NEW YORK--()--During the course of routine surveillance, Fitch Ratings has affirmed the following rating of the San Fernando, California (the city) Public Financing Authority (the authority):
--$3 million refunding revenue bonds series 1998 (tax allocation bonds, project areas 1 &3) at 'BBB+'.
In addition, Fitch affirms the following rating of the San Fernando Redevelopment Agency (RDA):
--$9.9 million civic center redevelopment project (project number 3) tax allocation bonds series 2006 at 'BBB+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating for the authority's revenue bonds is
based on Fitch's assessment of the weaker of two individual project
areas for this pooled financing, project area number 1 and number 3. The
two project areas each make separate loan repayments and there is no
cross-collateralization. The rating for the RDA's tax allocation bonds
is based on Fitch's assessment of project area number 3.
--Project
area 1 is very small in acreage but includes the city downtown business
district and the retail mall. Debt service coverage levels in project
area 1 are sound and assessed valuation declines of up to 59% would
continue to produce 1.0 times (x) maximum annual debt service (MADS)
coverage.
--Project area 3 encompasses one-quarter of the city's
acreage and includes important economic elements. Debt service coverage
levels in project area 3 are satisfactory and assessed valuation
declines of up to 30% would continue to produce 1.0x MADS coverage.
--Both
tax bases are very concentrated among the top 10 taxpayers. This risk is
mitigated somewhat by a high increment value/base year value, reflective
of the maturity of the project areas, which moderates both areas'
susceptibility to AV volatility.
--The project areas benefit from
historic tax base growth and a level of pending appeals that likely will
be absorbed without materially impairing debt service coverage levels.
--The
recent merging of all of the RDA's project areas effectively closed the
senior lien.
KEY RATING DRIVERS:
--Maintenance of sound debt service coverage
levels.
--Local economic and real estate performance, with
secondary effects on AV levels.
SECURITY:
The RDA bonds are secured by incremental property taxes.
The authority's bonds are secured by the RDA's loan repayments made from
net tax increment revenues generated in project areas 1 (original area
only) and 3 (original and amended areas), on a several but not joint
basis. Neither project area is responsible for loan repayments of the
other entity. For both the RDA and authority bonds, incremental tax
revenues exclude the 20% of gross revenues set aside for development of
low and moderate income housing and tax sharing agreements.
CREDIT SUMMARY:
The City of San Fernando is located in Southern
California in Los Angeles County and is completely surrounded by the
City of Los Angeles. The city is home to a variety of industrial and
commercial concerns, although retail has weakened somewhat due to the
softening economy. Wealth levels are below average and regional
unemployment is high.
The RDA manages all development for the city through several project areas and issues bonds to finance capital improvements through the authority and the agency. Bondholders of the RDA's 2006 debt are secured on parity with 1998 authority bondholders, with the 2006 bonds having funded projects in the original and annexed project area 3, and the 1998 bonds having funded projects in those areas as well as the original project area 1. The RDA has fiscally merged all four of the project areas under its jurisdiction, essentially closing the senior lien since any future debt will be subordinate to the 2006 and 1998 bonds. A current state legislative proposal to eliminate all state RDAs or force them to make large payments to schools will most likely be appealed; however, were the appeal to be unsuccessful, the legislation would provide for the repayment of all existing debt and contractual obligations.
Project area 1 is small, representing only 2% of the city, but encompasses the downtown business area including the San Fernando retail mall. Project area 1 consists of an original area and an annexation, although net tax increments from only the original project area 1 area secure the bonds. The tax base is highly concentrated with the top 10 taxpayers representing 52% of AV and the land use is 87% commercial. The project area also benefits from a low base year valuation reflective of its maturity and tax base growth. Tax base gains have been consistent since fiscal 2007, although preliminary fiscal 2012 assessments indicate a mild 1.5% decline in AV. Debt service coverage for project area 1 is strong with Fitch estimated fiscal 2012 pledged revenues providing strong 3.4x coverage of MADS. The hypothetical loss of the top 10 taxpayers results in still adequate 1.4x coverage, while AV could decline 59% and still provide 1X coverage.
Project area 3 consists of original and annexed areas, which together represents almost one-third of the city area and includes the civic center complex, the San Fernando business center as well as a 19 acre regional shopping center. Net tax increment revenues from both areas are pledged to loan repayment. On a combined basis, project area 3's tax base is 50% industrial, 20% unsecured, 14% commercial and 12% residential. The tax base is also heavily concentrated as the top 10 taxpayers represent 50% of fiscal 2011 AV. The project area benefits from a low base year valuation, indicative of its age and good growth in AV. AV rose a remarkable 19% in fiscal 2010, well above average for California and the project area's strongest gain in several years, although has since declined modestly, at 1.1% in fiscal 2011 and a preliminary 3.4% in fiscal 2012. Debt service coverage on all debt payable from project 3 net tax increments is adequate at 1.5x, somewhat improved from a few years ago due to the fiscal 2010 tax base growth. AV would need to decline 30% for coverage to fall below 1.0x. Fitch does not believe that the project area suffers significant exposure from pending appeals.
The fiscal 2010 audit noted concerns about the RDA's structural imbalances and pressured liquidity and reported negative unreserved fund balanced in the capital projects fund and the debt service fund for project area 3. To address the concern, the RDA reduced its fiscal 2011 budget to $6.2 million from $8.3 million in the prior year, and the RDA anticipates increasing its reserves at year end. The adopted fiscal 2012 budget of $4.9 million includes a $1.1 million surplus in the project areas. Out-year surpluses are expected to be less, as the RDA will begin to budget for repayment of a loan from the low-income housing capital projects fund, which had been necessary to pay a state mandated SERAF payment.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria', dated Aug. 16, 2010;
--'U.S. Local Government
Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
