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Rating Action:

Moody's assigns A2 to National Finance Authority Birmingham VA HCC and Garage Federal Lease Revenue Bonds; outlook stable

16 Nov 2020

New York, November 16, 2020 -- Moody's Investors Service has assigned an A2 rating to the $107.6 million Federal Lease Revenue Bonds (VA Birmingham Health Care Center and Garage Project), Federally Taxable Series 2020 issued by the National Finance Authority on behalf of Graham & Company Birmingham, LLC. Bond proceeds will fund the acquisition of the Department of Veterans Affairs Primary Care Annex (PCA) in Birmingham, Alabama and refinance related debt. The outlook is stable

RATINGS RATIONALE

The A2 rating on the Series 2020 bonds reflects the credit strength of the United States of America (Government of, Aaa stable) acting through the Department of Veterans Affairs as lessee under the lease agreement supporting the bonds and the high essentiality of the project. The strength of the lease is offset by significant lease renewal risk and refinancing risk in 2035 when approximately 76% of par will remain outstanding. The rating is supported by a strong legal structure, which includes the assignment and direct payment of all lease payments to the trustee, reducing bondholders' exposure to operating risk of the borrower and property manager, as well as a debt service reserve fund. The financed project, an outpatient healthcare clinic and garage in Birmingham, Alabama (Aa3 negative), is highly likely to be renewed. Absent renewal, however, recovery for bondholders will be limited because the high level of debt relative to market value of the property and the likely difficulty in finding a new tenant who would pay the above-market rent currently paid by the VA.

RATING OUTLOOK

The stable outlook reflects the rating outlook of the United States of America (Government of) and our expectation that lease payments will continue to flow uninterrupted to the trustee on a monthly basis.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Reduction in debt levels or final bullet payment that reduces overall leverage and refinancing risk

- Renewal of the lease with the VA that enables all bond payments to be serviced with revenue from leases currently in force

- Removal of all set-off and termination risks

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Downgrade of the United States (Aaa stable) issuer rating

- Interruption or delay in monthly lease payments

- Nonperformance of its obligations under the lease by the borrower

- Increased risk of non-renewal of the lease, due to deterioration in asset condition, weakened lessor/lessee relationship, weakened veteran demographics, reduced regional demand for VA medical services and/or change in federal policies regarding the provision of veteran health care

LEGAL SECURITY

The leased asset, the Department of Veterans Affairs (VA) Primary Care Annex (PCA), is an essential asset of high importance to the VA's mission of providing healthcare to veterans. The PCA is a 64,000 square foot outpatient clinic and 2,334-space parking garage, which is closely integrated with the VA Medical Center (VAMC) in downtown Birmingham. The facility is a "build-to-suit" property constructed for the VA and opened to patients in 2016. The VA has a 20-year firm term lease with the lessor, Graham & Company Birmingham LLC (GCB LLC), which expires in September 2035.

The PCA provides medical services to veterans in the Birmingham area, through its audiology, women's health, physical therapy, pharmacy, radiology, pathology, lab medicine, ambulatory care, rehabilitation, and prosthetics departments. The parking garage provides all patient and staff parking for the PCA and VAMC, as well as shuttle-bus services to all VA facilities in the area. The PCA had 81,000 appointments in 2019, while the Birmingham VAMC serviced just under 300,000. The Birmingham VA Healthcare System had a total of 588,000 appointments in 2019.

The bonds are ultimately secured by payments from the VA, including monthly lease payments, made to the borrower/lessor, GCB LLC. As a conduit, National Finance Authority (NFA) will service the debt using proceeds received under the terms of a loan agreement with the borrower. GCB LLC, in turn, will repay the loan solely using revenue received under its lease agreement with the VA.

The legal structure is strong, providing bondholders with minimal risk of lease payments being interrupted or reduced, and essentially no risk from construction, bankruptcy, abatement or termination. Assignment and direct payment of all lease payments from the federal government to the trustee protects bondholders from operating risks of the owner, property manager and lease facility. There is no termination for convenience, however the lease can terminate in the case of total destruction of the property. As is common with most federal leases, the VA can set-off, reduce or abate operating rent if it vacates the building or if the borrower fails to perform any service or obligation under the terms of the lease and the VA, after a 30 day cure period, has to perform such tasks itself. However, these reductions only apply to the operating portion of the rent, and do not affect the shell rent used to pay debt service. Appropriation risk is minimal given the 20-year firm term lease has previously been authorized by Congress. Risks related to federal budget delays are partially balanced by the timing of debt service payments (October 1 debt service payments are set-aside with the trustee in advance).

