Fitch Upgrades Lynwood Public Financing Authority CA's TABs

SAN FRANCISCO--(BUSINESS WIRE)--In the process of routine surveillance, Fitch Ratings takes the following rating actions on Lynwood Public Financing Authority, California's tax allocation bonds (TABs) as follows:

--$10.2 million 1999 TABs, series A (Project Area A) upgraded to 'A' from 'BBB+';

--$1.1 million 1999 TABs, series B (Project Area A) upgraded to 'A' from 'BBB+';

--$1 million TABs (Alameda Project Area), series 1999 upgraded to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

KEY RATING DRIVERS:

--The upgrade of the series A & B bonds (Project Area A) to 'A' reflects strong senior debt service coverage that stands up well to severe stress tests, as well as the closure of the senior lien.

--Project Area A is small and fairly concentrated among its top 10 taxpayers, but estimated appeals levels are manageable, the tax base has been relatively resilient to date, and the incremental value (IV) to base year value is moderate, which indicates a medium degree of revenue volatility for a given assessed value (AV) reduction.

--The upgrade of the series 1999 bonds (Alameda Project Area) to 'BBB+' reflects the bonds' high debt service coverage levels, a manageable level of estimated appeals, as well as the closure of the senior lien.

--The financial cushion for the 1999 bonds is offset by the Alameda Project Area's extremely high tax base concentration levels, very small size, a significant AV contraction in fiscal 2011, and a low IV to base year value, which indicates a high degree of additional revenue volatility for a given AV reduction.

--The City of Lynwood's economy continues to be strained by very high unemployment and low income levels and the regional housing market has been subjected to substantial price declines.

--All bond series include a standard debt service reserve requirement that is cash-funded.

--Los Angeles County does not participate in the Teeter Plan, so incremental tax revenues are subject to property tax delinquencies that nonetheless have been manageable to date.

--Recently approved legislation affecting redevelopment agencies was not a material factor for this rating as it appears debt service would continue to be paid from net incremental revenues if the agency is effectively shuttered.

WHAT COULD TRIGGER A RATING ACTION?

--Future residential and commercial real estate market performance will shape incremental tax revenues and debt service coverage.

--The continuation of future appeals at manageable levels is a key rating driver.

SECURITY:

The Project Area A, series A & B TABS are secured by net tax increment from Project Area A. A portion of series A debt service additionally is secured by the project area's 20% housing set-aside. The Alameda Project Area TABs, series 1999, are secured by net tax increment from the Alameda Project Area. A portion of series 1999 debt service additionally is secured by the project area's 20% housing set-aside.

CREDIT PROFILE:

The city of Lynwood, located approximately 11 miles south of downtown Los Angeles in Los Angeles County, is home to approximately 70,000 residents. The 4.9-square-mile city largely is built out, so population growth has been flat, with development stemming predominantly from infill and redevelopment. The local economy is strained, as exhibited by a 19% March unemployment rate. Although unemployment is marginally lower than a year prior, this was attributable to the city's shrinking labor force, and not to an improvement in employment. Per capita income levels are extremely low at 44% and 47% of state and national levels, respectively. However, reflective of large household sizes, median household income levels are much higher at 74% and 86% of state and national levels, respectively.

The Los Angeles regional housing market suffered a severe 40% average price reduction from its peak to the fourth quarter of 2010. However, due to the maturity of the city's housing stock, city-wide AV dropped by a relatively manageable 6.6% in fiscal 2010, following at least four consecutive years of sound growth.

Project Area A was originally adopted in 1973 and encompasses a small 734 acres, including property within the city's main commercial districts. The project area is fairly well diversified by land use, which is 55% commercial, 21% industrial, 18% residential, and 7% unsecured. However, the tax base is fairly concentrated among the top 10 taxpayers, which make up 25% of AV and 32% of IV. With an IV to base year value of 336%, there is a moderate degree of additional revenue volatility for a given AV reduction. Appeal levels are elevated, but appear quite manageable from a debt service coverage standpoint. In fiscal 2011 the project area's AV fell by just 1.2%, much lower than the overall city-wide AV decline.

Debt service coverage on the Project Area A series A and B senior lien bonds is quite strong, with Fitch-estimated fiscal 2011 net incremental revenues of $3.1 million covering senior debt service of $911,000 by a very high 3.4 times (x). Coverage continues to hold up well to severe stress tests that simulate the loss of the project area's top 10 taxpayers, or a 20% AV reduction. Under either stress scenario, coverage remains above 2.2x, and Fitch estimates that AV could contract by a high 55% before maximum annual debt service (MADS) coverage falls to 1.0x. In March 2011, the agency issued $18.5 million of TABs subordinate to the series A & B TABs, resulting in the closure of the senior lien.

The Alameda Project Area was originally created in 1975 and encompasses a very small 170 acres consisting almost exclusively of industrial properties. In addition to land use concentration, the top 10 taxpayers are extremely concentrated, making up 79% of AV and 131% of IV. Surprisingly, for an older project area the IV to base year value is somewhat low at 150%, which indicates a heightened degree of revenue volatility for a given decline in AV. The project area's AV fell by a significant 9.6% in fiscal 2011, resulting in a substantial 15% IV decline. Nonetheless, debt service coverage remains strong due to low leverage levels.

Debt service coverage on the Alameda Project Area 1999 TABs is strong, with Fitch-estimated fiscal 2011 net incremental revenues of $544,370 covering non-housing debt service of $84,400 by a very high 6.5x. Coverage holds up well to broad-based AV decline stress scenarios but not to simulations that eliminate the top 10 taxpayers as a result of extremely high concentration levels. Fitch estimates that AV could contract by a high 51% before MADS coverage falls to 1.0x. In March 2011, the agency issued $5.6 million of TABs partly secured by the housing set-aside revenues generated in the Alameda Project Area on a subordinate basis. The indenture for the new bonds prohibits any further issuances on parity with the series 1999 TABs, thus closing the lien.

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, LoanPerformance, Inc., and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', (Aug. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria' (Oct. 8, 2010).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

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