Fitch Rates Lee County, FL's TDT Bonds 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following Lee County, Florida (the county) tourist development tax (TDT) revenue bonds:

--$44.3 million series 2010A Build America Bonds (BABs);

--$37.4 million series 2010B BABs, Recovery Zone Economic Development Bonds;

--Series 2010C, tax-exempt bonds.

The bonds are expected to sell via negotiation on Aug. 31, 2010. At the time of issuance, the county will decide whether to sell a portion of the bonds as tax-exempt, series 2010C. The total par amount is expected to remain the same.

In addition, Fitch assigns the following ratings:

--Implied general obligation (GO) 'AA';

--Approximately $4.8 million in outstanding TDT revenue bonds, series 2004 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:

-TDT revenues, even after excluding lease payments from participating sports teams, provide ample debt service coverage, and no additional leveraging of the tax is anticipated.

--The rating also incorporates the strong additional bonds requirement, the significant presence of tourism in the local economy, the limited nature of the tax and the inherent cyclicality of pledged revenues as well as the general credit characteristics of the county.

--Financial results have historically been strong allowing the county to enter the economic downturn with robust reserves, well in excess of its policy level.

--Despite a projected operating deficit in fiscal 2010, substantial financial flexibility remains as fund balances are expected to remain ample while additional revenue and expenditures options are still available.

--The impact of the housing correction has been magnified within the county resulting in over 40% assessed valuation (AV) loss in the last few years as well as high foreclosures and unemployment rates.

--Debt levels are moderately low and are expected to remain so given the county's capital needs.

KEY RATING DRIVERS:

--Financial results significantly weaker than expected in the near term or the inability to regain structural balance within the next few years would put negative pressure on the county's implied GO.

--Economic and taxbase stabilization are also important credit considerations.

--The impact of the oil spill on TDT revenues and the county's economy as a whole is still to be determined.

SECURITY:

The bonds are secured by a pledge and lien upon the pledged revenues including the 5 cent TDT and gross revenues, defined as lease payments from the Minnesota Twins and Boston Red Sox.

CREDIT SUMMARY:

Proceeds from the current issuance will be used for the acquisition and construction of a major league Spring Training facility for the Boston Red Sox. The county has entered into a lease agreement with the Boston Red Sox Baseball Club, dated Dec. 9, 2008, to lease the 2010 project for a term of 30 years. The lease is to be held in escrow until the commencement date of the lease, which is expected to be Dec. 1, 2011 but in no event shall be later than Dec. 1, 2012. Upon the commencement date, the Red Sox have agreed to a minimum guaranteed rental of $0.5 million annually, which is scheduled to increase every five years at a rate of 3%. Additionally, the county has a lease through August 2020 with the Minnesota Twins relating to the lease of an additional park and facilities with lease rental payments equal to $0.3 million annually.

While the lease payments provide some revenue enhancement to the security, termination of the leases prior to bond maturity would not significantly alter debt service coverage. Debt service coverage is strong on the TDT bonds with total pledged revenues providing 3.0 times (x) maximum annual debt service (MADS) coverage in fiscal 2009, excluding any payment of BABS subsidy, while TDT revenues alone provide 2.95x coverage. TDT revenues have exhibited some volatility with the economic downturn declining 8% in fiscal 2009 and rebounding 4.3% from a year prior through the first nine months of collections in fiscal 2010. Assuming year to date growth is annualized, coverage will increase slightly for fiscal 2010 to 3.08x from TDT revenues alone. No pledged lease payments from the Red Sox have been included in debt service calculations as they have yet to commence. Coverage is expected to increase minimally once the lease revenues from the Red Sox are received. TDT bond legal provisions are sound with an additional bonds test requiring 1.75x MADS coverage.

Lee County is located the southwestern coast of Florida on the Gulf coast, bordered by Charlotte County on the north and Collier County ('AA+' implied GO rating by Fitch) to the south. Incorporated municipalities within the county include Fort Myers ('AA-' implied GO) and Cape Coral (covenant to budget and appropriate rated 'A+'). The economy is concentrated in health care, higher education, tourism and, until recently, real estate and construction. The recent housing market correction has severely hampered the county's economy. Speculative building contributed to unsustainable annual assessed value (AV) growth in the past including a 40% tax base increase in fiscal 2007. Since then, the combination of the housing correction and state property tax reform has had a magnified affect on the county with double digit AV losses in fiscal 2009 and fiscal 2010. Tax rolls for fiscal 2011 show another 14% decline, although less than the previous year's 23% decrease. In total, AV has fallen 40% from its peak. Foreclosures in the county remain high. The 12.5% unemployment rate for May 2010 remains well above state and national averages but has declined from its peak of 14.2% in January of this year. Wealth levels are above average.

Despite the recent economic volatility, operating margins have generally been positive with additions to fund balance for the past four audited years. Fiscal 2009 ended with a $41 million surplus increasing the unreserved fund balance to a robust 59.5% of spending. Beginning in the current year, the county has decided to use a portion of reserves to soften the immediate impact of revenue losses while maintaining programs and service levels to a degree. Fiscal 2010 is projected to end with a decrease of between $50 million and $55 million, while the reserves are expected to remain above 45% of spending. The county has stated that the unreserved fund balance may decrease to a still adequate 15% over the next few years.

Overall debt levels are low. The county maintains a 10-year CIP which currently totals $2.3 billion. Transportation makes up over half of total projects while utilities and land projects are the other major areas. The plan is fully funded through the first five years with no proposed bonds. Enterprise fund revenue and a dedicated ad valorem tax for land preservation are the largest funding sources.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com':

'Tax-Supported Rating Criteria', dated Dec. 21, 2009.

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

For Special Tax Bonds

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The analysis of special tax bonds considers the rating the security itself can support, with the unlimited tax general obligation (ULTGO) bond rating generally serving as a rating ceiling. Special tax bonds with a broad, diverse pledged revenue stream and a strong additional bonds test can often achieve ratings on par with the ULTGO rating. Those with a narrow, concentrated, or volatile pledged revenue stream such as a hotel tax or tax increment district revenues and/or a liberal additional bonds test will likely be rated in the lower half of the investment grade range.

The average local government general obligation rating is 'AA' with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings on ULTGO bonds that provide the ceiling for special tax bonds reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.

Additional information is available at 'www.fitchratings.com'.

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