TEXT-S&P affirms Toronto Community Housing 'AA-' rating

Fri Nov 9, 2012 4:58pm EST
 
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Overview
     -- We are affirming our 'AA-' long-term issuer credit rating on Toronto 
Community Housing Corp. (TCHC). 
     -- We are also affirming our 'AA-' senior secured debt rating on TCHC's 
affiliate, TCHC Issuer Trust.
     -- The affirmation reflects our view of the company's low debt levels, 
strong liquidity, adequate operating results and margins, and generally good 
relationship with its owner, the City of Toronto.
     -- The stable outlook reflects our expectations that debt levels will 
continue to be low, with the EBITDA interest coverage ratio remaining above 
3x, cash and investment balances will stay strong despite any drawing down of 
unused bond proceeds, and that there will be no repeat of the turbulence seen 
in governance and senior management in the past two years.  

Rating Action
On Nov. 9, 2012, Standard & Poor's Ratings Services affirmed its 'AA-' 
long-term issuer credit rating on TCHC. The outlook is stable. At the same 
time, Standard & Poor's affirmed its 'AA-' senior secured debt rating on 
TCHC's affiliate, TCHC Issuer Trust.

Rationale
The rating on TCHC reflects Standard & Poor's assessment of the company's 
relatively low debt levels, strong liquidity, good operating and EBITDA 
margins, and a historically good relationship with the City of Toronto 
(AA/Stable/A-1+). In our opinion, the company's relatively new board and 
senior management team and sizable state-of-good-repair backlog offset these 
strengths somewhat.

We rate TCHC in accordance with Standard & Poor's government-related entities 
(GRE) methodology. Accordingly, we view the likelihood of TCHC receiving 
extraordinary government support as "moderately high." This view reflects our 
assessment of the company's important role in discharging Toronto's 
responsibility for providing social housing and of having a "strong" link with 
the city. We believe that the company has a "strong" link with Toronto. The 
replacement of the board of directors at the mayor's request and the city's 
current deliberations on the sale of some of the company's house-form 
properties and the use of those proceeds demonstrate this link. 

TCHC's debt levels are low in our opinion. At year-end 2011, debt stood at 
C$1.4 billion, which was down modestly from C$1.5 billion a year earlier. 
Short-term debt, which rose slightly to about C$70 million in 2011, 
represented less than 10% of total indebtedness. Debt ratios indicate debt 
levels we consider to be low. At year-end 2011, the EBITDA gross interest 
coverage ratio (Standard & Poor's-calculated) was 2.9x, unchanged from the 
year earlier. The debt-to-EBITDA ratio was 6.3x, down from 7.0x the year 
before. We do not expect that the company will issue debt in 2012 and debt 
outstanding should be close to C$1.4 billion by the end of the year. We don't 
expect much change in 2013 and debt outstanding should range from C$1.3 
billion-C$1.5 billion by the end of that year. Coverage ratios are not likely 
to change substantially; we expect the EBITDA coverage ratio to range from 
3.0x to 3.2x in 2012 and 2013.

TCHC's liquidity is strong, in our view. The company had cash and investments 
holdings of about C$245 million, excluding about C$70 million of internally 
and externally restricted funds, at 2011 year-end. Liquidity levels fell about 
20% in 2011 as unused bond proceeds were deployed for capital project 
financing. In addition, TCHC generates a considerable amount of cash each year 
(close to C$100 million) from operations and it maintains a C$200 million 
revolving credit facility, of which it had used about C$75 million at year-end 
2011. In our opinion, it has strong access to external liquidity as evidenced 
by its two bond series and bank loans and line. For 2012 and 2013, we expect 
that liquidity will remain strong despite any drawing down of remaining unused 
bond proceeds.   

The company's 2011 results were in line with those of recent years with good 
operating and EBITDA margins in our opinion. The EBITDA margin improved 
slightly to 32% in 2011 from 31% a year earlier while the operating margin was 
unchanged at 15%. EBITDA reached about C$220 million, increasing 4%, from 
C$210 million in 2010. The increase was due to a small decline in operating 
expenses coupled with modest increases in rent and subsidies. Net income edged 
down below C$25 million on higher depreciation expense. TCHC has a good track 
record of producing adequate and stable financial results, in our view, and we 
expect that EBITDA margins will remain above 30% and net income will be small 
but positive for 2012 and 2013. 

Despite some management and governance turbulence in the past two years, we 
expect that TCHC's relationship with the city will remain good. Toronto has 
provided the company with a stable multiyear funding formula and clear 
operating direction that changes to senior management or the board have not 
affected. The operating direction permits TCHC to create debt as long as the 
new debt can be accommodated within the same debt service subsidy from the 
city. Furthermore, much of the framework that governs social housing provision 
in Ontario is established by provincial statute and is unlikely to change in 
the medium term.

In our opinion, a relatively new board and senior management team and a 
sizable state-of-good-repair backlog offset the company's business risk 
profile somewhat. TCHC board of directors was appointed in 2011 following the 
departure of the former board at the mayor's request. Furthermore, a number of 
the senior management team, including the CEO and CFO, are relatively new to 
the company. Board and team members do, however, have extensive private- and 
public-sector real estate experience. We believe that their relative 
collective inexperience with TCHC will vanish with time and that some members' 
experience in the real estate industry will benefit the company in the 
long-term. 

The company has a sizable state-of-good-repair backlog that it estimates to be 
about C$750 million. The backlog has increased steadily: It was estimated to 
be only C$300 million five years ago. TCHC has been reinvesting in its 
portfolio annually but not at a sufficiently high enough rate to stabilize or 
reduce the backlog. Council is considering plans to address the backlog. The 
company might issue debt to reduce some portion of the backlog in the next few 
years, which could diminish its strong financial risk profile somewhat if the 
debt issuance is large enough.  

Outlook
The stable outlook reflects our expectation that debt levels will continue to 
be low, with the EBITDA interest coverage ratio remaining above 3x and the 
debt-to-EBITDA ratio staying below 7x in the next two years. We expect that 
cash and investment balances will stay strong despite any drawing down of 
remaining unused bond proceeds. We further expect that there will be no repeat 
of the turbulence seen in governance and senior management in the past two 
years and that TCHC's relationship with the city should remain good. A 
significant adverse change in the relationship with the city, renewed 
governance and management turbulence, marked deterioration of EBITDA or cash 
generated from operations with substantial declines in interest coverage 
ratios, or a significant reduction in cash and investment balances could place 
downward pressure on the ratings. Conversely, a material and sustained 
improvement in operating results or substantial reduction in debt during our 
two-year outlook horizon could result in an upgrade.

Related Criteria And Research
     -- Public And Nonprofit Social Housing Providers: Methodology And 
Assumptions, July 11, 2012
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010

Ratings List
Ratings Affirmed

Toronto Community Housing Corp.
 Issuer credit rating                   AA-/Stable/--      

TCHC Issuer Trust
 Senior secured debt                    AA-


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal 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.