Annual debt service payments escalate from $3.2 million in 2021 (reflecting only 3/4 of a year) and $3.9 million in 2022 to $5.6 million in 2035, and are paid quarterly. The escalating debt service schedule is structured to match an automatic escalation in annual building shell rent from $4.6 million in years 6-10 of the lease to $6.6 million in years 16-20. Rent will be paid to the trustee on a monthly basis. After covering principal and interest payments, as well as administrative and operating expenses, lease payments from the VA will fund a number of reserve funds; including a debt service reserve fund of approximately 25% of MADS, a lease reserve fund of 25% of net operating expenses and a maintenance reserve fund of a minimum of $35,000.

The lease terminates in September 2035 and the bonds mature in January 2036, exposing bondholders to considerable lease renewal and refinancing risks. The final debt service payment in January 1, 2036 is a large balloon payment of $81.7 million (approximately 76% of original par) and will need to be paid via a refinancing, which will be contingent on re-signing the lease with the VA. The borrower has chosen this structure to enable amortization over a 40-year period to match with the useful life of the project. The maximum term of a VA lease is 20 years.

The likelihood of resigning the lease is high, because of the high essentiality of the project, the high quality of the asset, the time and capital investments already made, the rather lengthy process that would be necessary for the VA to move to a new site and the VA's current mission to expand service capacity. The PCA's operations are closely integrated with the Birmingham VAMC, an inpatient facility approximately one-half mile away. This includes a large parking garage at the PCA that serves patients and staff for both facilities. Nonetheless, the likelihood of renewal is moderated by the lack of history around VA lease renewals, and the potential for meaningful changes over the next 15 years to facility condition, veteran demographics, technology advancements in health services and VA policies that could occur prior to the expiration of the current lease.

Should the VA decide not to re-let the property, bondholder recovery is likely to be low. Given the above-market prices paid by the VA, challenges in finding a new tenant or owner and potential changes in the local real estate market, the market value of the property is likely to be considerably lower than the large amount of debt that will be outstanding at the time of lease expiration. In addition, our estimated market value of the facility is substantially lower than the reported net capital asset value owing to conservative assumptions regarding the cap rate (net operating income to property asset value) and the expectation that it would require a significant length of time and investment to repurpose and release or sell the facility.

As security under the loan agreement, the borrower will grant to the trustee a security interest in and to its fee simple interest in the land and the facility. This provides a mortgage interest for the benefit of the bondholders. Additionally, the loan agreement between NFA and GCB LLC requires that adequate levels of insurance be obtained and regularly renewed from highly rated companies, and names the trustee as a loss payee. The required insurance is extensive and includes all risk, comprehensive liability, business interruption, flood (if in zone) and workers compensation, among others. The property and casualty insurance on the facility must equal to the greater of (i) replacement cost or (ii) par amount of bonds.

The legal structure is strong, providing bondholders with essentially no risk of construction, abatement, bankruptcy or termination. Assignment and direct payment of all lease payments from the federal government to the trustee also protects bondholders. However, bondholders are exposed to some risk of set-off in the case of default under the lease and, as is common with most federal leases, termination in the case of total destruction of the property.

USE OF PROCEEDS

Series 2020 bond proceeds will be used to acquire the property, refinance certain outstanding debt, withdraw equity from the property, fund required funds and reserves and pay the costs of issuance.

PROFILE

The United States has the world's largest economy and is the center of global trade and finance, with a gross domestic product of $21.4 trillion in 2019. Its population of 328 million is third-largest. The Department of Veterans Affairs provides healthcare services and other benefits to military veterans.

The National Finance Authority is a New Hampshire conduit issuer and economic development entity that is tasked with developing businesses outside the state.

The borrower, Graham & Company Birmingham LLC, is an affiliate of Net Lease Capital Advisors - the property manager and a firm specializing in single tenant net lease properties. The borrower is a single purpose entity that owns and leases the VA facility in Birmingham, Alabama.

METHODOLOGY

The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joshua Grundleger
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
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250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Baye Larsen
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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