P’s downgrade. S&P Credit Analyst Valerie White says “the trustee drew on the debt service reserve funds to meet its January 2002 payments to bondholders.”

While the trustee expects to have sufficient funds from revenue and the debt service reserve to meet the July 2002 interest payment, White is concerned that “if the property’s financial performance does not improve,” the combined funds will not be sufficient to meet interest payments due in January 2003.

As of Dec. 31, 2001, debt service coverage for series A bonds dropped 29%, and debt service coverage on the subordinate series B and C bonds dropped 38%.

The debt service reserve fund is set by S&P as a cushion when the bonds are initially rated. The reserve diminished because the borrower failed to make all payments due. That meant the trustee had to dip into the reserve to make interest payments to the bondholders.

In addition, the unidentified private borrower also failed to provide audited financial statements for the past two fiscal years and ran up debt that is more than 60 days past due, according to White’s printed analysis.

Meanwhile, monthly rents on the properties have slipped from $519 to $407 and annual expenses have risen from $2,782 to $3,457. Occupancy is at 83%.

Ten of the 25 vacant units were damaged by fire in July 2001. The remaining 15 vacant units need significant repair for which funds are not available.

With the latest S&P downgrade, the bonds are slipping below S&P’s mid-level rating. The ratings begin at AAA, “bullet-proof,” Wendy Dolber, managing director and manager of housing group for S&P in New York, tells GlobeSt.com.

The ratings follow a series of plus-and-minus, triple, double and single levels in descending alphabetical order to D for “default,” Dobler says.

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